Edited version of your written advice

Authorisation Number: 1012725629270

Ruling

Subject: Goods and services tax: supply of real property

Question 1

Is the supply of Class 1 Lots each a supply of a freehold interest in land on which there are no improvements for the purposes of Subdivision 38-N (and in particular section 38-445)?

Answer

No

Question 2

Will the supply of Class 2 Lots be a supply of a going concern for the purposes of section 38-325 of the GST Act?

Answer

Yes

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Vendors have entered into a contract with Purchaser for the sale of the Land. The sale is expected to complete on or around ddmmyyyy.

The parties have agreed that:

• Where the supply (or a component thereof) of the Land is eligible to be a supply of a going concern, the supply with be a GST-free supply of a going concern. The parties have also agreed that on completion, the purchaser, will assume control and ownership of all things necessary for the continued operation of the enterprise on that part of the Land; and

• Where the supply (or a component thereof) is a supply by the State of land on which there are no improvements (as defined in section 38-445 of the GST Act), the supply will be GST-free.

The Vendors have granted a lease to Entity A over the Class 2 lots. The lease has expired. However, the Tenant is holding over. The lease will be assigned to the Purchaser on completion of the sales contract.

The Vendors will supply freehold title to the land.

The land has not already been the subject of a supply under section 38-445 of the GST Act.

Your agent has outlined the following identifiable features in relation to the Class 1 lots:

• Land fill

• Fencing including boundary steel post mesh, barbwire, metal and timber fencing

• Potential clearing of grass and bush area

Your agent also supplied a planning certificate and various reports on the site.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 38-445

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision

Note: In this ruling, unless otherwise stated,

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Question 1

Under subsections 38-445(1) and 38-445(2):

• a supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if the supply is of a freehold interest in the land

• however, the supply is not GST-free if, since 1 July 2000, the land has already been the subject of a supply that is GST-free under this section.

The supplier is the State

Your agent contends that the Vendor is the State for the purposes of section 38-445. As outlined in Goods and Services Tax Ruling GSTR 2006/5 Goods and services tax: meaning of 'Commonwealth, a State or a Territory' (GSTR 2006/5) the Commissioner agrees with this contention.

The supply is of a freehold interest in land

The Vendors will supply freehold title to the land.

Whether there are improvements on the land

Paragraph 22 of Goods and Services Tax Ruling 2006/6: improvements on the land for the purposes of Subdivision 38-N and Division 75 (GSTR 2006/6) explains 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 explains that where there have been a number of human interventions on the land it is necessary to establish whether any of the human interventions enhance the value of the land at the relevant date. Whether the net value of the human interventions enhance the overall value of the land is irrelevant.

As per paragraph 24 of GSTR 2006/6, objectivity is required when establishing whether a human intervention enhances the value of the land:

24. Determining whether a human intervention enhances the value of the land entails an objective test. This means that whether an intervention enhances the value should not be determined by reference to use or intended use by either the supplier or the recipient.

An objective view of whether any of the human interventions would be of value to anyone, for any purpose whatsoever, is necessary in order to correctly establish whether there are any improvements on the land. In other words, for whoever purchased that land, any particular intervention would relieve them of the cost of doing that themselves. The intended or subjective use of a particular person, including the notion of "highest and best use" is irrelevant.

Paragraph 25 of GSTR 2006/6 provides a list of examples of human intervention which may enhance the value of land and 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, and

• filling of land.

The human interventions, which may enhance the value of land and which are relevant in relation to your Land, are:

• Filling and levelling of the land (the major intervention)

• Fencing including boundary steel post mesh, barbwire, metal and timber fencing

• Potential clearing of grass and bush area

'Land Fill

The valuer has referred to the High Court case Lewis Kiddle and another v. Deputy Federal Commissioner of Land Tax 27 CLR 316 (Lewis Kiddle) to support his opinion that the human interventions do not enhance the value of the land. The valuer states that the landfill has elevated the Land from its low set, natural state. The valuer also acknowledges that this could be considered to be an improvement.

The valuer discounts the value of the improvement, referring to uncontrolled contaminated waste and increased levels of hazardous waste when assessing the Land for residential use. The valuer ultimately concluded that the improvement was negated by the uncontrolled land fill and the financial expense to remove it. On this basis, the savings referred to in Lewis Kiddle were nil.

A photo of Class 1 lots shows that the land is clear, level and well grassed with large, well established trees around the perimeter. The previous activities have altered the Land from its low set, sloping, natural state to its current state.

The valuer has referred to "uncontrolled contaminated waste". However, the "Uncontrolled" nature of the fill compaction is only an issue in relation to the proposed use of the Land for a residential or mixed use property development. Further, the "contamination" is only an issue in the context of the proposed use of the Land for a property development. The RAP is only required to make the site suitable for the proposed development.

The 'contamination' is not identified as an issue in relation to the current use, as evidenced by the planning certificate which states 'The land is not affected by any other matters contained in the relevant legislation.'

Paragraph 20 of GSTR 2006/6 explains that unimproved land is taken to be land in its natural state. Paragraph 24 of GSTR 2006/6 further explains that whether an intervention enhances the value should not be determined by reference to use or intended use by either the supplier or the recipient.

The filling and levelling undertaken is still present and the benefit has not been extinguished. Therefore, the filling and levelling of the Land still constitute human interventions that enhanced the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Accordingly they are improvements for the purposes of section 38-445.

