Edited version of your written advice

Authorisation Number: 1051228362624

Date of advice: 23 May 2017

Ruling

Subject: GST and the sale of subdivided land

Question

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 all or any Lots to purchasers as part of the development?

Answer

Yes, with the exception of the specified Lots, provided you agree in writing with purchasers to use the margin scheme, you can apply Item 4 of the table to subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) in calculating the margin on the future sale of the Lots to purchasers as part of the development.

Relevant facts and circumstances

You are registered for GST.

The residential development (the land) is located at the specified address.

You acquired the land before 1 July 2000.

One Lot is xx hectares in area. The other Lot is xx hectares in area.

You have engaged Entity B to undertake the development and subdivision of the the land into xxx lots. Entity B will be remunerated by means of development fees.

You will make sales of the Lots at the development to third party purchasers. It is anticipated that the application of the margin scheme will be agreed with purchasers in writing with respect to the sales of the Lots.

Land clearing and fencing have been identified as possible human interventions on the Land.

Land clearing

You have supplied aerial photographs of the site taken at different times from yyyy to yyyy.

The photographs show that:

● Part of the land was cleared at some prior to yyyy. There were several structures on the land.

● Later between yyyy and yyyy, the structures were removed.

● The photographs taken in various later years show that there has been significant natural regrowth of native trees and bush on the land.

Some sections of the aerial photographs appear to show a minimal natural regrowth of native trees and bush. You have provided additional photographs taken at different times which show that these areas are heavily infested with weeds.

Fencing

At some time between yyyy and yyyy the adjoining land to the south of the residential land was developed. Various residential Lots adjoin the southern development.

As part of the southern development, a number of fences were constructed on or over the boundary of the Land.

You consider that all fences which were constructed on or over the boundary are encroachments. These encroachments relate entirely to fencing from this earlier development which is not linked to the development.

Some of these encroaching fences are constructed entirely on the residential land. Others are only partially constructed on the residential land. You have not approved construction of any of these structures. None of the fences encroaches further than 90 mm onto the residential land. Some of the fences are dilapidated and in poor condition.

You have provided photographs of a number of the encroaching fences as they stand today - illustrating the current state of the fences as well as the level of encroachment.

Relevant legislative provisions

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

Reasons for decision

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, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au

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.

Margin scheme 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. None of the circumstances listed applies to your acquisition of the land. Your supply of each of the lots will be a supply of a freehold interest in land. You and the purchaser will agree in writing that the margin scheme is to apply. Therefore, the margin scheme will apply to your supply of each individual lot, pursuant to subsection 75-5(1).

Margin scheme calculation

Pursuant to subsection 75-10(1), the GST on a taxable supply of real property under the margin scheme is 1/11th of the margin for the supply. The margin per subsection 75-10(2) is the amount by which consideration for the supply exceeds the consideration paid to acquire the land being supplied.

However, subsection 75-10(3) determines that if the circumstances as specified in the second column of the table (replicated below) apply, and an approved valuation on the appropriately specified day has been made, then the margin is the amount by which consideration for the supply exceeds the approved valuation of the land at the date of that approved valuation.

If item 4 of the table in s75-10(3) applies, the valuation is to be made on the day on which the taxable supply takes place.

For item 4 of the table in s75-10(3) to apply, the following requirements must be met:

● the supplier must be considered as “a State” for GST purposes.

● the land must have been held by the supplier since before 1 July 2000.

● there must have been no improvements on the land as at 1 July 2000.

The supplier must be considered as “a State” for GST purposes.

The ATO accepts that you, being a local government body, are the 'State' for the purposes of applying the GST provisions referred to in paragraph 1 of Goods and Services Tax Ruling 2006/5: meaning of 'Commonwealth, a State or a Territory.

The land must have been held by the supplier since before 1 July 2000.

You have held the land since before 1 July 2000.

There must have been no improvements on the land as at 1 July 2000.

Paragraph 20 of Goods and Services Tax Ruling 2006/6: improvements on the land for the purposes of Subdivision 38-N and Division 75 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.

Paragraph 22 of GSTR 2006/6 further 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.

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.

However, as explained at paragraph 28 of GSTR 2006/6, where human interventions that were once improvements on the land have deteriorated over time or have contributed to land degradation, those interventions may no longer enhance the value of the land and may therefore no longer be improvements.

Further, as stated at paragraph 30 of GSTR 2006/6, in some situations improvements may have been on the land but no longer exist as improvements on the relevant date (i.e. date of sale for the purposes of section 38-445).

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 following possible human interventions have been identified on the Land:

Clearing

You have supplied aerial photographs of the site taken at different times from yyyy to yyyy.

The photographs show that:

● Part of the land was cleared at some prior to yyyy. There were several structures on the land.

● Later, between yyyy and yyyy, the structures were removed.

● The photographs taken in various later years show that there has been significant natural regrowth of native trees and bush on the land.

Some sections of the aerial photographs appear to show a minimal natural regrowth of native trees and bush. You have provided additional photographs taken at different times which show that these areas are heavily infested with weeds.

Although the clearing may have once enhanced the value of the Land (e.g. immediately after the clearing was completed) and thereby constituted an improvement to the Land, such improvements had been exhausted as at 1 July 2000 (as paragraph 28 of GSTR 2006/6 contemplates).

Accordingly, the clearing of the native vegetation did not constitute an improvement to the Land as at 1 July 2000.

Fencing

At some time between yyyy and yyyy the adjoining land to the south of the residential land was developed. As part of the development a number of fences were constructed on or over the boundary of the Land.

You consider that all fences which were constructed on or over the boundary are encroachments. These encroachments relate entirely to fencing from this earlier development which is not linked to the development.

Some of these encroaching fences are constructed entirely on the residential land. Others are only partially constructed on the residential land. You have not approved construction of any of these structures. None of the fences encroaches further than 90 mm onto the residential land. Some of the fences are dilapidated and in poor condition.

You have provided photographs of a number of the encroaching fences as they stand today - illustrating the current state of the fences as well as the level of encroachment.

Paragraph 25 of GSTR 2006/6 lists boundary fencing as an improvement. Boundary fencing, by necessity, must 'encroach' onto one or both of the adjoining properties.

Though some of them are not in good condition, we consider that the boundary fences located partly or fully on the southern boundary lots constitute an improvement to those individual lots as at 1 July 2000.

Accordingly, those lots where the boundary fence is constructed entirely on the residential land, or partially constructed on the residential land are not lots where there were no improvements on the land as at 1 July 2000

Conclusion

Two human interventions have been identified on the land; being land clearing and fencing to specified lots. We have determined that the clearing of the native vegetation did not constitute an improvement to the Land as at 1 July 2000. Therefore, those lots that do not adjoin the southern development satisfy the requirement that there be no improvements on the land as at 1 July 2000.

We consider that the boundary fences located partly or fully on the southern boundary lots constitute an improvement to those individual lots as at 1 July 2000.

Therefore, with the exception of the specified Lots, provided you agree in writing with purchasers to use the margin scheme, you can apply Item 4 of the table to section 75-10(3) of the GST Act in calculating the margin on the future sale of these Lots to purchasers as part of the development.