Edited version of your written advice

Authorisation Number: 1012755790584

Ruling

Subject: GST - unimproved land and refund of overpaid GST

Question 1

Is each parcel of land the subject of this ruling, 'land on which there are no improvements' for the purposes of section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The specified parcels of land are land which has been improved for the purposes of section 38-445 of the GST Act. The remaining parcels of land are 'land on which there are no improvements' for the purposes of section 38-445 of the GST Act.

Question 2

Are you entitled to a refund of overpaid GST in relation to the sale of any parcels of land in circumstances where the sales were mistakenly treated as fully taxable supplies when in fact they were GST-free supplies pursuant to section 38-445 of the GST Act?

Answer

Yes, you are entitled to a refund of overpaid GST for the properties referred to in question 1 that are GST-free supplies under section 38-445 of the GST Act.

Relevant facts and circumstances

You are a local government entity. You owned various real estate assets which were transferred to new owners as part of a voluntary land exchange program. The program was initiated by you with a view to acquiring land for specific purposes.

You exchanged particular lots for other privately owned lots in your local government area. In some cases there was a cash amount in your favour in addition to the value of the land acquired by you.

The Properties were acquired by you both before and after 1 July 2000. You supplied a listing of the Properties. None of the Properties acquired after that date were supplied to you as GST-free supplies under section 38-445 of the GST Act.

The Properties have been transferred to the new owners via a Land Transfer form.

The value of the consideration for the transfer of your land is the value of the privately-owned land that you acquired in exchange for the transfer together with any cash paid by the purchaser.

In your ruling application you enclosed aerial photographs that were taken at or near the time of transfer of the Properties.

GST paid on land transfers

The transfers of the Properties were treated as fully taxable supplies by you and GST was paid to the ATO on each of the exchanges in the relevant tax periods, calculated at 1/11th of the GST inclusive sales price as set out on the Property Information (Transfer) forms for each of the properties received in exchange for the respective Properties.

None of the transferees of the Properties were registered or required to be registered for GST.

You do not intend to reimburse the recipients of your supply.

You notified the Commissioner in accordance with subsection 105-55 of the TAA that you were entitled to a refund in respect of some of the land transfers. You advised that the refund relates to property sales that were subject to the margin scheme as per Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and subject to the GST free status under section 38-445 of the GST Act.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-445(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-445(2)

Taxation Administration Act 1953 Schedule 1 Section 105-65

Reasons for decision

In this reasoning:

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

• all terms marked with an asterisk* are a defined term in the GST Act.

Question 1

Section 38-445 states, in part:

(1) A supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if:

(a) the supply is of a freehold interest in the land……

(b) …

…

(2) 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.

As you are a local government authority we consider that you are a 'State' for the purposes of section 38-445 of the GST Act. This is consistent with the view expressed by the Commissioner in paragraph 13 of Goods and Services Tax Ruling GSTR 2006/5 Goods and services tax: meaning of 'Commonwealth, a State or a Territory:

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.

For the purposes of subsection 38-445(2), the supply of the land is a supply of a freehold interest in land by a State and it has not previously been supplied under section 38-445.

All that remains to be determined is whether this is 'land on which there are no improvements'.

Improvements on the land

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) discusses the meaning of the phrase 'land on which there are no improvements'.

Paragraph 20 of GSTR 2006/6 states:

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.

Paragraph 21 of GSTR 2006/6 refers to the principles established by the High Court in Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503 in relation to the meaning of 'improvement': Any operation of man on land which has the effect of enhancing its value comes within the definition of 'improvement'.

The application of this principle to 'improvements on the land' is set out in paragraph 22 of GSTR 2006/6, which states:

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.

We must establish if there are human interventions, physically located on the land, that enhance the value of the land.

Paragraph 24 of GSTR 2006/6 states:

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.

Paragraph 25 of GSTR 2006/6 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 intervention located on the land enhances its value at the relevant date, then there are improvements on the land.

You supplied aerial photographs and other relevant information, including some certifications by a valuer in relation to the parcels of land. The Commissioner of Taxation is not bound by a professional valuer's opinion of the land. However, an objective consideration as to whether a human interaction enhances the value of the land, may be assisted by a valuer's assessment of improvements on the land conducted in accordance with the parameters outlined in GSTR 2006/6.

In our view, based on aerial photos and the valuer's certifications, the human intervention of clearing is still evident on some of the Properties.

As explained in paragraph 23 of GSTR 2006/6, if there are 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.

