Private ruling: GST and the application of the margin scheme to the sale of land
Date of advice: 3 July 2018
Published: September 2018
Ruling period: Year ending 30 June 20xx and later
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are you entitled to apply the margin scheme under section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in working out the GST on your supplies of land to be developed from two specified lots? | A1: Yes (provided the contract for sale signed by the parties does contain the clause about the parties agreeing that the GST on the supply will be calculated under the margin scheme). | Q2: If the answer to question 1 is yes, what is the margin for your supplies? | A2: The margin for your supplies is the amount by which the consideration for the supplies exceeds an approved valuation of the Land (as apportioned) as at 1 July 2000 pursuant to Item 3 in the table in subsection 75-10(3) of the GST Act.

Relevant facts and circumstances: You are registered for GST and pays GST in respect of taxable supplies of land that you make. You are the owner of specified land, being lot … and lot … (collectively the Land). You have held the interest in the Land since before 1 July 2000. You have entered into a Project Delivery Agreement, as amended, with a Developer and a third party as Guarantor. The Land is located at a specified location. Under the arrangement, you will make taxable supplies of residential land to third parties under sale contracts. The Developer is contractually entitled to retain the sale proceeds from those contracts provided that it pays you an amount from those proceeds equivalent to your liability to GST on that transaction. This contractual position does not alter the legal position that you are liable to GST on the supply. Each of the transactions under the Project Delivery Agreement between the parties is subject to clause …, which, in very general terms, provides that the supplying party is entitled to be indemnified by the other party for its GST costs on a particular transaction provided it gives that other party a tax invoice. You have submitted copies of the following documents with your private ruling application: ● the valuation report, ● aerial photographs, ● the pro-forma Contract for Sale, and ● relevant zoning maps. Condition of the land As at the relevant date of 1 July 2000, the site was being utilised as a carpark. The site was bitumen sealed with boundary fencing as supported by photographic evidence. The area was paved with bitumen but did not otherwise include any building structures. The carpark has been asphalted with line markings and there has been stormwater drainage installed, concrete kerbing, guttering and lighting. Valuation report You commissioned a valuation report from a Valuer which assesses the Market Value of the Property as at 1 July 2000 to be Market Value $... (excluding GST). Importantly, the valuation did not ascribe any value to the existing works on the Land and values the land on an unimproved basis. Notes in the ‘Executive Summary’ reveal that the valuation was done on the basis of the Land’s redevelopment potential using an approach of comparable sales and hypothetical development. Contentions It is necessary for the parties to a sale of land eligible for the margin scheme to agree in writing that the margin scheme will apply in order that GST is calculated under this method. You understand that the pro-forma sales contract that is being used for residential sales contains such an agreement.

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 | 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: Summary: Note: 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) Pursuant to section 75-5, you are is entitled to apply the margin scheme in working out the GST on your supplies of the land and the margin for these supplies is the amount by which the consideration for the supplies exceeds an approved valuation of the Land (as apportioned) as at 1 July 2000 pursuant to Item 3 in the table in subsection 75-10(3). | Detailed Reasoning - Question 1: Section 75-5 of the GST Act states that: (1) 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. (2) However, 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. Subsection 75-5(3) provides for circumstances where a supply is ineligible for the margin scheme. The written agreement between you and the recipient of the supply must be made on or before the making of the supply or within such further period as the Commissioner allows. Section 75-10 of the GST Act then provides that if a taxable supply of a real property is made under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply. In your case, you have advised that the sales contracts to be used by you contain a written clause stating that the parties agree that the margin scheme will apply in working out the GST on the sale. Furthermore, in your circumstances, subsection 75-5(3) does not apply to make your supplies of the Land ineligible for the margin scheme. Therefore, pursuant to section 75-5, the margin scheme will apply in working out the GST on your supplies of the Land. | Detailed Reasoning - Question 2: Section 75-10 stipulates circumstances where, in working out the margin for a taxable supply of real property 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 valuations are to be made. Taking into consideration your specific circumstances, in your situation, such a valuation must be made as at either: ● 1 July 2000 in accordance with item 3 in the table in subsection 75-10(3) (Item 3); or ● the day on which the taxable supply takes place in accordance with item 4 in the table in subsection 75-10(3) (Item 4). 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 1 July 2000; and ● there were no improvements on the land or premises in question as at 1 July 2000. Furthermore, if Item 4 applies, then the valuation excludes any improvements on the land or premises at the valuation date. In the present case, the question at issue is whether there were no improvements as at 1 July 200 on the land being supplied. 