Edited version of your written advice

Authorisation Number: 1051196543211

Date of Advice: 8 March 2017

Ruling

Subject: GST and the valuation date for margin scheme purposes

Question 1

Does section 75-11 of the A New Tax System (Goods and Services Tax) 1999 (GST Act) apply in working out, for margin scheme purposes, the margin for the supply by you to the Purchaser under a Development Agreement of certain parcels of land subdivided from englobo land held by you at a particular location (the land)?

Answer

No.

Question 2

Can you apply Item 3 in the table in subsection 75-10(3) of the GST Act to work out, for margin scheme purposes, the GST payable on the sale of these subdivided parcels of Land?

Answer

Yes, provided there were improvements, as at 1 July 2000, on the physical area of the particular subdivided parcel of land being supplied.

Relevant facts and circumstances

Entity D was established by State law (Act A) which came into operation on a specified date.

Entity D was registered for GST with an ABN that has since been cancelled.

Entity D held the Land since before 1 July 2000.

Entity D held the Land on behalf of the Crown.

Act A contained the following provisions among others:

Entity D;

(a) Is a body corporate with perpetual succession (section …);

(b) Holds property on behalf of the Crown and represents the Crown in relation to Crown land (section …);

(c) Is managed by not less than a specified number, nor more than another specified number, of members appointed by the Governor in Council (section …);

(d) must carry out its functions, powers and duties subject to the general direction and control of the Minister and to any specific direction given by the Minister in relation to a matter or class of matters specified in the direction (section …);

(e) With the Minister's approval, may carry out its functions, powers and duties in relation to an area other than the relevant area, if the Minister reasonably considers this will promote the development of the relevant area (section …). With the approval of the Minister and the Treasurer, Entity D may enter into joint ventures (section …);

The objective of Entity D is to promote, encourage and facilitate development of the relevant area. In carrying out its objective, functions and powers Entity D must give full recognition to government objectives, policies and plans for the operation of a certain port (section …);

The Governor in Council may by Order published in the Government Gazette specify the procedures to be followed by Entity D in acquiring or disposing of real or personal property other than the compulsory acquiring of interests in land or making agreements or arrangements (section …);

For each financial year Entity D must, at the times and in the manner that the Treasurer may direct, pay to the Treasurer for payment into the 'Consolidated Fund' any amounts by way of dividend that the Treasurer determines after consultation with the Minister (section …); and

With the approval of the Governor in Council Entity D may make by-laws in relation to all or any part or parts of the relevant area (section …).

On a date after 1 July 2000, with the commencement of another State law (Act B) (and transitional provisions), Entity D and another entity were abolished and a new body called Entity V was created.

The provisions of Act B, as enacted, set out the following:

(i) Specific paragraphs confers to Entity V the functions and powers exercised by Entity D under Act A;

(ii) At Part …, subsection … provides that on a specified date:

(A) Entity D is abolished and its members go out of office;

(B) Entity V is the successor in law of Entity D; and

(C) all rights, assets, liabilities and obligations of Entity D immediately before its abolition become rights, assets, liabilities and obligations of Entity V; and

(D) Entity V is substituted as a party in any proceedings, contract, agreement or arrangement commenced or made by, or against, or in relation to Entity D.

Entity V registered for GST from a date after 1 July 2000.

On a specified date, another State law (Act C) changed the name of Entity V to U (you).

Rectification … was registered in respect of the land contained in …on a date before the name change. The Rectification states that Entity V is the successor to Entity D and amends the name of the registered proprietor to Entity V.

On a specified date, the ATO issued a private ruling to Entity V in which the Commissioner concluded that Entity V is the State for the purposes of Division 75 of the GST Act.

Development

You are managing the development of a substantial area of land.

The development is one of Australia's largest urban renewal projects under construction.

The development started before 1 July 2000. It is now two-thirds complete and has attracted more than $... billion in private investment to date. It is expected to attract a total of $... billion in private investment upon completion.

