Edited version of your written advice

Authorisation Number: 1012704912867

Ruling

Subject: GST and entitlement to a refund or credit on miscalculation of margin

Question

Are you entitled to a refund of overpaid goods and services tax (GST) which arose from the miscalculation of the margin under subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act (GST Act) on the supply of subdivided lots of land?

Answer

No, you are not entitled to a refund of overpaid GST because there was no miscalculation of the margin.

Relevant facts and circumstances

You are a local government entity being a municipal council constituted under the relevant Local Government Act (LG Act).

You are registered for GST with effect from 1 July 2000.

You were the registered owner as at 1 July 2000 of a parcel of land (Land).

You entered into an arrangement with a developer, to undertake the development of the Land. The multi-staged development involved carrying out works consistent with subdividing the Land into lots (Lots). The developer did the physical work of developing the Land and became the marketing agent for the subsequent sale of the Lots.

You sold the subdivided Lots pursuant to contracts for the sale of real estate (Contract).

The particulars of sale in each Contract identify you as the vendor and provide that the price in the Contract is inclusive of GST, which was to be calculated by applying the margin scheme in accordance with Division 75 of the GST Act.

You applied the margin scheme in working out the amount of GST payable on the taxable supply of each of the Lots. In your monthly Business Activity Statements (BAS) lodged you calculated the amount of the margin in accordance with item 1 in the table in paragraph 75-10(3)(b) of the GST Act (item 1) as the difference between:

• the sale price per contract of sale, and

• the valuation as at 1 July 2000 of the Land apportioned for each subdivided Lot sold.

You obtained a valuation of the Land as at 1 July 2000. You provided a detailed spread sheet (Spread Sheet) where you set out information on each of the Lots sold.

You contend that you miscalculated the GST payable on the supplies of the Lots because instead of calculating the margin for each Lot in accordance with item 4 in the table to paragraph 75-10(3)(b) of the GST Act (item 4) you had calculated the margin in accordance with item 1.

You notified the Commissioner for the purposes of section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA) of your entitlement to a yet to be quantified refund or credit for the monthly tax periods in question. The Commissioner acknowledged receipt of your notification for the monthly tax periods in question and advised that due to recent law changes you no longer had the option of lodging a notification for those tax periods after 1 July 2012.

You provided an aerial photograph of the Land as at 1 July 2000 as well as an aerial photograph of the Land after it had been developed.

You describe the Land as at 1 July 2000 as gently sloping grassland predominantly comprised of native grasses and a handful of trees. On the Land is a natural creek which has a denser tree canopy.

The Land was, prior to 1 July 2000 likely to have been used for cropping or grazing at some point but according to the aerial photograph any such activity had terminated. Some vegetation would have been removed for cropping or grazing and also for fire wood.

No physical improvements were made on the Land in subdividing it however some works were carried out consistent with subdivision. For example, each of the Lots after subdivision had, at the time of sale, access to utilities or the ability to connect to utilities, such as sewer, water and electricity. The Lots had also been cleared and graded and rocks, stones and other impediments were removed.

A more recent aerial photograph from Google maps of the wider area in which the Land is located indicates that to the north of the Land there are heavily treed areas. That photograph also indicates that within a couple of kilometres from the Land there are areas that are heavily treed as well as areas that would appear to be the subject of agriculture.

You contend that no amount of GST should be payable on property sold by you on the basis that you are a State for the purposes of section 114 of the Constitution and as such the Commonwealth cannot impose any tax on property belonging to a State.

You further contend that the overpayment of GST on the sale of land by you is a taxable supply and the overpayment results from a miscalculation of the margin and consequently the GST payable. Subdivision 105-65 of Schedule 1 to the TAA does not apply to restrict the refund to which this ruling application relates.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 75-10

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(3)

Schedule 1 to Taxation Administration Act 1953 section 105-55

Schedule 1 to Taxation Administration Act 1953 section 105-65

Reasons for decision

Summary

You are not entitled to a refund, other payment or credit in respect of which you notified the Commissioner pursuant to subsection 105-55 of Schedule 1 to the TAA because there was no miscalculation or error in the calculation of the margin which would give rise to an overpayment of GST.

On the facts provided, and in the absence of evidence to the contrary, it is reasonable to conclude that the Land as at 1 July 2000 had been subjected to human intervention most likely cleared for use in some form of agricultural activities (grazing or cropping). The relief from the necessity to clear the Land for the most effective use of the Land either for agricultural or development purposes enhanced the value of the Land.

