Edited version of your written advice

Authorisation Number: 1012751993236

Ruling

Subject: GST and sale of land

Question 1

Was the land unimproved land at 1 July 2000 for the purposes of Subdivision 38-N and Item 4 of the table in section 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Provided you agree in writing with purchasers to use the margin scheme, can you apply Item 4 of the table to section 75-10(3) of the GST Act in calculating the margin on the future sale of lots subdivided from the land?

Answer

No, the land is not land on which there were no improvements as at 1 July 2000.

Question 3

If Item 4 of the table to section 75-10(3) of the GST Act does not apply, does subsection 75-11(7) of the GST Act apply in calculating the margin on the future sales of lots subdivided from the land?

Answer

No, the relevant subsection is 75-11(6).

Relevant facts and circumstances

You, the Relevant Authority (RA), are registered for GST.

You were established under the Relevant Authority Act (RA Act).

The RA Act repealed the Acts establishing other Prior Authorities. Upon commencement of the RA Act, you assumed responsibility for the assets, operations and projects for each of those Prior Authorities.

The land was formerly held by Department 1. In mmyyyy, Department 1 sold the land to Prior Authority 1 for a nominal amount. The margin scheme was applied to this sale.

On mmyyyyy, the Prior Authority 1 Act was repealed. Later, Prior Authority 1's GST registration was cancelled with effect from the day after you were established.

The land was previously used for the disposal of waste fill as part of land reclamation works. The fill material used was dredge spoil extracted from the adjoining river as well as building waste, road and general waste.

Later, the State used the site for commercial purposes.

Your representatives advised that the dredge spoil used for the reclamation works was contaminated.

In mmyyyy, the Environmental Authority classified the site 'contaminated'.

Under the RA Act, you are required to undertake environmental reviews and remediation works to comply with the requirements of the Environmental Authority, which required the land to be fully de-contaminated prior to development.

You have been undertaking the remediation and site stabilisation works necessary to remove and manage the contaminants on the land and prepare the site for future construction and sales. This has involved the recent removal of all topsoil in order to access the sub-surface contaminants.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 72-100

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

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

A New Tax System (Goods and Services Tax) Act 1999 section 75-11

A New Tax System (Goods and Services Tax) Act 1999 section 149-15

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

Was the land unimproved land at 1 July 2000 for the purposes of Subdivision 38-N and Item 4 of the table in section 75-10(3) of the GST Act?

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.

Land and improvements

The meaning of 'land' is not defined for the purposes of the GST Act, therefore it takes its generally accepted meaning, i.e. '1. the solid substance of the earth's surface. 2. the exposed part of the earth's surface' (Macquarie Dictionary). We consider that any solid portion of the earth's surface can be regarded as 'land', even though it may be covered by the sea itself, or the water in a river.

The High Court, in Goldsworthy Mining Ltd v Federal Commissioner of Taxation [1973] HCA 7; (1973) 128 CLR 199, at paragraph 32 (Goldsworthy case), has accepted that land below the surface of sea-water is also considered to be land within its generally accepted meaning:

32. There is the independent question whether the subject matter of the dredging lease is "land" within the meaning of s. 88 (2) of the Income Tax Assessment Act, but for present purposes that question may be put to one side. There is no reason for thinking that, at common law, a lease cannot be granted of portion of the sea-bed, provided that the property the subject of the grant is defined with sufficient certainty. There may be some question whether the sea-bed answers the description of "land" in every sense in which that word is used. But in general the word in its legal signification includes any ground, soil or earth (Halsbury's Laws of England, 3rd ed., vol. 32, p. 249). There is a long history of leases for mining purposes of strata of land underlying the sea, which supports the view that a lease may be granted of portion of the sea-bed. The description contained in the schedule to the dredging lease makes it clear that the property the subject of the instrument consists of the surface of the sea-bed as it exists at the time of the grant to a specified depth forty-five feet below Admiralty datum. The exception specified in the schedule then excludes so much of the sea-bed as is excavated in accordance with the dredging carried out by the appellant. By reason of this exception the vertical ceiling of the property demised is reduced and assumes the actual surface of the sea-bed as it exists from time to time so long as it does not extend beyond the surface as it existed at the time of grant. Consequently, the property the subject of the dredging lease does not include the superjacent waters, but is confined to the surface of the sea-bed, extending to the depth specified in the schedule. It follows, therefore, that in my opinion the property which was the subject of the instrument is land within the general acceptation of that expression, notwithstanding that it has the character of sea-bed.

