Private ruling: GST and the Margin Scheme
Published: September 2014

Ruling: Q1: Are you entitled to a refund of overpaid GST to the amount of $ related to sales of real estate under the margin scheme where the GST payable was previously miscalculated and where sales were completed during the relevant period? | A1: No. However, you may be entitled to a refund of GST of a different amount. As you have not submitted an approved valuation we cannot consider the amount of GST refund that you may be entitled to at this stage.

Relevant facts and circumstances: You are an entity and own substantial parcels of land, much of which you have owned since before 1 July 2000. You owned parcels of land which were subdivided and portions sold off since 1 July 2000 including the period from 1 February 2010 to 30 September 2013. You contend that these lots were unimproved at 1 July 2000 and are collectively referred to herein as the 'Ruling Properties'. A detailed description of the lots comprising the Ruling Properties is attached to your application for a private ruling and is marked as Annexure A. The sales of the subject parcels of land have been pursuant to Contracts for the Sale of Real Estate, the first page of which indicates that the margin scheme will be used in making the taxable supply, although you did not follow the contracts when you paid GST on the sales in your BAS, you calculated the margin as equal to the sales price and the GST as 1/11th of this erroneous margin. You attached to your application for a private ruling, and marked as Annexure B, the first page of the contract for sale which you submit as a sample contract and you state is representative of all of the contracts for sale relating to the Ruling Properties. You inform us that: • The price at which the Ruling Properties were sold was the market value determined by you as the price that a willing but not anxious vendor and purchaser would enter an agreement to transfer the lands. • You set the price without taking into consideration any GST that may be payable on the sale of each parcel of land. • You operated in a free market and sold the land at the going market rate. • In arriving at the price at which lots of land was advertised, you did not start with a particular price and then added GST to the prices obtained for the sale of each property. The prices are even amounts, for example $70,000. • The GST paid by you on each parcel of land is a cost absorbed by you in the same way that costs of undertaking subdivision work including the construction of roads, drainage, sewage and other infrastructure. You believe that none of the purchasers of the Ruling Properties were registered or required to be registered for GST. You have kept records of the land sales made in the relevant period covered by your application for a private ruling. You have attached to your application for a private ruling, and marked as Annexure A, a table of the land sales made in the relevant period which describe the particulars of the Properties sold. You submit that Business Activity Statements (BAS) lodged by you for the relevant period, representing the period during which the Ruling Properties were sold, you reported the full amount of GST being 1/11 of the sale price of each of the properties. You have attached to your application for a private ruling, and marked as Annexure C, a series of aerial photographs which show the parcels of land making up the Ruling Properties at issue in this application for private ruling. You contend that as at 1 July 2000, these parcels were all unimproved and in their natural state being devoid of built structures and comprised of predominantly flat land with native grasses, shrubs and trees. You contend that the lots were created by a subdivision of land. No physical improvements were made on the land; however, some works were carried out consistent with a subdivision. For example, each of the lots, after subdivision, had been enhanced at the time of sale by way of access to utilities or the ability to connect to utilities, such as sewer, water and electricity. You contend that you should have applied item 4 of the table in subsection 75-10(3) of the GST Act in calculating the GST instead of paying 1/11 th of the sale price of each of the properties. You sought an extension of time to obtain valuations which was granted. However a significant amount of time has passed and you have not been able to submit a valuation as intended. You intend to obtain a valuation in the future and submit another application for a private ruling at that time.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 75.

Reasons for decision: Summary: The Commissioner accepts that some entities can apply item 4 of the table in subsection 75-10(3), where relevant. The Commissioner has provided clarification on the meaning of the phrase "land on which there are no improvements" 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 (GSTR 2006/6). It is important to consider the view outlined in GSTR2006/6 in its entirety in order to determine the Commissioner's view on what constitutes improvements on the land. The premise of the Commissioner's view is outlined at paragraph 20 which 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. In relation to any improvements on the land from the land's natural state GSTR 2006/6 follows the principle established by High Court in Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 49 8 and states at paragraph 22: 22. Applying this principle 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; 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 provides that where there have been a number of human interventions on the land it is necessary to establish whether any one of the human interventions enhances the value of the land at the relevant date. Whether the net value of the human interventions enhances the overall value of the land is irrelevant. Paragraph 25 of the ruling provides a list of examples of human interventions which may enhance the value of land that includes: • houses, town-houses, stratum units, separate garages, sheds and other out-buildings • commercial and industrial premises • 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 • removal of rocks, stones or soil • filling of land. One of the photographs you supplied has been taken during the year of 2005. It shows that the en globo land had already been extensively cleared of native vegetation, scrub and bushland and highly developed, with buildings, roads, and structures evident at that time. It is reasonable to conclude that the land has been improved as at 2005 on the basis of all of the improvements undertaken as evidenced in the photograph taken in 2005. The issue in question is whether this land, comprised of the Ruling Properties specifically, was also in an improved state as at 1 July 2000. With the absence of specific evidence, we can only base our conclusions on a balance of probabilities that, being in a rural setting the surrounding and en globo land, encompassing the Ruling Properties, would have probably been extensively cleared of native vegetation, scrub and bushland some time prior to 1 July 2000 and used predominantly as farmland. This initial clearing per se is an improvement as highlighted in the above paragraph 25, which enhanced the value of the land. This conclusion is partly supported by the photograph supplied showing that the surrounding land, as at July 2005, had been extensively cleared of native vegetation, scrub and bushland. It is also reasonable to conclude that this extensive clearing had not been exhausted and that the land comprising of the Ruling Properties had not returned to its original native state as at 1 July 2000 to become unimproved once more. Historical research of the region may disprove our conclusion, however, we are of the view that this scenario would be unlikely. Consequently, we conclude that the Ruling Properties is land on which there are improvements as at 1 July 2000 for the purposes of Division 75. As we have concluded that the Ruling Properties is land on which there are improvements as at 1 July 2000 for the purposes of Division 75, item 3 of the table in paragraph 75-10(3)(a) applies. The appropriate valuation date therefore is as at 1 July 2000. | Detailed Reasoning - Valuation: Any valuation must comply with the requirements of A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3 (MSV 2005/3) and A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 (MSV 2009/1) as the case may be in relation to the Ruling Properties. The valuation for each allotment you submitted with your application for private ruling are based on market values for the Ruling Properties as determined by you to be the prices that willing but not anxious vendors and purchasers would enter agreements to transfer the particular allotments. The particular allotments were sold by you at the going market rate. The valuations do not comply with the requirements of MSV 2005/3 nor MSV 2009/1 as the case may be in relation to the Ruling Properties. Therefore, it is not an approved valuation under subsection 75-35(2). As the valuation is not an approved valuation for the purposes of Division 75, there is no appropriate refund amount that you have sought to claim. Therefore, we cannot consider the amount of GST refund that you may be entitled to.