Edited version of your written advice

Authorisation Number: 1012705748009

Ruling

Subject: GST and the Margin Scheme

Question 1

Are you entitled to a refund of overpaid GST related to sales of real estate under the margin scheme where the GST payable was previously miscalculated and where sales were completed during the relevant period?

Answer

No. However, you may be entitled to a refund of GST of a different amount. As you have not submitted an approved valuation we cannot consider the amount of GST refund that you may be entitled to at this stage.

This ruling applies for the following periods:

Relevant facts and circumstances

You are an entity and own substantial parcels of land, much of which you have owned since before 1 July 2000.

You owned parcels of land which were subdivided and portions sold off since 1 July 2000 including the relevant period.

You contend that these subdivided lots were unimproved at 1 July 2000 and are collectively referred to herein as the 'Ruling Properties'. A detailed description of the lots comprising the Ruling Properties is attached to your application for a private ruling and is marked as Annexure A.

The sales of the subject parcels of land have been pursuant to contracts for the sale of real estate, the first page of which indicates that the margin scheme will not be used in making the taxable supply. The parties to the sales of the Ruling Properties have subsequently adopted the margin scheme in accordance with extensions of time approved by the Commissioner. Copies of the agreements with those purchasers are attached as Annexure B.

You attached to your application for a private ruling, and marked as Annexure C, the first page of the contract for sale for a property which is submitted as a sample contract and is representative of all of the contracts for sale relating to the Ruling Properties.

You inform us that:

• The price at which the Ruling Properties were sold was the market value determined by you as the price that a willing but not anxious vendor and purchaser would enter an agreement to transfer the lands.

• You set the price without taking into consideration any GST that may be payable on the sale of each parcel of land.

• You operated in a free market and sold the land at the going market rate.

• In arriving at the price at which lots of land were advertised, you did not start with a particular price and then added GST to the prices obtained for the sale of each property. The prices are even amounts, for example $125,000.

• The GST paid by you on each parcel of land is a cost absorbed by you in the same way that costs of undertaking subdivision work including the construction of roads, drainage, sewage and other infrastructure.

You believe that none of the purchasers of the Ruling Properties were registered or required to be registered for GST.

You have kept records of the land sales mad, which is the relevant period covered by this ruling application.

You have attached to this application for private ruling, and marked as Annexure A, a table of the sales made in the relevant period which describe the particulars of the Properties sold.

You contend that Business Activity Statements (BAS) lodged by you for the relevant period, you reported the full amount of GST being 1/11 of the sale price of each of the properties.

You have attached to this application for a private ruling, and marked as Annexure D a series of aerial photographs taken in June 2000 which show the parcels of land making up the Ruling Properties at issue in this application.

You contend that as at 1 July 2000, these parcels were all unimproved and in their natural state being devoid of built structures and comprised of predominantly flat land with native grasses, shrubs and trees.

The lots supplied were created by a subdivision of land. No physical improvements were made on the land, however some works were carried out consistent with a subdivision. For example, each of the lots, after subdivision, had been enhanced at the time of sale by way of access to utilities or the ability to connect to utilities, such as sewer, water and electricity.

You submit that you should have applied item 4 of the table in subsection 75-10(3) of the GST Act in calculating the GST instead of paying 1/11^th of the sale price of each of the properties.

You sought an extension of time to obtain valuations which was granted. However a significant amount of time has passed and you have not been able to submit a valuation as intended. You intend to obtain a valuation in the future and submit another application for a private ruling at that time.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 75.

Further issues for you to consider

Valuations under Method 2

As we have concluded that the land is improved, Method 2 may be available under certain limited circumstances as explained in paragraph 80B of Goods and Services Tax Ruling GSTR 2006/7: Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000:

80B. The method only applies if the contract is executed and exchanged before the valuation date and settlement occurs after that date. In these limited circumstances, the valuation of the interest, unit or lease would be the same as the consideration for the supply of the interest, unit or lease. Under this valuation method, the margin for the supply is nil.

