Private ruling: Entitlement to refund or credit on miscalculated margin scheme
Published: November 2013

Ruling: Q1: Are you entitled to a refund or credit for the relevant tax period for the sales of vacant land (property 1 and 2) | A1: No, you are not entitled to a refund or credit for the relevant tax period for the sales of vacant land.

Relevant facts and circumstances: You have been registered for goods and services tax (GST) since 1 July 2000 and are a government entity. You notified the Commissioner of an entitlement to a refund or credit within the 4 year period and you have now quantified your refund. You believe you are entitled to a refund or credit for the following tax periods: the tax period 1 April 20XX to 30 April 20XX and the tax period 1 October 20XX to 31 October 20XX. You are a 'state' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The GST refund applications relates to the sale of vacant land by you. You owned Property 1 and 2 prior to and at 1 July 2000. Property 1 was sold by you in Month 20YY. You provided a schedule identifying the Lot sold, by lot number, the date the Lot was sold and the GST payable by you in respect of the Lot, calculated on the basis that item 1 of the schedule in sub-section 75-10(3) of the GST Act applied. The contract for sale of Property 1 shows a sale price whereas the transfer form shows that the consideration paid for the Lot. The difference represents the amount of GST that was paid by you under the margin scheme in respect of the sale. The front page of the contract for sale shows that the sale price for the Lot is stated as exclusive of GST. The front page of the contract for sale also shows that the margin scheme will be used in making the taxable supply. A subclause of the contract for sale stipulates that the sale is subject to GST and the purchaser must pay to you, in addition to the sale price under the contract, an amount equal to the amount of GST payable by you on the supply. You have engaged a professional valuer to establish whether there are improvements on the property land and this valuer has provided you valuation reports with the date of valuation being in Month 20YY on this issue.(copies submitted) You have provided copies of valuations prepared in which it states they had made the following assumptions: Our valuation has been undertaken assuming freehold title, subject to vacant possession, and assuming the subject land was in an unimproved state at the date of the valuation. That is, in accordance with the Goods and Services Tax Act and appropriate rulings, all improvements to the land have been disregarded. That is, the value of the land excluding the added value of any "improvements on the land." You provided aerial photographs of the Properties taken on or about 1 July 2000. Property 1 has been predominately cleared apart from some large trees. The block is level, grassed and fenced. Property 2 has a structure on land. You advise the structure was not permanently affixed to the land. The land had been cleared and fenced at the time. Property 2 was sold in Month 20XX. You provided a schedule with your notification identifying the lot sold, by lot number, the date the lot was sold and the GST payable by you in respect of the lot, calculated on the basis that Item 1 of the schedule in subsection 75-10(3) of the GST Act applied. A subclause of the Contract for sale of land for Property 1 states: The vendor and the Purchaser agree that the margin scheme will apply to the supply of the property, provided that the Purchaser pays to the Vendor as an adjustment of Completion, and as an essential term of the Contract, the cost of obtaining a valuation of the Property as at 1 July 2000.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 75-10 | A New Tax System (Goods and Services Tax) Act 1999 Section 75-11 | A New Tax System (Goods and Services Tax) Act 1999 Section 75-35