Each of the subdivided Lots show signs of the human intervention that enhanced its value and therefore, all of the Lots subdivided from the Land is land on which there are improvements for the purposes of calculating the margin. Accordingly, contrary to your submissions, you were not entitled to use item 4 to calculate the margin on the supply of each of the Lots from which the GST payable was determined.

Detailed reasoning

In Miscellaneous Taxation Ruling MT 2010/1 the Commissioner explains that a refund or credit may arise where a taxpayer's assessed net amount is amended to, amongst other things, reduce the GST payable. The result of the amendment may be that:

• the assessed net amount the entity paid is reduced

• the entity becomes entitled to a refund under section 35-5 of the GST Act, or

• the amount of the refund under section 35-5 of the GST Act is increased.

The Commissioner is required to give a refund or apply that amount in accordance with the running balance account (RBA) rules. However, the Commissioner need not give a refund where the requirements of subsection 105-65(1) of Schedule 1 to the TAA are met.

We agree with your submissions that subsection 105-65(1) of Schedule 1 to the TAA does not apply in the present circumstances. The Commissioner expresses the view in paragraph 25B of MT 2010/1 that section 105-65 of Schedule 1 to the TAA will not apply in cases where the supply is always correctly characterised and treated by the supplier, but an overpayment of GST arises from a mere miscalculation. The error you described in calculating the margin under Division 75 of the GST Act in relation to applying the margin scheme to the sale of the Lots is analogous to those circumstances in paragraphs 83 and 84 of MT 2010/1.

On the facts provided, you made taxable supplies of subdivided Lots and worked out the amount of GST payable on those taxable supplies by applying the margin scheme under Division 75 of the GST Act. You determined the margin in accordance with item 1.

You contend that it was open to you to have determined the margin in accordance with item 4, being the difference between the consideration on the sale and the valuation as at the day on which the taxable supply takes place. Calculating the margin under item 4 equates to a lesser margin than the margin determined in accordance with item 1.

Your claim to a refund of the overpaid GST rests on you having reported more GST payable than you would have had to, had you calculated the GST payable based on a margin determined by applying item 4 instead of item 1. At the heart of that claim lies the issue of whether it was open to you to apply item 4 to determine the margin on which GST was calculated.

Under subsection 75-10(1) of the GST Act the amount of GST payable on a taxable supply of real property is 1/11 of the margin for the supply. Subject to section 75-11 of the GST Act, subsection 75-10(3) of the GST Act provides that the margin for the supply is the amount by which the consideration for the supply exceeds that valuation of the interest, unit or lease if:

• the circumstances specified in an item in the second column of the table in subsection 75-10(3) (table) of the GST Act apply to the supply, and

• an approved valuation of the freehold interest, stratum unit or long term lease, as at the day specified in the corresponding item in the third column of the table has been made.

The valuation date under items 1 and 3 in the table is 1 July 2000 whereas the valuation date in relation to item 4 in the table is the day on which the taxable supply takes place.

There are 3 requirements to applying item 4:

• the supplier is the Commonwealth, a State or a Territory

• the supplier has held the interest, unit or lease since before 1 July 2000, and

• there were no improvements on the land or premises in question as at 1 July 2000.

With regards to the first requirement, as a local government authority and the supplier of the Lots we consider that you are a 'State' for the purposes of applying item 4. This is consistent with the view expressed by the Commissioner in Goods and Services Tax Ruling GSTR 2006/5 in which he states at paragraph 13 that:

13. Local governments may be a State or Territory. As is the case for corporations, the Commissioner considers that the principles developed by the High Court of Australia in cases concerning the meaning of 'a State' in section 114 of the Constitution, as described at paragraphs 8 to 12 of this Ruling, also apply in determining whether a particular local government is a 'State' or 'Territory' for the purposes of the GST Act.

With regard to the second requirement, the facts show that you held the Land as at 1 July 2000, being its legal owner since before 1 July 2000 and the legal and equitable owner of the Lots after subdivision.

You advised that the Lots were created by subdivision with no physical improvements made on the Lots in subdividing them. However, each of the Lots after subdivision had, at the time of sale, access to utilities or the ability to connect to utilities, such as sewer, water and electricity. The Lots were also cleared and graded and rocks, stones and other impediments removed. Accordingly, on the day on which the taxable supply takes place there were improvements on the land in question.

However, the requirement for applying item 4 is that there were no improvements on the Lots as at 1 July 2000. Since the Lots were created from subdividing the Land the issue is whether there were improvements as at 1 July 2000 on the Land from which the Lots were created.