Fencing

Fencing involves human intervention on land.

The valuer has made the following comments:

"The Land includes sections of boundary steel post mesh and barbwire fencing affecting some Lots ….These site characteristics are not considered to enhance or detract the value of the Land in my view at the relevant dates."

Further, he states in relation to fencing:

"Based on the principles of the Lewis Kiddle High Court case, I do not consider a prospective purchaser would pay less for the Land for the site characteristics referred to herein, if they were not in place, at the relevant date. Accordingly, I do not consider such site characteristics to be an Improvement to the Land."

The photos illustrate that there is minimal fencing on or around the Land. The Commissioner agrees that the fencing does not enhance the value of the Land and therefore cannot be considered to be an improvement for the purposes of section 38-445.

Clearing

The valuer states:

"Some clearing is evident… These site characteristics are not considered to enhance or detract the value of the Land in my view at the relevant dates."

Further, he states:

"The clearing of the Land appears to be a function of the imported landfill …Based on the principles of the Lewis Kiddle High Court case, I do not consider a prospective purchaser would pay less for the Land for the site characteristics referred to herein, if they were not in place, at the relevant date. Accordingly, I do not consider such site characteristics to be an Improvement to the Land."

Your agent contends that the land fill does not enhance the value of the land as it is contaminated and is poorly compacted. Your agent also contends that, as any clearing to the lots is associated with the landfill, the clearing also does not enhance the value of the Land.

However, as discussed under landfill, the Commissioner does not agree with this assessment.

Loose road base

The valuer states:

"A small area of loose road base is also evident, however its purpose is unknown. These site characteristics are not considered to enhance or detract the value of the Land in my view at the relevant dates."

The Commissioner agrees that the road base would not be considered an improvement in the context of section 38-445.

Conclusion

As the 'Class 1 Lots' are not unimproved land due to the land fill being considered an improvement, the supply of each or any Lot will not be a supply of a freehold interest in land on which there are no improvements for the purposes of Subdivision 38-N (and in particular section 38-445).

Question 2

Under section 9-5, an entity makes a taxable supply if:

• it makes a supply for consideration; and

• the supply is in the course or furtherance of an enterprise that it carries on; and

• the supply is connected with Australia; and

• the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

On the facts provided, the supply of the 'Class 2 Lots' will be a taxable supply unless it is GST-free or input taxed. In the current circumstances, there is no provision under the GST Act in which the supply will be input taxed.

Section 38-325 deals with the supply of a going concern. Subsection 38-325(1) provides that the supply of a going concern is GST-free if:

• the supply is for consideration

• the recipient is registered or required to be registered for GST, and

• the supplier and the recipient have agreed in writing that the supply is of a going concern.

On the facts supplied, the supply will satisfy the requirements of subsection 38-325(1). Therefore, where the supply meets the requirements of subsection 38-325(2) it will be a GST-free supply of a going concern.

Subsection 38-325(2) provides that a supply of a going concern is a supply:

• under an arrangement under which:

• the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and

• the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of the larger enterprise carried on by the supplier).

Supply under an arrangement

Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5; Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explain that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

The supply of the Class 2 Lots will be supplied pursuant to the Sales Contract. Therefore, the supply of the Lots will be a supply under an arrangement.

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraph 38-325(2)(a) requires that you supply all things necessary for the identified enterprise.

The enterprise

As explained in paragraph 29 of GSTR 2002/5, subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

The Vendors undertake a leasing enterprise. This is the identified enterprise for the purposes of paragraph 38-325(2)(a).

All things necessary

The lease has expired. However, the Tenant is holding over and is still paying rent for the Class 2 lots. As explained in paragraphs 65 and 66 of GSTR 2002/5, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

A supplier who occupies premises under a periodic tenancy therefore can supply the right to occupy the premises to a recipient and would not be precluded from making a supply of going concern in circumstances where the premises were a thing necessary for the continued operation of the relevant enterprise.

As the Tenant will continue to pay rent for the Class 2 Lots and has a legally enforceable right to occupy the premises, the Vendors are still undertaking a leasing enterprise on the Land which is capable of assignment to the Purchaser.

The Vendors have agreed that the Purchaser, will assume control and ownership of all things necessary for the continued operation of the enterprise on the Class 2 Lots. This will include the Vendors rights under the lease. Therefore, the Vendors will supply all things necessary for the continued operation of the leasing enterprise to the Purchaser.

Supplier carries on the enterprise until the day of the supply

The Vendors will carry on the leasing enterprise until the day of Completion of the sale contract (i.e. the day of the supply). Specifically, the Sales Contract states:

(1) Until completion, the Vendor must:

(a) Duly and punctually observe and perform in a prudent and responsible manner all of the obligations as landlord contained in or implied under the Lease;

(b) Not do anything which gives rise to the Purchaser being liable to the Tenant for breach of the Lease; and

(c) Continue to manage the Property and the Lease in accordance with its usual practice and procedure prior to the date of this Contract.

Accordingly, the Vendors will carry on the leasing enterprise until the day of the supply.

Therefore, the Vendors will satisfy the requirements of section 38-325(2) of the GST Act.

Conclusion

As the Vendors will satisfy the requirements of subsections 38-325(1) and (2) of the GST Act, their supply of the "Class 2 Lots" will be a supply of a going concern for the purposes of section 38-325 of the GST Act.