Reasons for decision: Summary: You have provided the quantification of your miscalculations of the margin scheme for the refund or credit for the monthly tax periods from 1 April 20XX to 30 April 20XX together with the method of valuation. You notified the ATO on dd/mm/ 20ZZ for the period Section 75-10 of the GST Act sets out the amount of GST payable for a taxable supply of real property under the margin scheme and states: | Detailed Reasoning - 75-10 The amount of GST on taxable supplies: (1) If a *taxable supply of *real property is under the *margin scheme, the amount of GST on the supply is 1/11 of the *margin for the supply. (2) Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the *consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question. (3) Subject to section 75-11, if: (a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and (b) an *approved valuation of the freehold interest, *stratum unit or *long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made; the margin for the supply is the amount by which the *consideration for the supply exceeds that valuation of the interest, unit or lease. | Detailed Reasoning - Days when valuations are to be made: 1 The supplier acquired the interest, unit or lease before 1 July 2000, and items 2, 3 and 4 do not apply. 1 July 2000 2 … 2A … 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 as at 1 July 2000. The day on which the *taxable supply takes place (3A) If: (a) the circumstances specified in item 4 in the second column of the table in subsection (3)apply to the supply; and (b) there are improvements on the land or premises in question on the day on which the *taxable supply takes place; the valuation is to be made as if there are no improvements on the land or premises on that day. (4) This section has effect despite section 9-70 (which is about the amount of GST on taxable supplies). You have advised you have, incorrectly calculated the amount of the margin in accordance with item 1 of the table in subsection 75-10(3) of the GST Act and have calculated the margin as the difference between the consideration on sale and the valuation as at 1 July 2000. You have advised Item 4 of the table in subsection 75-10(3) of the GST Act should have been used using the valuation at the day of the taxable supply takes place. You advise you are a State for the purposes of the GST Act. Subsection 75-35 (1) of the GST Act provides that the Commissioner may, by legislative instrument, determine in writing requirements for making valuations for the purposes of Division 75 of the GST Act. Subsection 75-35 (2) of the GST Act further provides that a valuation made in accordance with those requirements is an approved valuation. You advise you are a State for the purposes of the GST Act. .MSV 2009/1 is a determination that was made by the Commissioner under section 75-35 of the GST Act. MSV 2009/1specifies the requirements for making valuations of real property for calculating the margin for taxable supplies of real property made on or after 1 March 2010 for the purposes of Division 75 of the GST Act. Goods and services tax ruling GSTR 2006/7 (GSTR 2006/7) explains how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000 and explains how MSV 2009/1 applies. Valuations are required to work out the margin for supplies of real property under paragraph 75-10(3)(b) of the GST Act and in particular circumstances, under section 75-11 of the GST Act. The table in subsection 75-10(3) of the GST Act sets out the valuation dates for the purposes of these provisions. Where the supplier is the Commonwealth, State, or Territory and it has held the freehold interest, stratum unit or long-term lease since before 1 July 2000 and there were no improvements on the land or premises as at 1 July 2000, item 4 in the table in subsection 75-10(3) of the GST Act (item 4) is relevant. The valuation date is the day on which the taxable supply takes place. To be able to use item 4 there must be no improvements on the land as at 1 July 2000. Paragraphs 47-51 of 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 provides in relation to improvements that are not on the land and states: 47. While the term 'improvements on the land' is not limited to visible improvements, it should be noted that 'improvements on the land' does not include interventions that are not upon the land, such as amenities in the surrounding area, even though they may enhance the value of the land. | Detailed Reasoning - Subdivided land and item 4 of the table in subsection 75-10(3): 48. In this part of the Ruling, the Commissioner considers whether a supply of a particular subdivided lot is ineligible for consideration under item 4 of subsection 75-10(3) 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. 49. The issue is whether it is necessary to consider whether any part of the englobo land had improvements on it or whether regard should be had only to that part of the englobo land that forms the subdivided lot. 50. It is the Commissioner's 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. 51. These words can be contrasted with the expression 'interest, unit or lease' which are used elsewhere in the item to refer to the legal interest being supplied under the margin scheme. This distinction supports the view that 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. The primary issue is whether the land in which the refund is being sought was in fact unimproved at the relevant time being 1 July 2000. The Commissioner has provided clarification on the meaning of the phrase "land on which there are no improvements" in 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. Professional valuations at times do not consider the ruling in its entirety and therefore form conclusions not necessarily aligned with the Commissioner's view. The premise 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. ATO view documents We consider the natural state of the land in question and whether there have been any improvements that enhance its value. In relation to whether the land in question is in its natural state paragraphs 37 and 38 of GSTR 2006/6 states: 37. The term 'improvements on the land' refers to any human intervention on the land which has the effect of enhancing its value. It is not limited to visible structural improvements and includes improvements below the surface of the land, such as underground drainage or other facilities. 38. Support for this view is found in the decision in Commonwealth of Australia of Australia v. Oldfield (1976) 133 CLR 612; (1976) 10 ALR 243 where the High Court described the meaning of 'improvements on the land' in the following manner: 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. ... Improvements to land result in improvements on that land in the relevant sense. The preposition 'on' does not here mean 'on the surface of the land' or the like unless the word improvement is limited to physical objects placed or constructed in or in the soil and for the reasons which I have given I do not think that the word has that meaning. Paragraph 25 of the ruling 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 · filling of land. You have engaged a professional valuer to establish whether there are improvements on Property 1 and this valuer has provided you a valuation report for a valuation which took place in Month 20XX on this issue. Human interventions relevant to your Land As suggested at paragraph 36 of GSTR 2006/6, the engagement of a professional valuer to establish the issue of whether there are improvements on the land should not be read as an action to conclude the issue. Rather, the engagement of a professional valuer may assist in the objective consideration of the issue of improvements on the land in accordance with the parameters as outlined in GSTR 2006/6 and discussed earlier. Furthermore the starting point, from which to consider the impact and valuation of any human interventions, should be the original state of the Land You have engaged a professional valuer to establish whether there are improvements on the land and this valuer has provided you valuation reports with the date of valuation in Month 20XX for property 1 and Month 20YY for Property 2. These valuations state: Our valuation has been undertaken assuming freehold title, subject to vacant possession, and assuming the subject land was in an unimproved state at the date of valuation. You provided an aerial photograph of Property 1 taken on or about 1 July 2000. The block has been predominately cleared apart from some large trees. The block is level, grassed and fenced. There has been human intervention on the land which has improved the land. As the land is improved you are not entitled to use Item 4 of the schedule to subsection 75-10(3). Therefore you are not entitled to a refund for the period for the sale of property1. You provided an aerial photograph of Property 2 taken on or about 1 July 2000. There was a structure on the land. You advise the structure was not permanently affixed to the land. The land has still been cleared and fenced and not in its natural state therefore improved. As the land is improved you are not entitled to use Item 4 of the schedule to subsection 75-10(3). Therefore you are not entitled to a refund for the period for the sale of property 2