The High Court, in the case of Risk v Northern Territory [2002] HCA 23 (Risk case), decided on the issue of whether 'land in the Northern Territory' includes the seabed of bays or gulfs for the purposes of the Land Rights Act. The High Court in the Risk case supports the principle that land can encompass the seabed as was indicated in the High Court's citation of the Goldsworthy case (paragraph 42):

42. In its ordinary meaning, "land" means the "solid portion of the earth's surface, as opposed to sea, water"[39]. In certain statutory contexts, however, "land" is capable of referring to the sea-bed. In Goldsworthy Mining Ltd v Federal Commissioner of Taxation [40], Mason J held that, for the purpose of s 88 of the Income Tax Assessment Act 1936 (Cth), a lease for dredging purposes of the sea-bed was a lease of land. Hence, whether or not land in the Land Rights Act includes the sea-bed depends on the history, context and purpose of the Land Rights Act[41].

And again at paragraph 81:

81. In Dampier Mining Co Ltd v Federal Commissioner of Taxation[ 88], in the course of construing provisions of the Income Tax Assessment Act 1936 (Cth) ("the Tax Act"), Mason and Wilson JJ said that it was "somewhat artificial" to speak of the seabed as being "land". However, they went on to refer to the judgment of Mason J in an earlier case construing the Tax Act, Goldsworthy Mining Ltd v Federal Commissioner of Taxation [89]. There, his Honour had referred to the long history of leases for mining purposes of strata of land underlying the sea, but also had observed that there may be some question as to whether the seabed answers the description of "land" in every sense in which that word is used.

The Risk case supports the notion that land can include land under the sea or fresh water. Therefore, in your case, we conclude that land which lay under the surface of the river is also 'land' within its generally accepted meaning, and wider statutory meaning.

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.

The land originated from below the surface of the river and it is at this point, being in its natural state, from which we consider whether there have been any improvements that enhance its value. Paragraph 38 of GSTR 2006/6 outlines this view:

38. Support for this view is found in the decision in Commonwealth of Australia of Australia v. Oldfield (1976) 133 CLR 612; (1976) 10 ALR 243 where the High Court described the meaning of 'improvements on the land' in the following manner:

...

We are concerned with the value at the relevant date of the physical consequences which enure to the land of the acts whereby the land attained a quality and usefulness additional to that which it had in its virgin state.

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 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, and

• filling of land.

The starting point, from which to consider the impact and valuation of any human interventions, is the original state of the land which was below the surface of the river.

Human interventions relevant to your land

As explained in paragraph 23 of GSTR 2006/6, if there are any human interventions that enhance the value of the land, then there are improvements on the land. Any human intervention is considered to mean any single human intervention. We are not looking at the net value of human interventions.

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

• reclamation of land from the river

We consider that this state of reclamation enhances the value of the land. The reclaimed land has not returned to its natural state as part of the river. It is still in existence and it has not been exhausted, nor has it deteriorated. Therefore, reclamation of the land is a human intervention that enhances the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

• filling of the land

From reclamation, the land has been substantially filled. The land is still in its substantially filled state. The fill does not appear to have been exhausted, nor has it substantially deteriorated. Therefore, filling of the land is a human intervention that enhances the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

• levelling

From reclamation, the land has been substantially levelled. The land is still in its substantially levelled state. The levelling does not appear to have been exhausted, nor has it substantially deteriorated. Therefore, levelling of the land is a human intervention that enhances the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Your representative has advised that the reclamation was made with contaminated materials, thus negating the 'improvement' effect of the reclamation work.

The land reclamation works improved the land to the point where it was able to be used by the State for a commercial purpose.

Although the need for remedial work erodes the value of the reclamation, filling and levelling undertaken, it does not extinguish the benefit. Therefore, the reclamation, filling and levelling of the land still constitute human interventions that enhance the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Question 2

Provided you agree in writing with purchasers to use the margin scheme, can you apply Item 4 of the table to section 75-10(3) of the GST Act in calculating the margin on the future sale of lots subdivided from the land?

Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by:

a. Selling a freehold interest in land; or

b. Selling a stratum unit; or

c. Granting or selling a long-term lease;

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long term lease through a supply that was ineligible for the margin scheme.

If the land is not ineligible for the margin scheme, the GST on any sale will be calculated as 1/11th of the relevant margin, i.e. 1/11th of the amount by which the consideration for the supply exceeds the valuation of the interest, unit or lease.

Eligibility

Subsection 75-5(3) lists the circumstances in which you acquire the entire freehold interest, stratum unit or long term lease through a supply that was ineligible for the margin scheme. As you acquired the land from Prior Authority 1 by way of vesting, it was not a taxable supply to you. Therefore, the relevant paragraph for consideration is 75-5(3)(g) which deals with supplies in relation to which all of the following apply:

i. you acquired the interest, unit or lease from an entity who was your associate, and who was registered or required to be registered, at the time of the acquisition

ii. the acquisition from your associate was without consideration

iii. the supply by your associate was not a taxable supply

iv. your associate made the supply in the course or furtherance of an enterprise that your associate carried on

v. your associate had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme

However, under subsection 3A, where (as in this case) your acquisition of the property from an associate was not by way of a supply by an associate, subparagraphs 75-5(3)(g)(iii) and (iv) do not apply.