Reasons for decision

Unless otherwise stated, all legislative references are legislative references to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 1

Summary

We have concluded that the Ruling Properties is land on which there are improvements as at 1 July 2000 for the purposes of Division 75, therefore , Item 3 of the table in paragraph 75-10(3)(a) applies. Consequently, the appropriate valuation date is as at 1 July 2000.

As you have been unable to provide a valuation at this time we cannot consider the amount of GST refund that you may be entitled to.

Detailed reasoning

The Commissioner accepts that some entities can apply item 4 of the table in subsection 75-10(3), where relevant.

The Commissioner has provided clarification on the meaning of the phrase "land on which there are no improvements" in Goods and Services Tax Ruling GSTR 2006/6 Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75 (GSTR 2006/6).

It is important to consider the view outlined in GSTR2006/6 in its entirety in order to determine the Commissioner's view on what constitutes improvements on the land. The premise of the Commissioner's view is outlined at paragraph 20 which 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.

In relation to any improvements on the land from the land's natural state GSTR 2006/6 follows the principle established by High Court in Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 and states at paragraph 22:

22. Applying this principle means that, for there to be improvements 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 land.

Paragraph 23 of GSTR 2006/6 provides that where there have been a number of human interventions on the land it is necessary to establish whether any one of the human interventions enhances the value of the land at the relevant date. Whether the net value of the human interventions enhances the overall value of the land is irrelevant.

Paragraph 25 of the ruling provides a list of examples of human interventions which may enhance the value of land that includes:

• houses, town-houses, stratum units, separate garages, sheds and other out-buildings

• commercial and industrial premises

• formed driveways, swimming pools, tennis courts, and walls

• any other similar buildings or structures

• fencing internal or boundary fencing

• 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

• drainage of land

• removal of rocks, stones or soil

• filling of land.

You have stated that the aerial photographs you supplied have been taken in June 2000. It shows that the en globo land, prior to the subdivision and sale of the Ruling Properties, as at June 2000 had already been extensively cleared of native vegetation, scrub, bushland and was devoid of trees. It is reasonable to conclude that the land had already been extensively cleared as at June 2000, and most likely prior.

This extensive clearing per se is an improvement as highlighted in the above paragraph 25, which enhanced the value of the land some time prior to June 2000.

It is also evident that this extensive clearing had not been exhausted and that the en globo land comprising of the Ruling Properties had not returned to its original native state as at 1 July 2000 to again become unimproved.

Consequently, we conclude that the Ruling Properties is land on which there are improvements as at 1 July 2000 for the purposes of Division 75.

As we have concluded that the Ruling Properties is land on which there are improvements as at 1 July 2000 for the purposes of Division 75, item 3 of the table in paragraph 75-10(3)(a) applies. The appropriate valuation date therefore is as at 1 July 2000.

Valuation

Any valuation must comply with the requirements of A New Tax System (Goods and

Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3 (MSV 2005/3) and A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 (MSV 2009/1) as the case may be in relation to the Ruling Properties.

You have not been able to submit a new valuation for the purposes of this private binding ruling, as intended. Consequently, we can only consider the valuation as submitted per Annexure A.

The valuation for each allotment you initially submitted with your application for a private ruling are based on market values for the Ruling Properties as determined by you to be the prices that willing but not anxious vendors and purchasers would enter agreements to transfer the particular allotments. The particular allotments were sold by you at the going market rate. The valuations do not comply with the requirements of MSV 2005/3 nor MSV 2009/1 as the case may be in relation to the Ruling Properties as there is no valuation of the en globo land from which the allotments sold by you were created, nor appropriate valuation of the individual allotments.

Therefore, the valuation as submitted per Annexure A is not an approved valuation under subsection 75-35(2). As the valuation is not an approved valuation for the purposes of Division 75, there is no appropriate refund amount that you have sought to claim. Therefore, we cannot consider the amount of GST refund that you may be entitled to.