Paragraph 28 of GSTR 2006/6 deals with human interventions that may have deteriorated:

In other circumstances, human interventions that were once improvements but that have deteriorated over time or have contributed to land degradation, may no longer enhance the value of the land and are not improvements. For example, clearing is a human intervention which ordinarily enhances the value of the land. However, clearing may deteriorate over time with the regrowth of the same type of vegetation or even different vegetation (for example, lantana, blackberry or other noxious weeds). Clearing also may degrade the land by later causing erosion or salinity problems.

We consider that there has been clearing of the land to some extent and this is a human intervention that enhances the value of the land in accordance with paragraph 22 of GSTR 2006/6. In addition for the listed properties we consider that the clearing is a human intervention which has not deteriorated therefore it enhances the value of the land. Consequently, these properties are not unimproved land for the purposes of section 38-445.

For the remaining properties, the aerial photos reveal that these properties are heavily timbered. On this basis there is no evidence of previous clearing. However if these properties were cleared in the past, the advanced regrowth on these properties means that the clearing has deteriorated to such an extent that it is no longer an enhancement to the land. Therefore the remaining properties is 'land on which there are no improvements' for the purposes of section 38-445.

Question 2

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 Taxation Administration Act 1953 (section 105-65) are met.

Section 105-65 will apply if all three of the following conditions are present:

• there was an overpayment of GST

• a supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent, and

• the recipient(s) has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient(s) of the supply is registered or required to be registered for GST.

You overpaid GST as you incorrectly treated the supplies of the land as taxable when these supplies were GST-free under section 38-445 of the GST Act. Further you have not reimbursed (and do not intend to reimburse) the overpaid GST to the unregistered recipients as you consider that you absorbed the cost of the GST and did not pass it onto these recipients. You therefore meet the conditions for section 105-65 to apply.

Miscellaneous Tax Ruling MT 2010/1 restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 provides the Commissioner's view of the application of section 105-65.

Paragraphs 116 and 117 of MT 2010/1 state:

116.The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary.…The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions.

117. The Commissioner considers that the words 'need not', in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has a discretion to pay a refund in appropriate circumstances. It is noted that this view is supported by the decision in Luxottica.

As you satisfy the requirements in section 105-65, the Commissioner need not give you a refund of overpaid GST. The question then is whether, in these circumstances, the discretion to pay the refund should be exercised.

Paragraphs 127, 128 and 129 of MT 2010/1 provide guiding principles to consider when exercising the discretion. In particular paragraph 127 states in part:

… It is clear from the scope and purpose of section 105-65 that the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost …

Paragraph 129 goes on state:

129. Generally, the Commissioner will not exercise the discretion in cases where the supplier has not reimbursed the unregistered recipients a corresponding amount of the overpaid GST, unless there are other countervailing reasons for doing so.

As you do not intend to reimburse the unregistered recipient we will consider whether there are countervailing reasons to exercise the discretion.

You contend that you did not did not pass on the cost of the GST. It is our view that you did pass on the GST as a component in the 'price'. This is because the properties were valued in a market where most supplies would have been taxable and included GST in the price.

However, we consider that there are special circumstances which warrant the exercise of the Commissioner's discretion.

The following factors were taken into account:

• Under the council's voluntary land exchange program you exchanged land that you owned for land that was owned by unregistered recipients. The price at which each of the properties was exchanged was the then current market value as determined by an independent property valuer. In some cases, the purchaser paid monetary consideration in addition to supplying their land.

• You gave up land that you owned in order to acquire land within the shire for specific purposes. The land exchange program reflects council's policy objectives in respect of land use. Therefore the supply of land under the land exchange program can be distinguished from sales of land for commercial purposes.

• We have accepted your statement that during an audit the ATO advised you that the sales of land were subject to GST even though the records of the audit are no longer available.

• The unregistered recipients each received property of equal value to that which they gave up. These recipients have not borne any additional cost as a result of the transactions. In fact the unregistered recipients received a property which was more suitable to their purposes.

• You also received property of equal value to that which you gave up (including cash where applicable), however you then remitted GST meaning that on a simple analysis you have suffered a loss.

• It can be reasonably concluded that you will not make a windfall gain if the discretion is exercised to allow the refund.

Therefore, in respect of the properties referred to in question 1, the Commissioner will exercise the discretion in section 105-65 to allow a refund of overpaid GST subject to the requirements of section 105-55 of the TAA.