Paragraphs 80 to 91 of Goods and Services Tax Ruling 2006/9: supplies (GSTR 2006/9) discuss the GST consequences of vesting in a government authority of real property in accordance with State legislation. Paragraph 82 of GSTR 2006/9 explains that, in cases where land vests in the authority as a result of the authority seeking to acquire the land, and initiating the acquisition process pursuant to its statutory right, then the owner does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

The effective date of the RA Act was ddmmyyyy. Under the RA Act, the Prior Authority Act was repealed. The effect of this is that you acquired the land on ddmmyyyy. This was formalised later, when the land was vested in you.

As at ddmmyyyy Prior Authority 1 was registered for GST. Prior Authority 1's GST registration was cancelled after you were established and its property had passed to you.

You have acquired the land, for no consideration, from an associate (Prior Authority 1) who was registered at the time of the acquisition. Therefore, the conditions set out in sub-paragraphs (i) and (ii) of paragraph 75-5(3)(g) have been met. It is therefore necessary to review the circumstances of Prior Authority 1's acquisition of the property to determine whether the conditions set out sub-paragraph (v) has also been met.

On ddmmyyyy, Department 1 sold the land to Prior Authority 1 for $xx. Prior Authority 1's offer was accepted and the transfer of the land was authorised under the State's relevant Land Act. The margin scheme was applied to this sale

Paragraph 10 of Goods and Services Tax Determination GSTD 2006/4 Goods and services tax: government entities and the margin scheme - does item 4 in the table in subsection 75-10(3) apply if real property was vested for no consideration in a government department or agency on or after 1 July 2000 but was held by another department or agency of the Commonwealth or the same State or Territory since before 1 July 2000?, explains that each Government department or agency that is registered for GST is treated as a separate entity carrying on an enterprise (section 149-15 of the GST Act). If the supply of real property between departments or agencies that are not members of the same GST group is for consideration, the supply is a taxable supply, provided the other requirements in section 9-5 are satisfied. This is so even though the departments or agencies are part of the Commonwealth or the same State or Territory.

The relevant Land Act provides for various methods of dealing with Crown land, including vesting and sale by private treaty. Although other options were available, Department 1 disposed of the land via a contract for sale. Department 1 was registered for GST. Therefore, pursuant to section 149-15, the GST law applied to Department 1. The supply of the land was neither GST-free nor input taxed. As the other requirements of section 9-5 were satisfied, the supply of the land was a taxable supply. The margin scheme was applied to this sale.

Therefore your associate, Prior Authority 1, acquired the land through a taxable supply on which the GST was worked out by applying the margin scheme. Therefore the conditions set out in sub-paragraph 75-5(3)(g)(v) has not been met. As not all of the conditions in all of the relevant sub-paragraphs of paragraph 75-5(3)(g) have been met, your subsequent supplies of the land are not ineligible for the margin scheme.

However, as established in Question 1 above, the land is not land on which there were no improvements as at 1 July 2000 and Item 4 of the table to section 75-10(3) does not apply.

Question 3

If Item 4 of the table to section 75-10(3) of the GST Act does not apply, does subsection 75-11(7) of the GST Act apply in calculating the margin on the future sales of lots subdivided from the land?

Calculating the margin

Section 75-11 sets out the way to calculate the margin for the supply of real property in certain circumstances. Subsections 75-11(1) to 75-11(5) do not apply in your circumstances. In accordance with section 72-100, you and Prior Authority 1 were associates. Therefore, it is appropriate to consider subsections 75-11(6) and 75-11(7).

Subsection 75-11(6) deals with supplies in relation to which all of the following apply:

a) you acquired the interest, unit or lease from an entity who was your associate, and who was registered or required to be registered, at the time of the acquisition

b) the acquisition from your associate was without consideration

c) the supply by your associate was not a taxable supply

d) your associate made the supply in the course or furtherance of an enterprise that your associate carried on

e) none of subsections (1) to (5) apply.

However, under subsection 75-11(6A), where (as in this case) your acquisition of the property from an associate was not by way of a supply by an associate, subparagraphs 75-11(6)(c) and (d) do not apply.

As established at Question 2, you have acquired the land, for no consideration, from an associate who was registered at the time of the acquisition. Further, your associate was registered at the time of its acquisition of the land, for which it paid consideration. Therefore, in accordance with paragraph 75-11(6)(g), the margin for the supplies that you make will be the amount by which the consideration for your supply exceeds:

• an approved valuation of the land as at the day on which Prior Authority 1 acquired the land, or

• the consideration paid by Prior Authority 1.

As subsection 75(11)(6) applies to this situation, subsection 75-11(7) cannot apply pursuant to paragraph 75-11(7)(b).