Part of the development (Area H) consists of a large mixed use urban regeneration project that includes commercial, residential, retail and non-revenue stages and is a prime precinct within the larger area being developed.

Another part of the development (Area B) is situated east of Area H. It is a mixed-use precinct proposed to include multi-level residential apartments, commercial and retail space and hotels. This private ruling application applies only to specified parcels on Area B.

There were improvements on Area H and Area B (the land) as at 1 July 2000.

Development Agreements

On a specified date, Purchaser 1 entered in a Development Agreement with Entity D in relation to development of the land for Area H.

On a specified date, Purchaser 2 entered in a Development Agreement with you in relation to development of the land for Area B.

(For the purpose of this ruling, Purchaser 1 and Purchaser 2 are collectively referred to as the Purchaser).

The parties agreed under the Development Agreements for Entity D/You to sell the Land to the Purchaser in stages, once subdivided.

Under the Development Agreements and associated land sale contracts, the Purchaser acquires land in different stages from you, and the parties can agree in writing that the margin scheme under Division 75 of the GST Act (the 'margin scheme') will apply to the sale for that particular stage.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-70

A New Tax System (Goods and Services Tax) Act 1999 Section 11-10

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 195-1

Reasons for decision

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

Question 1

Summary

You did not acquire your interest in the subdivided parcels of land in question. Consequently, for margin scheme purposes, section 75-11 has no application in working out the margin for your supply of the subdivided parcels of land to the Purchaser.

Detailed reasoning

If you make a taxable supply of real property, the GST payable under the basic rule in section 9-70 is 1/11th of the price. However, under subsection 75-5(1), if you make a taxable supply of real property by:

Selling a freehold interest in land;

Selling a stratum unit; or

Granting or selling a long-term lease,

You may apply the margin scheme, if you and the recipient have agreed in writing that the margin scheme is to apply.

Under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply. The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property unless subsection 75-10(3) or section 75-11 applies.

On the facts submitted to us, your supply of the subdivided parcels of land in question to the Purchaser is eligible for the margin scheme under section 75-5. The matter to be resolved is whether section 75-11 has any application in working the margin for the supply. For section 75-11 to apply, the overriding essential requirement is that you 'acquired' your interest in the subdivided parcels of land in question.

Did you acquire your interest in the subdivided parcels of land in question?

The meaning of 'acquisition' in section 11-10 is the corollary of the meaning of supply in section 9-10. Subsection 11-10(1) provides that, 'An acquisition is any form of acquisition whatsoever'. Subsection 11-10(2) refers to the thing acquired, such as goods, services or a right, and the means by which the thing is acquired, such as its receipt or acceptance.

To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.

In the context of section 75-11, the verb 'acquire' is used in an active form which indicates that the supplier must have obtained the interest, unit or lease in question by somehow taking action to cause the interest, unit or lease to be transferred to them.

Entity D did not pass the land to you and conversely you did not receive the land from Entity D. Rather, there has been a machinery of government (MOG) change, being the transfer of functions from Entity D to Entity V. This transfer was given effect by virtue of the enactment of Act B, which prescribes, among other things, the abolishment of Entity D and the creation of Entity V (later to be known as you).

In this instance, Entity D, as the losing agency, has not taken any action to cause the land to be transferred to Entity V, as the gaining agency. Conversely, Entity V, as the gaining agency, has not taken any action to receive the land from Entity D, as the losing agency. It is the enactment of the Act B, in particular the operation of specified sections that has caused the transfer from the losing agency to the gaining agency.

It follows from the above analysis that you did not acquire your interest in the land (and by extension your interest in the subdivided parcels of land in question) but rather you have obtained the land as a consequence of a MOG change. This position reflects the ATO view that where neither a losing agency, nor a gaining agency, has taken any action to cause assets to be transferred, there are no GST consequences if those assets are transferred as a result of MOG changes. This view is set out in our publications 'Machinery of government changes' and 'GST and machinery of government - frequently asked questions'.

