Private ruling: GST and the supply of land
Date of advice: 3 October 2017
Published: February 2018

Ruling: Q1: Are the blocks of land identified in your submission as item numbers X1 to X41, owned by you, land upon which there were no improvements at 1 July 2000? | A1: Yes, in respect of item numbers X1 to X10, we consider that the land is unimproved at 1 July 2000. No, in respect of item numbers X11 to X41, human intervention has taken place on the land, enhancing its value at 1 July 2000. | Q2: When you sell the blocks of land and the parties agree in writing to adopt the margin scheme, are you entitled to calculate the GST payable in accordance with item 4 in the table to subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and apply one of the valuation methods contained in Margin Scheme Valuation Requirements Determination MSV 2009/1 ( MSV 2009/1)? | A2: No, in respect of item numbers X11 to X41 as we have determined in Question 1 above that human intervention has taken place on the land, enhancing its value at 1 July 2000. Item 3 in subsection 75-10(3) of the GST Act will be used in determining the date at which the valuation of the land is to be made (that is, 1 July 2000). Yes, in respect of item numbers X1 to X10, we consider that the land is unimproved at 1 July 2000 and item 4 in subsection 75-10(3) of the GST Act will be applicable for margin scheme purposes. Method 3 in MSV 2009/1 is an appropriate valuation for the application of the margin scheme to the sale of the Lots.

Relevant facts and circumstances: You are a local government authority which owns parcels of land, much of which have been owned since before 1 July 2000. Of relevance for the purpose of this ruling is Lot XX. Lot XX has been subdivided into two parts. One part has been subdivided into XX blocks (the Lots) with the second part proposed to be classified as Lot XX and which will also be subdivided into a number of blocks. The Lots have all been sold and settled. This ruling only concerns the Lots which have been identified as follows: Table Item Number Vegetation Cover Lot number Sale price X11 Shrubs, grass and some clearing 1 $ X12 Shrubs, grass and some clearing 2 $ X13 Shrubs, grass and some clearing 3 $ X14 Shrubs, grass and some clearing 4 $ X15 Shrubs, grass and some clearing 5 $ X16 Shrubs, grass and some clearing 6 X17 Shrubs, grass and some clearing 7 $ X18 Shrubs, grass and some clearing 8 $ X19 Shrubs, grass and some clearing 9 $ X20 Shrubs, grass and some clearing 10 $ X21 Shrubs, grass and some clearing 11 $ X22 Shrubs, grass and some clearing 12 $ X1 Native trees 13 $ X23 Shrubs, grass and some clearing 14 $ X24 Shrubs, grass and some clearing 15 $ X25 Shrubs, grass and some clearing 16 $ X26 Shrubs, grass and some clearing 17 $ X27 Shrubs, grass and some clearing 18 $ X28 Shrubs, grass and some clearing 19 $ X29 Shrubs, grass and some clearing 20 $ X30 Shrubs, grass and some clearing 21 $ X31 Shrubs, grass and some clearing 22 $ X32 Shrubs, grass and some clearing 23 $ X2 Native trees 33 $ X3 Native trees 34 $ X4 Native trees 35 $ X5 Native trees 36 $ X6 Native trees 37 $ X7 Native trees 38 $ X8 Native trees 39 $ X9 Native trees 40 $ X10 Native trees 41 $ X33 Shrubs, grass and some clearing 24 $ X34 Shrubs, grass and some clearing 25 $ X35 Shrubs, grass and some clearing 26 $ X36 Shrubs, grass and some clearing 27 $ X37 Shrubs, grass and some clearing 28 $ X38 Shrubs, grass and some clearing 29 $ X39 Shrubs, grass and some clearing 30 $ X40 Shrubs, grass and some clearing 31 $ X41 Shrubs, grass and some clearing 32 $ The Contract of Sale (the Contract) indicates that the parties to the sale agree that the margin scheme will be applied. The Lots were sold at market value (inclusive of GST). You have provided aerial photographs taken of Lot XX in 1955, 1999 and 2014. At 1 July 2000, 10 of the Lots had native trees on them with the remaining Lots having been cleared and containing shrubs and trees (as outlined above). You have provided the following documentation in support of your application: 1. Sample Contract of Sale 2. Draft Plan of Subdivision

