Edited version of your written advice

Authorisation Number: 1012931682230

Date of advice: 14 January 2016

Ruling

Subject: GST and unimproved land

Question

Will the supply of the Lots by the Commonwealth, State or Territory to Entity B (the Developer), be GST-free supplies under section 38-445(1A) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Answer

Yes, the supply of the Lots which do not fall within the cleared area will be unimproved land and GST-free. The supply of the Lots affected by the clearing are considered to be improved and taxable.

Relevant facts and circumstances

The Commonwealth, State or Territory (You) are registered for Goods and Services Tax (GST)

On X June YYYY, you entered into a Development Agreement (the Agreement) with Entity B (the Developer) and granted the Developer a Crown lease to develop Lot X, (the Area), consisting of XXX hectares of Crown land.

The development area provides for XXX residential allotments across a number of discrete development stages. The residential lots vary in size, ranging from XXX square metres to over XXXX square metres.

There are XX Lots remaining to sell and settle.

Development commenced in late YYYY and was completed in November YYYY.

Pursuant to the arrangement, the Developer would develop all public infrastructure works (including roads, sewerage, electricity and water infrastructure, public parks and community purpose allotments) and you would retain ownership over those areas and all infrastructure.

The Developer would develop the land and acquire titles for the residential Lots once all roads, parks, community land and public infrastructure had been surrendered to you.

The residential lots would then be on-sold to third party purchasers. You would receive XX% of the sales proceeds.

Pursuant to Clause X of the Agreement, you granted the Developer a Crown Lease over the Area for the purpose of undertaking the works under the Agreement.

Under Clause XX of the Agreement, the Developer must execute certain documents (ie memoranda of transfer/surrender of title, memoranda of grants of easement etc) before the Developer is entitled to surrender the Crown Lease in exchange for a certificate of Title in respect of the Lots.

The Developer is entitled to surrender the Crown Lease in respect of the area comprising one or more Lots and all associated public infrastructure (roads, services, parks and community land for example) in accordance with Clause XX of the Agreement, in exchange for freehold title of the lot/s within the surrendered area. In each case, the area of the Crown Lease surrendered is larger than the area of land to which the Developer is entitled to receive freehold title. This is because the Crown Lease returns all parks, gardens, roads and public infrastructure to you (or the relevant service authority).

The Agreement is supported by Clauses X and X of the Crown Lease Terms. The Crown Lease sets out the conditions which need to be satisfied by the Developer before you will grant an interest in fee simple to the Developer for each of the Lots. One such condition is that the works have been completed and a Certificate of Practical Completion has been issued in accordance with the Agreement.

Clause X of the Crown Lease Terms stipulates that the Developer will not be entitled to freehold title in respect of any open space, thoroughfare, park, garden, road or path or land dedicated to a public purpose and that all such land will vest in you.

Pursuant to Clause X of Schedule X to the Agreement, the Developer sells the Lots to end purchasers for monetary consideration and transfers the relevant Certificate of Title for the Lots to the purchasers. In practice, most sales between you and the Developer and the Developer and the end purchaser will occur back to back.

The Developer is registered for GST.

You held title to the land (relating to this development) since before 1 July 2000. There have been no previous sales (GST-free or otherwise) of the land.

Upon commencement of the Crown Lease, Lot XXXX was natural bushland. Informal and unapproved dirt tracks have been made and used recreationally and without approval by members of the public driving 4WD's, motorcycles and other recreational vehicles. There were also road stubs encroaching on the outskirts of the site.

Following development of the site, the road stubs did not sit on any of the Lots but rather became public roads which vested in you (ie title in the road stubs were not transferred to the Developer at any time and the Developer never had the right to a transfer of those areas).

The survey plan of the Land confirms that established roads, other than the road stubs, were outside the boundaries of Lot XXXX. A series of photographs, taken in January YYYY of the adjoining land, is reflective of the site prior to commencement of the project.

The Request for Expression of Interest, dated YYYY, refers at paragraph X.X to the site being covered by open woodland forest.

In an e-mail dated XX December YYYY, you provided the following additional information:

• The Crown lease was granted on XX June YYYY.

• The road stubs protruded onto the land but were never transferred to the Developer.

• You provided an image of the land dated X June YYYY. This indicated that works had commenced for an electricity easement as at X June YYYY (prior to issue of the Crown Lease) within the western corner of the parcel (now Lot XXXX). The image shows part of a trench within the development parcel as well as temporary fencing around the works.

• You also provided a current survey plan for Lot XXXX which shows the electricity supply easement.

• Another image dated X June YYYY shows part of a culvert within the parcel (now Lot XXXX). Currently the culvert is no longer there. The culvert was never transferred to the Developer.

• A third image dated X June YYYY shows some clearing extending from the road stub used as a lay-down area by the developer of a previous development.

• You have confirmed that there have been no other human interventions that may be considered an improvement on the land.

In a further e-mail dated XX December YYYY, you provided the following additional information:

• Paragraph X.X of the 'Request for Expressions of Interest' Development of the Area YYYY (EOI) indicates that head works were to the boundaries of Lot X which was the Development Lot prior to subdivision.

