Private ruling: GST-free supply of unimproved land
Date of advice: 19 July 2016
Published: September 2016

Ruling: Q1: Are the supplies of the Residential Lots made by the Government to the Developer upon the issue of Certificate of Titles for these lots GST-free under subsection 38-445(1A) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the supplies of the Residential Lots made by the Government to the Developer upon the issue of Certificate of Titles for these lots are GST-free under subsection 38-445(1A) of the GST Act.

Relevant facts and circumstances: • On a certain date the Government entered into a development agreement (the First Agreement) with a Developer and granted the Developer a Crown Lease to develop two adjacent Lots in a specified town. The Crown Lease was registered on a certain date. • On a certain date the Government entered into another development agreement (the Second Agreement) with the same developer and granted a Crown Lease to develop another adjacent Lot. The Crown Lease was registered on a certain date. • The commercial arrangement in respect of both the First Agreement and the Second Agreement is broadly that the Developer would develop and acquire titles of Residential Lots for on-sale to end purchasers and pay the Government an agreed percentage of the gross sale price of those Residential Lots. • The Residential Lots represent the balance of the Crown Lease area once all roads parks community land and public infrastructure has been surrendered to the Government. • The Developer would develop all public infrastructure works (including roads, sewerage, electricity and water infrastructure, and some public parks and community purpose allotments) for the Government and the Government will retain ownership over those areas including all infrastructures. • Pursuant to a clause of the First Agreement, the Government granted the Developer a Crown Lease over the two Lots for the purposes of undertaking the Works under the First Agreement. • Pursuant to a clause of the Second Agreement, the Government granted the Developer a Crown lease over the Lot for the purposes of undertaking the Works under the Second Agreement. • The terms of each agreement are similar. For example, under a clause of each Agreement, the Developer must execute certain documents (i. e. 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 Residential Lots. • A clause of both Agreements requires the Developer to surrender the lease upon the issue of a Certificate of Title of a Developed Lot. • The area of the Crown Lease surrendered is larger than the area of land to which the Developer is entitled to freehold title because the Crown Lease surrender process returns all parks, gardens, roads and public infrastructure to the Government (or the relevant service authority). • The Agreements are supported by specific clauses of the Crown Lease Provisions set out at an annexure to the Agreements. These Provisions set out the conditions which need to be satisfied by the Developer before the Government will grant an interest in fee simple to the Developer for each of the Residential 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. • Further, a clause of the Crown Lease Provisions identifies that the Developer will not be entitled to freehold title in respect of any open space, thoroughfare, park, garden, road or path or other land dedicated to a public purpose and that all such land shall vest in, or at the direction of, the Government. • Pursuant to a schedule to the Agreements, the Developer sells the Residential Lots to end purchasers for monetary consideration and transfers the relevant Certificate of Title for these lots to the purchasers. • In practice, most sales between the Government and the Developer, and between the Developer and the end purchaser, happen immediately back to back. • Up until the time of the grant of the Crown Leases to the Developer, the Government has held title to the land relating to this development continuously since prior to 1 July 2000 and there has been no previous supply of this land by way of sale (GST-free or otherwise) or lease. • Upon commencement of the Crown Leases, the three Lots in question consisted of natural bushland, but for informal and unapproved dirt tracks made and used recreationally without approval, by members of the public driving 4WDs, motorcycles and other recreational vehicles, and road stubs encroaching on the outskirts of the site as confirmed by a photograph. • Following development of the site, the road stubs will not sit on any of the Residential Lots but rather become public roads vested in the Government (that is, title of the road stubs will not transfer to the Developer at any time, and the Developer will not have the right to a transfer of those areas). • There is also a small clearing on one of the Lots used for storage of machinery and materials by the Government whilst undertaking the construction of headwork. This area will be included in the area at an annexure to the First Development Agreement marked New School and highlighted yellow which will remain the property of the Government. • A photograph confirms there was no change to one of the lots since the previous photograph. • There is a straight line clearing from the boundary of one of the Lots to an established road which is where a water main was buried, • The Government obtained a private ruling relating to the previous development of a separate Lot in the same town. The ATO ruled the transfer of land to the developer in that case was GST-free. The current development adjoins this previous development and is similar in nature to the land as confirmed by a photograph. • An Archaeological Survey Report shows the land in question having no improvements. The report confirms the land was not used at that time, other than for occasional recreational activities such as dirt bike riding and four wheel driving. The report describes the land and vegetation and provides a description of the area, confirming it was natural bushland. The report provides a selection of photographs of the area. A Google search of the land in question showed an aerial satellite photograph of the area revealing the land to still be mostly undeveloped bush land with a partially constructed road located on what looks to be the outskirts.

