Private ruling: GST improvements on the land
Published: June 2012

Ruling: Q1: Will your supply of land be GST-free under section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)? | A1: No, your supply will not be GST-free. The structures built on your land are considered to be improvements to the land. | Q2: If the answer to question 1 is 'No', are you able to use the margin scheme to work out your GST liability? What should be the date of valuation for margin scheme purposes? | A2: Yes, you are able to use the margin scheme. The date of valuation will be 1 July 20XX for the improved land.

Relevant facts and circumstances: · You, a government entity own land that you intend to sell to adjoining landowners (landowners). · You are registered for GST. · You have owned the land since pre 1 July 2000. · From time to time, past and present landowners have built illegal structures on land owned by you. · These structures were on the property before 1 July 2000. · You did not in any way fund the erection or acquisition of these structures. · Whilst you could order the demolition or removal of such structures, you intend to sell the land to the landowners who built the structures.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-N | A New Tax System (Goods and Services Tax) Act 1999 section 38-445 | A New Tax System (Goods and Services Tax) Act 1999 subsection 38-445(1) | A New Tax System (Goods and Services Tax) Act 1999 section 38-450

Reasons for decision: Summary: Section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that: (1) A supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if: (a) the supply is of a freehold interest in the land, or (b) the supply is by way of long-term lease. (1A) ……. (2) However, the supply is not GST-free if, since 1 July 2000, the land has already been the subject of a supply that is GST-free under this section. You will be supplying freehold interest in land and therefore, we have to consider whether you are considered to be part of the Commonwealth, a State or a Territory. The Australian Taxation Office (ATO) view on the meaning of Commonwealth, a State or a Territory is explained in Goods and Services Tax Ruling GSTR 2006/5 (GSTR 2006/5) 'meaning of Commonwealth, a State or a Territory'. Paragraphs 14 and 15 of GSTR 2006/5 confirm that a local government is a 'State' for the purposes of section 114 of the Constitution in the case of, ' The Municipal Council of Sydney v. The Commonwealth' . Accordingly, we consider that you are included in the definition of 'State', and we now have to consider the term 'no improvements' on the land. The ATO view on the meaning of the term 'improvements on the land' is explained in Goods and Services Tax Ruling GSTR 2006/6 'improvement on the land for the purposes of Subdivision 8-N and Division 75' (GSTR 2006/6). Paragraphs 21 and 22 of GSTR 2006/6 state: 21. The meaning of 'improvements' in the context of land tax has been held by the High Court in Morrison v Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503 to be: Any operation of man on land which has the effect of enhancing its value comes within the definition of 'improvement'. 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 further 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 enhance the overall value of the land. Listed below are some examples of human interventions that may enhance the value of land: · separate garages · sheds · out-buildings · fencing - internal or boundary fencing · clearing of timber, scrub or other vegetation · formed driveways · swimming pools · tennis courts · walls · drainage of land · filling of land · removal of rocks, stones or soil · any other buildings or structures See paragraph 25 of GSTR 2006/6 for further examples. In your situation, you have stated that you own a number of parcels of land and over the years the landowners (past and present) have built structures that have encroached on your land. You contend that these structures do not add value to the land as they relate to illegal structures built on your land. Further you did not in any way fund the erection or acquisition of the structures. In considering your facts, we refer to paragraph 35 of GSTR 2006/6 which explains that whether human intervention enhances the value of the land is an objective test. Further, whether an intervention enhances the value of the land should not be determined by reference to use or intended use by either the supplier or the recipient. For example, real property with a building on it that is not condemned enhances the value of the land even though the recipient may intend to demolish the building and construct some other building in its place. In examining the facts, we consider that these illegal structures enhance the value of the land because they still remain on the land and are in a useable or repairable condition such that they are still capable of fulfilling the function for which they were constructed. Further, you have stated that you will be selling the portion of land that has the structures to the landowners. We consider that these structures have value to the purchasers and therefore it is viable for them to purchase the additional parcel of land. Unimproved land is taken to be land in its natural state. We consider that the land in question has been changed from its natural state by the construction of these structures. We consider that the structures built on the land amount to improvements on the land. It does not matter that the structures were built illegally or whether you funded the building of the structures. Therefore, the supply of the land does not meet the criteria of section 38-445 of the GST Act and will be subject to GST as per section 9-5 of the GST Act. However, you may choose to use the margin scheme to work out your GST liability for the supply of the land. | Detailed Reasoning - Margin Scheme: Generally, if an entity is registered, the sale of real property will be subject to goods and services tax (GST). Under the basic rules, GST is generally calculated on the full value of the real property. However, an entity may be able to choose to calculate the GST payable on the supply of real property by using the margin scheme provided for in Division 75 of the GST Act. Under the margin scheme, the GST payable on the supply of certain real property is 1/11 of the margin on the supply. The margin for the supply is usually the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit or lease unless subsection 75-10(3) of the GST Act applies. Subsection 75-10(3) of the GST Act defines the margin differently in certain circumstances. The effect of subsection 75-10(3) of the GST Act is that if: · the circumstances specified in an item in the second column of the table in subsection 75-10(3) apply to you · and a valuation of the property has been made · the valuation values the property at the day specified in the corresponding item in the third column of the table, and · the valuation complies with any requirements determined in writing by the Commissioner for making valuations for the purpose of Division 75 of the GST Act, then the margin for the supply is the amount by which the consideration for the supply exceeds that valuation. Paragraph 75-10(3)(b) of the GST Act requires valuations for the margin scheme to comply with requirements determined in writing by the Commissioner for making valuations for the purpose of Division 75 of the GST Act. The Commissioner has set out requirements for valuations in two legislative Determinations, A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No. 1) 2000 and A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No. 2) 2000. You are registered for GST. You have held your interest in the land since pre 1 July 2000. The improvements existed before 1 July 2000. In your situation, Item 3 of the table in subsection 75-10(3) of the GST Act provides that valuations to be used to work out margins for the purposes of the Margin Scheme is the value of the land and improvements as at 1 July 2000. Therefore the margin for your case will be the difference between the valuation of the improved property as of 1 July 2000 and the sale price of the improved land.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.