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. In forming the view expressed in GSTR 2006/6, the ATO was guided by case law. Paragraph 20 of GSTR 2006/6 explains that to establish whether there are improvements on the land, the land in question is compared with the land in its natural state. At paragraph 22, GSTR 2006/6 adopts the position that for there to be ‘improvements on the land’, the following requirements need to be satisfied: ● there must be 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 the land. Paragraph 23 of GSTR 2006/6 states: 23. Where there has 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. Furthermore, the ATO considers that where an increase in value is required for a physical intervention to be characterised as an improvement, the value is not to be measured by reference to the purpose to which the land can be put (Paragraphs 24 and 35 of GSTR 2006/6). Rather, we consider that the comparator is the value of the land in its natural state and all that is required is an increase from that value. Determining whether or not a 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. Applying the above principles to your situation, as at 1 July 2000, there had been physical human interventions on the Land (bitumen sealed with boundary fencing) to make it usable as a carpark (and in fact the Land was being used for that purpose on that date). Objectively comparing the state of the Land as at that date to what would have been its natural state, it is clear that as 1 July 2000 the Land had been cleared of its natural vegetation, the boundary fencing had been erected on that Land and it had been levelled and the bitumen laid on the surface. Furthermore, these physical human interventions on the Land had not been exhausted and were still serving their functions as at 1 July 2000 since the Land was in fact being used as a carpark on that date. Guidance about how the principles apply in your circumstances can be found in the New South Wales Court of Appeal case Trust Company of Australia Ltd v. Valuer-General [2007] NSWCA 181, (2007) 154 LGERA 437 . In this case, existing multi-storey buildings on the land in question were to be demolished to allow a mixed use development to proceed. The question that arose was whether the existing buildings were to be disregarded for the purpose of assessing the market value of the land. In this case the New South Wales Court of Appeal affirmed the decision from the Land and Environment Court that ‘improvements’ are human operations of persons on land which have the effect, as at the date of valuation, of enhancing its value compared with its natural state. The Court then concluded that the existing buildings on the land in question, whilst not suitable for the land’s highest and best use, were improvements because as at the valuation date they enhanced the land’s value compared with its natural state. It follows that in your case, as at 1 July 2000, there had been human interventions physically located on the Land and these interventions had made, and still made, the Land more valuable in comparison to its natural state. Accordingly, as explained at paragraph 20 of GSTR 2006/6, we consider that there were improvements on the Land as at 1 July 2000. Furthermore, the view in GSTR 2006/6 is also based on principles applied in Commonwealth of Australia v. Oldfield (1976) 133 CLR 612; (1976) 10 ALR 243 as quoted at paragraph 38 of that ruling as follows: We are concerned with the value at the relevant date of the physical consequences which enure to the land of the acts whereby the land attained a quality and usefulness additional to that which it had in its virgin state. ... On this basis, GSTR 2000/6 contemplates a broader meaning to the term ‘improvements on the land’ rather than confining the term to a description based solely on market value concepts. The term ‘improvements on the land’ in GSTR 2006/6 also encompasses an improvement in the usefulness of the land for any occupant, notwithstanding the current or intended use by the occupant 1 . There will be improvements on the land where a physical human intervention still serving its function on the land has made the land more useful in comparison to that same land in its natural state. In your case, as at the relevant date of 1 July 2000, the Land in question was bitumen sealed with boundary fencing and was being utilised as a carpark, that is, the Land had been made more useful as compared to its natural state. Accordingly, irrespective of the fact that the zoning of the Land meant that at a point after that date the bitumen and the fencing would eventually have had to be demolished and removed, we consider that, as at 1 July 2000, there were improvements on the Land. (Valuation report) As mentioned above, the ATO view about establishing whether there are improvements on land is explained at paragraph 20 of GSTR 2006/6 as follows: 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. In your case, as evidenced by the valuation report for the property, in valuing the Land, no value was ascribed to the existing physical works on the Land. The valuation was done on the basis of the Land’s redevelopment potential using an approach of comparable sales and hypothetical development, that is, the valuation was based on the potential use of the Land. Applying the principles in paragraphs 20, 24 and 35 of GSTR 2006/6 and for reasons discussed above, in particular the Court’s decision in Trust Company of Australia Ltd v. Valuer-General [2007] NSWCA 181, (2007) 154 LGERA 437 , we consider that the valuation made in this instance does not assist in establishing whether the physical human interventions on the Land constitute ‘improvements on the land’. It follows from the above explanations that there were in fact improvements on the Land as at 1 July 2000 in the form of the physical human interventions located on the Land at the time. Accordingly, Item 3 applies in establishing the cost base to calculate the margin for your supplies of the Land as: ● you are registered for GST; and ● you have held the interest in the land since before 1 July 2000; and ● there were improvements on the land in question as at 1 July 2000.