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

Reasons for decision: Summary: Are the blocks of land identified in your submission as item numbers X1 to X41, owned by you, land upon which there were no improvements at 1 July 2000? Paragraph 22 of Goods and Services Tax Ruling 2006/6: improvements on the land for the purposes of Subdivision 38-N and Division 75 (GSTR 2006/6) 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 20 of GSTR 2006/6 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 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. As per paragraph 24 of GSTR 2006/6, objectivity is required when establishing whether a human intervention enhances the value of the land: 24. Determining whether a human intervention enhances the value of the land entails an objective test. This means that whether an intervention enhances the value should not be determined by reference to use or intended use by either the supplier or the recipient. An objective view of whether any of the human interventions would be of value to anyone, for any purpose whatsoever, is necessary in order to correctly establish whether there are any improvements on the land. In other words, for whoever purchased that land, any particular intervention would relieve them of the cost of doing that themselves. The intended or subjective use of a particular person, including the notion of ‘highest and best use’ is irrelevant. Paragraph 25 of GSTR 2006/6 provides a list of examples of human intervention 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, and ● filling of land. 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 human interventions, which may enhance the value of land and which are relevant in relation to your Land, are: ● Clearing You have provided us with aerial photographs of the subject property taken in 1955, 1999 and 2014. When we compare the aerial photograph from 1955 with the one taken in 1999, it is apparent that a portion of the land has been cleared. That is, the trees and scrub have been removed. In specific areas, the native trees have been retained. The clearing does not appear to have been exhausted, nor has it substantially deteriorated, in respect of those areas where this has taken place on the land. You contend that the market value of this land and its utility at 1 July 2000 is not higher than the adjoining land which contains native trees and thus is not higher than the market value or utility of native land. As per the principles from Lewis Kiddle and another v. Deputy Federal Commissioner of Land Tax 27 CLR 316, outlined in paragraph 31 of GSTR 2006/6, the value attributable to the existing clearing is the cost that another purchaser (any purchaser) would be relieved from incurring. Therefore, the clearing of the Land is a human intervention that enhances the value of the land at 1 July 2000 in accordance with paragraphs 22 and 23 of GSTR 2006/6. You have provided a Draft plan of subdivision which we have compared with the aerial photograph taken in 1999 of the subject property. Based on this information, we concur with the details of the respective item numbers provided to us. That is, item numbers X1 to X10 are populated with native trees and have not been cleared, whilst the remaining item numbers X11 to X41, have been cleared. Consequently, human intervention has taken place on the land, enhancing its value at 1 July 2000, in respect of item numbers X11 to X41. In respect of the remaining item numbers (X1 to X10), we consider that the land is unimproved at 1 July 2000. When you sell the blocks of land and the parties agree in writing to adopt the margin scheme, are you entitled to calculate the GST payable in accordance with item 4 in the table to subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act )and apply one of the valuation methods contained in MSV 2009/1? 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, that is, 1/11th of the amount by which the consideration for the supply exceeds the valuation of the interest, unit or lease. In your case, you will be selling a freehold interest in land. You have further confirmed that you and the recipient have agreed in writing that the margin scheme will apply. 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. In your case, the land which is the subject of this ruling scheme is not ineligible to use the margin scheme. The margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the real property unless subsection 70-10(3) or section 75-11 applies. Subsection 75-10(3) applies if an approved valuation has been made and: ● the circumstances in section 75-11 do not apply, and ● you acquired (or in some cases held) the real property before 1 July 2000, or ● you acquired the real property on or after 1 July 2000, but the supply to you: (i) was GST-free under subsection 38-445 (1A), and (ii) related to a supply before 1 July 2000, by way of lease, that would have been GST- free under section 38-450 had it been made on or after 1 July 2000 (item 2A). Under subsection 75-10(3), the margin for the supply is the difference between the consideration for the supply and the amount determined by the approved valuation. In your case, section 75-11 does not apply to your circumstances and the land which is the subject of this ruling request was held before 1 July 2000. To work out the margin for the supply of real property, you require a valuation as at the valuation date. The valuation dates which are relevant in your case are contained in the table in subsection 75-10(3), Items 3 and 4 which states: | Detailed Reasoning - Days when valuations are to be made: … … … 3 The supplier is *registered or *required to be registered and has held the interest, unit or lease since before 1 July 2000, and there were improvements on the land or premises in question as at 1 July 2000 1 July 2000 4 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 at 1 July 2000 The day on which the *taxable supply takes place You are a local government and we accept you are a State as per Goods and Services Tax Ruling GSTR 2006/5 Goods and services tax: meaning of ‘Commonwealth, a State or a Territory’ . GSTR 2006/6, paragraphs 48 – 51 discusses subdivided land and item 4 of the table in subsection 75-10(3) and whether the Commissioner considers a supply of a particular subdivided lot is ineligible for consideration under item 4 of subsection 75-10(30) because the larger area (englobo land) from which it was subdivided had improvements on it at 1 July 2000, even though the physical area of the particular subdivided lot had no improvements. It is the Commissioners’ view that the words ‘land or premises in question’ in item 4 qualify the application of the improvements test to land that is supplied and not the larger area from which it is subdivided. It is the physical land rather than the legal interest that is considered when determining whether there were improvements on the land at the relevant date. We have determined in Question 1 above that human intervention has taken place on the land, enhancing its value at 1 July 2000, in respect of item numbers X11 to X41. Consequently, for the purposes of the margin scheme, item 3 in subsection 75-10(3) will be used in determining the date at which the valuation of the land is to be made (that is, 1 July 2000). In respect of the remaining item numbers (X1 to X10), we consider that the land is unimproved at 1 July 2000 and item 4 in subsection 75-10(3) will be applicable for margin scheme purposes. The date at which the valuation of the land is to be made is the day on which the taxable supply takes place. A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 (MSV 2009/1) specifies the requirements for making valuations for the purposes of applying the margin scheme in Division 75. The requirements apply to valuations for taxable supplies of real property made on or after 1 March 2010. MSV 2009/1 outlines the requirements for making valuations for the purposes of Division 75 under four Methods: ● Method 1: Valuation by a professional valuer ● Method 2: Valuation based on the consideration received by the supplier under the contract of sale ● Method 3: State Government or Territory Government department valuation ● Method 4: Valuation obtained by the Commissioner in certain circumstances. You have asked us to consider whether Method 3 is appropriate to your circumstances. You wish to use Method 3 and adopt the rating value for council rates. Clause 16 of MSV 2009/1 outlines Method 3 and states: Method 3: State Government or Territory Government department valuation 16. For a valuation based on a valuation made by or on behalf of a State Government or a Territory Government to be an approved valuation for the purposes of Division 75, that valuation must be made in accordance with the following requirements: (1) The valuation must be made by adopting as the valuation the most recent valuation of the interest, unit or lease made before the valuation date by or on behalf of a State Government or a Territory Government Department for rating or land tax purposes; and (2) The valuation must be made by the item specified in clauses 21 to 23 below. In your case, Method 3 is an appropriate valuation method to be applied for the purposes of calculating the margin and the most recent value can be used for that purpose.

● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | ● all terms marked by an asterisk are defined terms in the GST Act | ● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au