Goods and Services Tax Ruling GSTR 2006/6 considers the meaning of the phrase 'land on which there are no improvements'. Paragraph 20 of GSTR 2006/6 states:

20. Unimproved land is taken to be land in its natural state. Thus, to establish whether there are improvements on the land for the purpose of these provisions, the land is compared with land in its natural state.

GSTR 2006/6 refers to the meaning of 'improvements' in the context of land tax which was held by the High Court in Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503 to be:

Any operation of man on land which has the effect of enhancing its value comes within the definition of 'improvement'.

Paragraph 22 of GSTR 2006/6 explains that for there to be 'improvement on the land':

• there must have been some human intervention

• the human intervention must have been physically located on the land, and

• that human intervention must enhance the value of the land at the relevant date for ascertaining whether there are improvements on the land.

Paragraph 25 sets out examples of human intervention that may enhance the value of land which include:

• utilities, for example, water, electricity, gas, sewerage connected or available for connection

• clearing of timber, scrub or other vegetation

• excavation, grading or levelling of land, and

• removal of rocks, stones or soil.

If any human interventions located on the land enhance its value at the relevant date, then there are improvements on the land.

The aerial photograph of the Land as at 1 July 2000 indicates only a few trees on the Land. This contrasts with the adjoining creek which has a denser canopy of trees. Some vegetation would have been removed from the Land for fire wood and in order to use the Land for cropping and grazing.

A more recent aerial photograph in Google maps of the wider area in which the Lots are located indicates that to the north of the Land there are heavily treed areas. That photograph also indicates that within a couple of kilometres from the Lots there are areas that are heavily treed as well as areas that are clear of trees that would appear to be the subject of agriculture.

It is reasonable to conclude that as at 1 July 2000 the part of the Land from which the Lots were subdivided was not in its natural state. That is, there is every indication that the Land was more densely treed in its natural state as is the adjoining creek and the surrounding areas.

On the facts provided, and in the absence of evidence to the contrary it is reasonable to conclude that the Land as at 1 July 2000 had been the subject of human intervention most likely cleared of native trees and shrubs for use in some form of agricultural undertaking (grazing or cropping).

In Lewis Kiddle and another v. Deputy Federal Commissioner of Land Tax 27 CLR 316 at 320 the High Court stated:

Presumably, a purchaser of land, if he considered this question at all, would determine that the amount to be attributed to value of improvements would be equal to the amount which he gained or saved by reason of the improvements having been made, he being thereby relieved from the necessity of making them. …

There can be little doubt that the owner of the Land would have gained or saved an amount by reason of the Land having been cleared. There is no evidence presented that the clearing of the Land had degraded the Land. Accordingly, the relief from the necessity to clear the Land either for agricultural or development or other activities enhanced the value of the Land.

Each of the subdivided Lots showed the sign of human intervention (clearing) that enhanced its value and therefore, the Lots subdivided from the Land is land on which there are improvements as at 1 July 2000. Accordingly, contrary to your submissions, it was not open to you to apply item 4 to determine the margin on which GST was to be calculated. That being the case, there was no overpaid GST because there was no error in your calculation of the GST payable.

You raised an alternative argument contending that no amount of GST should have been payable on property sold by you on the basis that you are a 'State' for the purposes of section 114 of the Constitution and the Commonwealth cannot impose any tax on property belonging to a State.

Paragraphs 92 to 94 of Miscellaneous Taxation Ruling MT 2011/1 explain the application of GST to States and Territories in the context of section 114 of the Constitution. MT 2011/1 refers to the difficulties created by section 114 of the Constitution for the design of the GST.

To overcome these difficulties, the Commonwealth and each of the States and Territories came to an agreement under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (IGA) that they would operate as if they were subject to the GST legislation. Relevantly, Clause 17 of the IGA states:

The Parties intend that the Commonwealth, States, Territories and local government and their statutory corporations and authorities will operate as if they were subject to the GST legislation. They will be entitled to register, will pay GST or make voluntary or notional payments where necessary and will be entitled to claim input tax credits in the same way as non-Government organisations. All such payments will be included in GST revenue.

The States achieved this by enacting specific legislation providing the legal authority for State entities to voluntarily comply with the GST legislation where it would not otherwise apply.

You are registered for GST and the State is a signatory to the IGA and has enacted specific legislation providing legal authority for a State entity to voluntarily comply with the GST legislation. On the facts provided you included the GST payable calculated by you on the taxable supplies of the Lots in your monthly BAS. It would appear from your conduct that you have agreed to comply with the GST legislation.

On that basis, we reject your submission that no amount of GST should have been payable on the Lots sold by you.