• The photo image titled 'works for electricity easement' provided by you, shows the location of the easement on the corner of Lot XXXX. Paragraph X.X of the Development Agreement confirms that the easement is land retained by the government and not transferred to the Developer. Furthermore, the head works were the responsibility of the government and not part of the Developers Works. The electricity connection is effectively to the boundary of the Developer's land. There were no other utility connections protruding on the land.

• Paragraph X.X of the Development Agreement restricted the developer from connecting to the utilities until approved.

• The photo image titled 'culvert' provided by you, showed a culvert partially on Lot XXXX. This lot is within the circle, next to the road stub, of the photo image titled 'clearing' provided by you. You consider that the culvert degraded the land rather than improved it. The culvert was located in that area when adjacent land was developed and drained storm water from the previous development onto the land. The culvert had to be removed to stop the drainage of storm water onto the land. You provided a photo image of developed Lot XXXX confirming the removal of the culvert. The 'clearing' on and around Lot XXXX was land used by a previous developer to store materials and machinery during that development. There are no other culverts located on the land.

• You also provided a photo image of the Development. The Masterplan identifies lots included in the Development.

You have provided the following documentation in support of your ruling application:

1. Development Agreement.

2. Sample settlement statement in relation to the developed lots.

3. Aerial photo YYYY.

4. Survey plan.

5. Photographs of adjoining land January YYYY.

6. Aerial photo X July YYYY.

7. Extract from Request for Expressions Of Interest dated YYYY.

8. Extract from Archaeological Survey YYYY.

9. Aerial Photo YYYY.

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 38-445

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-450(1), and

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

Reasons for decision

Note: 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 reference materials used in this ruling are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Question

Will the supply of the Lots by the Commonwealth, State or Territory to the Developer, be GST-free supplies under section 38-445(1A) of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)

Section 9-5 outlines the requirements for a taxable supply:

You make a taxable supply if:

(a) you make a supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with the indirect tax zone; and

(d) you are *registered or *required to be registered.

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

Division 38 sets out the supplies that are GST-free. In particular, subdivision 38-N deals with grants of land by government.

Under subsection 38-450(1), 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 by way of a lease other than a long-term lease and the lease is subject to conditions that when satisfied entitle the recipient to the grant of a freehold interest in or long term lease of the land.

When the Commonwealth, a State or Territory subsequently supplies the freehold interest or long term lease, it is GST-free under subsection 38-445(1A), unless the land has previously been supplied as a GST-free supply under section 38-445.

Subsection 38-445(1A) states:

A supply by the Commonwealth, a State or a Territory of land is GST-free if:

(a) the supply is of a freehold interest in the land, or is by way of *long-term lease; and

(b) the Commonwealth, State or Territory had previously supplied the land, by way of lease, to the *recipient of the supply; and

(c) at the time of that previous supply, there were no improvements on the land; and

(d) because conditions to which that lease was subject had been satisfied, the recipient was entitled to the supply of the freehold interest or the supply by way of long-term lease.

In your case, the supply of the freehold interest in the land is being made by the Commonwealth, State or Territory. Further, on X June YYYY, the Commonwealth, State or Territory entered into a Development Agreement with the Developer and granted the Developer a Crown lease (on XX June YYYY) to develop Lot XXXX ( the Area). Consequently (a) and (b) are satisfied of subsection 38-445(1A).

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 'improvements on land' in the context of the phrases 'improvements on the land' or 'no improvements on the land' in Subdivision 38-N and Division 75.

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 meaning of 'improvements on the land'

21.The meaning of 'improvements' in the context of land tax has been 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'.

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.

23. 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. If any of the human interventions located on the land enhance its value at the relevant date, then there are improvements on the land. This is regardless of whether the net value of the human interventions enhances the overall value of the land.

It should be noted that the term 'improvements on the land' is not limited to visible structural improvements and includes improvements below the surface of the land, such as underground drainage or other facilities.

The table in paragraph 34 of GSTR 2006/6 specifies the relevant day for ascertaining whether there are improvements on the land. In relation to subsection 38-445(1A) the relevant day is specified as the day 'when the land was previously supplied by the Commonwealth, a State or a Territory by way of a Lease to the recipient of the supply'. For the purposes of this ruling, that date is XX June YYYY.

Determining whether or not human intervention enhances the value of the land entails an objective test. Paragraph 25 of GSTR 2006/6 lists the following examples of human interventions that may enhance the value of the land:

• houses, town-houses, stratum units, separate garages, sheds and other outbuildings;

• commercial and industrial premises;

• farm houses, farm outbuildings, internal fencing, stockyards, wells and bores, excavated tanks, dams, surface drains, culverts, bridges, sown pasture, formed internal roads, and irrigation layouts;

• 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;

• building up of soil fertility;

• removal of animal pests, rabbit burrows etc;

• removal of rocks, stones or soil; and

• filling of land.

To be an improvement, the human intervention must enhance the value of the land. In some circumstances, human interventions that were once improvements may have deteriorated over time and may no longer enhance the value of the land and are not improvements.