In fact, the implementation of the MOG change in the circumstances discussed above makes it impossible for Entity V to have taken any action to cause the land to be transferred as Entity V was not yet created prior to the land being transferred. As discussed below, in these circumstances we consider that, at all times, it is the State that has held the land.

Question 2

Summary

You, in your capacity as the State, have held the subdivided parcels of land in question since before 1 July 2000. Provided an approved valuation of these parcels of land as at 1 July 2000 is made, Item 3 in the table in subsection 75-10(3) will apply in working out the margin on the supply if there were improvements, as at that date, on the physical area of the particular subdivided parcel of land being supplied land.

Detailed reasoning

For Item 3 in the table in subsection 75-10(3) to apply, the supplier must have held the land being supplied since before 1 July 2000 and there must have been improvements on that land as at 1 July 2000. You have advised that there were improvements on the land as at 1 July 2000.

Has the supplier held the subdivided parcels of land since before 1 July 2000?

Entity V (subsequently you) was created after 1 July 2000. Therefore, as supplier, you can only have 'held' the subdivided parcels of land since before 1 July 2000 if you are selling these parcels of land in the same capacity as the holder of the land as at that date.

It is the ATO view that where real property is held before 1 July 2000 by a government department or agency and on, or after, 1 July 2000 that property is vested for no consideration in another department or agency that is part of the Commonwealth or the same State or Territory, the real property has been held by the 'Commonwealth, that State or that Territory for the entire period - see 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?

Entity D has held the land since before 1 July 2000. It has done so in its capacity as the State. In arriving to this conclusion, we have given due consideration to the purpose and design of Act A as applied against the principles adopted in GST Ruling GSTR 2006/5 Goods and services tax: meaning of Commonwealth, a State or a Territory, in particular paragraph 12. Relevantly, we note that the policy enacted by Act A exhibited the following features:

Entity D

(i) Is a body corporate with perpetual succession (section …);

(ii) Holds property on behalf of the Crown and represents the Crown in relation to Crown land (section …);

(iii) Is managed by not less than a specified number, nor more than another specified number, of members appointed by the Governor in Council (section …);

(iv) Must carry out its functions, powers and duties subject to the general direction and control of the Minister and to any specific direction given by the Minister in relation to a matter or class of matters specified in the direction (section …);

(v) With the Minister's approval, may carry out its functions, powers and duties in relation to an area other than the relevant area, if the Minister reasonably considers this will promote the development of the relevant area (section …). With the approval of the Minister and the Treasurer, Entity D may enter into joint ventures (section …);

The objective of Entity D is to promote, encourage and facilitate development of the relevant area. In carrying out its objective, functions and powers Entity D must give full recognition to government objectives, policies and plans for the operation of a certain port (section …);

The Governor in Council may by Order published in the Government Gazette specify the procedures to be followed by Entity D in acquiring or disposing of real or personal property other than the compulsory acquiring of interests in land or making agreements or arrangements (section …);

For each financial year Entity D must, at the times and in the manner that the Treasurer may direct, pay to the Treasurer for payment into the 'Consolidated Fund' any amounts by way of dividend that the Treasurer determines after consultation with the Minister (section …); and

With the approval of the Governor in Council Entity D may make by-laws in relation to all or any part or parts of the relevant area (section …).

We have previously ruled (under your former name Entity V) that you are the State for the purpose of Division 75 of the GST Act. Furthermore, upon the MOG change, the land was vested in Entity V for no consideration.

As the successor in law of Entity D which had been holding the land in its capacity as the State, you have also been holding the land in that capacity since the MOG change. On this basis, it follows that the State has held the land since before 1 July 2000.

You are supplying the subdivided parcels of land to the Purchaser in your capacity as the State, that is, the supplier of the land is the State. As the supplier has held the land since before 1 July 2000, Item 3 in the table in subsection 75-10(3) will apply in working out the margin for the supply, provided there were improvements, as at 1 July 2000, on the physical area of the particular subdivided parcel of land being supplied and an approved valuation, as at that date, is made.