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

Reasons for decision: Summary: A supply of land by the Commonwealth, a State or a Territory of land is GST-free under subsection 38-445(1A) if certain conditions are met. 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. However, the supply will not be GST-free if the land in question has already been the subject of a supply that was GST-free under section 38-445. In this case, the Government has held Title to the land since prior to 1 July 2000 and up to the grant of the Crown leases there had not been any previous sale or lease of that land. In this case, the supplier is the Government and; • the supply is of freehold interest in the Residential lots [satisfying the requirement in paragraph 38-445(1A)(a)]; • the Government has previously supplied the land by way of the Crown Leases [satisfying the requirement in paragraph 38-445(1A)(b)]; and • only when conditions to which the leases are subject has been satisfied will the Developer be entitled to the freehold interest [satisfying the requirement in paragraph 38-445(1A)(d)]. Therefore it remains to be determined whether the requirement in paragraph 38-445(1A)(c) is satisfied, that is, whether there were no improvements on the land at the time the Crown Leases were granted. 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. Paragraph 20 of GSTR 2006/6 explains that to establish whether there are improvements on the land, that land is compared with 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. 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.' Accordingly, the relevant day in your circumstances is the day the Crown Leases were granted. It follows that the land supplied on that day is to be compared with that same land as it existed in its natural state. 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. Furthermore, at paragraphs 48 to 51 of GSTR 2006/6 the Commissioner expresses the view that, for the purposes of Item 4 in subsection 75-10(3), it is the individual lots being supplied that are subject to the 'improvements' test and not the larger area from which they are subdivided. We consider that in your circumstances, similar principles apply. You have provided a copy of an Archaeological survey report in respect of a proposed larger subdivision that includes the three lots that are subject of your ruling application. Among other things, the executive summary of the report explains that the survey area totalled approximately a number of hectares of tropical woodland, seasonal swamps and mangrove vegetation communities. It is further stated in this report that the land was used for resource procurement, camping and possibly as a travel corridor. The proposed area has no current land uses other than for occasional recreational activities such as dirt bike riding and four wheel driving. There is a gazetted heritage area in an adjoining subdivision. We note that the adjoining subdivision is a separate development to the current one and that we have previously issued a ruling to you in regards to this adjoining subdivision. The photographs from the survey report as well as the other ones submitted by you show the proposed development area to be unimproved bushland. Furthermore, a Google search of the relevant area revealed the land to still be mostly undeveloped bush land with a partially constructed road located on what looks to be the outskirts of the land in question. You have advised that there are road stubs encroaching on the land and that there is also a small cleared area on one of the Lots that is used for storage of machinery and materials and which eventually will form part of the grounds for the proposed new school. There is also a straight line clearing from the boundary of one of the Lots to an established road where a water main was buried. While the road stubs, the clearing on the particular Lot and the water main might constitute 'improvements on the land', we note that the specific parts of the land with these improvements will not form part of the Residential Lots being supplied by the Government. As provided by a clause of the Crown leases Provisions, the Government will retain title to such parts of the land. We also note that this would also apply to the partially constructed road should this road in fact be located on the land and had already been built on the day the relevant lease was granted. Taking into account all the factors discussed above, we consider that there were no improvements on the Residential Lots at the time the Crown leases over this development area were issued to the Developer. While a number of things listed in paragraph 25 of GSTR 2006/6 will happen before the Government transfers freehold title of the subdivided Residential lots to the Developer, it is the state of the land at the time the Crown leases were issued (being the previous supply) that is critical in determining whether there were no improvements on the land for the purpose of paragraph 38-445(1A)(c). As discussed above, at the time the Crown Leases were issued there were no improvements on the specific parts of the land from which the Residential Lots to be supplied to the Developer will eventually, be carved out. It follows that the requirement in paragraph 38-445(1A)(c) is met. Consequently, the supplies of the Residential Lots to the Developer upon the issue of Certificate of Title for these lots will satisfy all the requirements outlined in subsection 38-445(1A) and will therefore be GST-free.