Paragraphs 32 and 33 of GSTR 2006/6 discuss multiple human interventions on the land and state:

32.  Where there are a number of human interventions on the land, it is not appropriate to take a holistic approach to establishing whether there are improvements on the land. Instead, it is necessary to determine whether any of the human interventions enhance the value of the land. If any of the human interventions enhance the value of the land there are improvements on the land.

33.  For example, a building that is uninhabitable because it is derelict and condemned by order of the local council does not enhance the value of the land. The building in these circumstances is a detriment rather that an improvement. However, if the land on which the building is located is cleared and the clearing has not deteriorated or has not degraded the land, there are improvements on the land. The clearing still enhances the value of land.

Whether a human intervention enhances the value of the land is an objective test which cannot be determined by reference to use or intended use by either the supplier or the recipient. The issue of whether there are improvements on the land is a question of fact.

In your case, you have advised that upon Commencement of the Crown lease, Lot XXXX was natural bushland. There were informal, unapproved dirt tracks made and used recreationally by members of the public driving 4WDs, motorcycles and other recreational vehicles. There were also road stubs encroaching on the outskirts of the site. Following development of the site, the road stubs did not sit on any of the Lots but rather became public roads which vested in the Commonwealth, State or Territory (that is, the title to the road stubs were not transferred to the Developer at any time and the Developer never had the right to a transfer of those areas).

Furthermore, the Commonwealth, State or Territory Request for Expression of Interest dated YYYY refers at paragraph X.X to the site being covered by open woodland forest consisting mostly of native species of plants. The woodlands transition to water tolerant vegetation including palms and mixed ground cover grasses.

The aerial photograph provided at X June YYYY confirms that the site was predominantly bushland with some minor undeveloped tracks on the property. A cleared area / road stub was visible on the North east corner of the aerial photo.

You have provided a number of images dated X June YYYY of the development area:

1. Shows some clearing extending from the road stub.

The 'clearing' on and around Lot XXXX was land used by a previous developer to store materials and machinery during that development.

2. Shows part of a culvert within the parcel (now Lot XXXX). This lot is within the circle, next to the road stub, of the photo image titled 'clearing' provided by you. You consider that the culvert degraded the land rather than improved it. The culvert was located in that area when adjacent land was developed and drained storm water from the previous development onto the Land. The culvert had to be removed to stop the drainage of storm water onto the Land. You provided a photo image of developed Lot XXXX confirming the removal of the culvert. There are no other culverts located on the Land.

3. Indicates that works had commenced for an electricity easement within the western corner of the parcel (now Lot XXXX). The image shows part of a trench within the development parcel as well as a temporary fencing around the works. A Survey plan for Lot XXXX shows the electricity supply easement. Paragraph X.X of the Development Agreement confirms that the easement is land retained by the government and not transferred to the developer.

Paragraph X.X of the 'Request for Expressions of Interest' Development of the Area YYYY (EOI) indicates that head works were to the boundaries of Lot X which was the Lot prior to subdivision. Furthermore, the head works were the responsibility of the government and not part of the Developer's Works. The electricity connection is effectively to the boundary of the Developer's land. There were no other utility connections protruding on the land.

Paragraph X.X of the Development Agreement restricted the Developer from connecting to the utilities until approved.

Based on the information provided, we consider that there were some improvements located on the land at the time that the Development Agreement and Crown Lease were entered into. We refer specifically to the land cleared on and around Lot XXXX and the culvert located on Lot XXXX. The remainder of the land is predominantly open woodland or bushland.

The Lots which are affected by the clearing will be considered to be improved and will not meet the requirements of subsection 38-445(1A). The lots which do not fall within the cleared area will be unimproved.

Finally, we must examine the conditions to which the Crown Lease is subject and which must be satisfied before the Developer is entitled to the supply of the freehold interest in the land, pursuant to section 38-445(1A).

Pursuant to the Crown Lease, the Developer was required to satisfy a number of conditions under the terms of the Development Agreement in order to become entitled to a freehold interest in the Lots. Annexure A of the Development Agreement outlines the Provisions and Conditions and Covenants of the Crown Lease. In particular:

Crown Lease - Provisions

The Crown lease was granted for the purpose or enabling the Lessee to subdivide the Lease area and to comply with its obligations under the Development Agreement in relation to the Lease Area.

Conditions and Covenants

Subject to the Crown Lands Act and the Development Agreement, the Lessee must not use the Lease Area for a purpose other than the purposes for which it is leased being the purpose of development in accordance with the Development Agreement.

Recital B of the Development Agreement between the Commonwealth, State or Territory and the Developer states that the Commonwealth, State or Territory will grant a Crown Lease over the Lease Area on and subject to the terms and conditions of the Development Agreement. These terms and conditions include the following paragraphs:

• Clause x Supervision and Certification by Chartered Engineer

• Clause x Developers Works

• Clause x Certificates of Acceptance and Handover of Works

• Clause x Execution of Documents for the purposes of vesting works in the Territory and granting of easements etc

Consequently, the requirements outlined in 38-445(1A) have been met and the supply of freehold title to the land, from the Commonwealth, State or Territory to the Developer, will be GST-free in respect of land/Lots which are considered unimproved at the time the Crown Lease was entered into.