Edited version of your written advice

Authorisation Number: 1013107101783

Date of advice: 21 October 2016

Ruling

Subject: GST and the margin scheme under Item 4 at subsection 75-10(3) of the GST Act

Question 1

Does Item 4 in the table at subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to the supply of the Lot such that the valuation date is the date of the supply?

Answer

Yes.

Relevant facts and circumstances

On a certain date you entered into an agreement with a Developer and granted the Developer a crown lease to develop the Lot.

As part of the agreement, the Developer would construct residential buildings to be purchased by Entity C, also a party to this agreement.

The crown lease was registered on a certain date. You and the Developer also entered into a separate Agreement for certain works in that year.

The development involves the construction and strata titling of a number of residential buildings.

The commercial arrangement in respect of the agreement is broadly that the Developer would develop the land in stages and acquire freehold title of the lots at the completion of the first stage upon payment of an agreed sum of money.

The Lot is to be developed as residential buildings for on-sale to end purchasers, including Entity C.

The Developer would also undertake works on adjacent land for which a specified sum would be deducted from the purchase price of the land.

Development Agreement (DA):

A clause of the agreement provides for a crown lease commencement date as soon as is practical after execution of the agreement. The crown lease was registered on a certain date.

A clause of the agreement provides for the surrender of the crown lease in exchange for freehold title upon completion of the first stage.

A clause of the agreement provides for the reduction of the purchase price subject to compliance with the works under the Works Agreement.

An item in a schedule to the agreement states the purchase price of the land as $XX (GST exclusive), subject to another clause.

Under a clause of the agreement the parties have agreed to apply the margin scheme for the sale of the land to the Developer.

Under a clause of the agreement the parties have agreed to apply the margin scheme for the sale of the units to Entity C.

A clause of the agreement restricts the Developer from disposing of its interest without prior consent in writing from you.

A schedule to the agreement deals with the crown lease term and provides for a term of a number of months under one of the clauses.

A clause of a schedule to the agreement requires a rent of $XX for the whole term of the lease, payable on demand.

A clause of a schedule to the agreement allows the lessee to surrender the lease at any time after compliance with the DA.

A clause of the agreement allows the surrender of the lease for freehold title after completion of the first stage.

Works Agreement

A clause of the agreement defines works as the work area described at a schedule to the agreement which provides a description of the works and plans.

The locality plan shows the works are not located on the Lot.

Private Ruling issued to Entity D

The Lot has previously been the subject of private ruling authorisation number XX which was issued by the Australian Taxation Office on a certain date to Entity D under the following circumstances:

● Entity D was in the process of purchasing the Lot from you for the purpose of development.

● In their request for a private ruling, Entity D advised, among other things, that the land has been identified for residential development and that after a development permit was issued to you on a date after July 20XX, infrastructures were established on the Lot for the supply of power and water.

● However, the sale did not proceed and the land remained vested in you and this land has been held continuously by you since prior to July 20XX. The land has not been sold or leased at any time that it has been vested in you.

● It was ruled that the supply of that land would not be GST-free under section 38-445 of the GST Act as there were improvements on that land in the form of power and water connections located thereon.

● The ruling did not address the valuation date in applying the margin scheme although it was implied that Item 4 of the table in subsection 75.0(3) of the GST Act might apply.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 - subsection 75-10(3)

A New Tax System (Goods and Services Tax) Act 1999 - subsection 75-10(3A)

Reasons for decision

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

● all terms marked by an asterisk are defined terms in the GST Act

● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Summary

On the facts presented to us, there were no improvements on the Lot as at July 20XX.

Detailed reasoning

Under section 75-5, the margin scheme applies to a taxable supply of real property where, prior to making the supply, both parties to the transaction agree in writing that this will be the case. This is so provided the supply is not ineligible for the margin scheme under that section. In the present case, the supply is not ineligible for the margin scheme.

Section 75-10 stipulates circumstances where, in working out the margin for a supply under the margin scheme, an approved valuation can be used in lieu of the consideration disbursed by the supplier to acquire the property in question and the days when the valuation is to be made. Item 4 in the table at subsection 75-10(3) (Item 4) provides that the valuation date is the day on which the taxable supply takes place if:

● the supplier is the Commonwealth, a State or a Territory; and

● has held the interest unit or lease since before July 20XX; and

● there were no improvements on the land or premises in question as at July 20XX.

Pursuant to Goods and Services Tax Ruling GSTR 2006/5, Goods and services tax: meaning of 'Commonwealth, a State or a Territory', you satisfy the first requirement above.

The second requirement is satisfied by virtue of the land being held by you since prior to July 20XX and has not been the subject of any sale or lease after that date.

To determine whether the third requirement is satisfied, we have applied the principles adopted 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. This ruling outlines the Commissioner's view of the meaning of the term 'improvements on the land' in the context of the provisions of the GST Act where this term is used.

At paragraph 20 of GSTR 2006/6, the ruling states that 'unimproved land' is taken to be land in its natural state. Therefore, to establish whether there are improvements on the land for the purposes of subdivision 38-N and Division 75, the features of the land in question are to be compared with the features of that land in its natural state. Furthermore, paragraph 21 of GSTR 2006/6 explains that any operation by humans on the land that has the effect of enhancing the value of the land is an 'improvement' (Morrison v Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503). The ruling notes that applying the principle in Morrison 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;

● that human intervention must enhance the value of the land at the relevant date for ascertaining whether there are improvements on the land.

While the term 'improvements on the land' is not limited to visible improvements, it should be noted that 'improvements on the land' does not include interventions that are not upon the land, such as amenities in the surrounding area, even though they enhance the value of the land.

There is no photograph available to show the state of the land in question as at July 20XX and the closest available factual evidence of the state of the land as at that date is a photograph dated prior to the introduction of the Goods and Services Tax regime. This photograph shows three features that altered the land by human intervention. You have described these features as follow:

● An informal dirt track running through the Lot. This track is not a public road. It passes through the land, but does not add value to the land nor does it provide any usefulness to the occupier of the land.

● A small clearing from a specific avenue for a short distance onto the Lot. This drains water from the specified avenue onto the Lot and degrades the land rather than improve it.

● There is also a track originating from the specified avenue through an adjoining lot and through the Lot to join the informal dirt track mentioned above. This is a bush track formed by unauthorised use of the land.

After a thorough examination of the available photograph in light of the above comments, we consider that while there have been human interventions on the land prior to July 20XX, these interventions have not enhanced the value of the land. Furthermore, subsequent human interventions on the Lot only started to take place after July 20XX when the land was identified for development.

Giving due consideration to the above factors, we consider that there were no improvements on the Lot as at July 20XX and therefore the third requirement of Item 4 is also satisfied.

It follows from the above that all the requirements of Item 4 are met and the valuation date is the date on which the supply takes place.

Please note that where improvements have been made to land after July 20XX and Item 4 applies, in accordance with subsection 75-10(3A), the valuation of the land at the date of supply is undertaken as if there were no improvements on that land.