Private ruling: GST and the supply of a freehold interest in land
Date of advice: 15 July 2015
Published: July 2015

Ruling: Q1: Is the supply of the Land a supply of a freehold interest in land on which there are no improvements for the purposes of Subdivision 38-N (and in particular section 38-445)? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Entity A is the current owner of land. Entity A has entered into a contract with Entity B for the sale of the Land. Both parties are registered for GST. The parties have agreed at clause xx of the Special Conditions of the Sales Contract that: "where a supply (or a component thereof) is the supply by the State of land on which there are no improvements (as defined in Section 38-445 of the GST Act), the supply will be GST -free." The land has previously had a number of uses. These are as follows: • The land was partly occupied by a building and several other associated buildings. • The land was also occupied by low density residential buildings with gardens. The majority of the buildings on the site were demolished and a specific building was also located near the site. • The most recent use of the land was an operational building. The identifiable features currently on the Land are as follows: • Fencing / retaining wall: From the photographs of the Land, the fencing/retaining wall appear to be vandalised in some areas and also cracked (i.e. the fencing does not appear to be in its original condition); • Asphalt / hardstand: A small section of asphalt / hardstand is located on the land. The asphalt / hardstand remains from the time that the site was an operational building. However, it is cracked and worn away in many places; • Clearing and levelling: Due to the multiple historical uses of the land, it is possible that the land has been historically cleared and levelled. • Utility access points: The Sewerage and Recycled Water Infrastructure Survey dated XXYYYY indicates that sewerage and recycled water network infrastructure is located up to the boundary of the site. It is believed that this infrastructure is located underneath the ground. The Stormwater and Cable Networks Survey dated XXYYYY indicates that a private stormwater line is located on the site. The survey Plan was last updated in 19XX. Contamination A contamination assessment of the Land was carried out in XXYYYY. In that assessment it was found: "…the identified asbestos impacts were observed to be co-located with demolition/rubble, material (bricks, wood, concrete etc) presumably used as uncontrolled fill to create a level surface. Extent Based on the available data, the asbestos impacts appear to be restricted to the upper terrace and one isolated location in the lower terrace. However, given the variability of the fill material encountered and that not all samples were analysed from every lithology, there remains the potential for unassessed asbestos impacts to be present at the Site. Recommendations …consider that the identified asbestos impacts will require remediation to render the Site suitable for the proposed land use. This can be achieved by excavation and disposal of the soils that contain asbestos impacts exceeding the adopted site assessment criteria for the proposed medium density land use. It is estimated that the volume of material that will require removal is approximately XXXXXXX tonnes. Given the history of the Site and the variability in the encountered fill material, there is a possibility for further assessed asbestos impacts in soils to be present. Furthermore … understands that proposed development will not require basement level structures, therefore much of the fill material will remain at the Site and may be intercepted during future intrusive maintenance works. Considering this, it is recommended that a Site Management Plan (SMP) also be prepared to: • Manage the potential asbestos risks during any future intrusive maintenance work's and /or development works; and • Manage un-expected finds of ACM or other forms of contamination (odourous and/or visually discoloured soils) that may be encountered during future intrusive maintenance work's and / or development works. You have advised that it will cost between $xx to $xx to remove and manage the asbestos impacted soil. A Valuation Assessment was prepared for the site. The Valuer has provided the following observations which have been summarised from his report: 1. The subject property is land on which there are no improvements as at the relevant date. 2. The uses of the subject property and off-site uses may have caused contamination to the subject property which may require remediation that reduces the value of the land as at the relevant date. 3. Given the thickness of the contaminated land fill over the land it is anticipated that the most appropriate method of ground improvement would be to excavate and replace under engineering controls. 4. The geotechnical tests show the land to have considerable contaminated fill material which will need to be remediated before any redevelopment of the land. Therefore, considerable land improvement is needed to the existing land conditions. 5. In relation to both the perimeter fencing and the existing retaining walls, they would not be adaptable to the highest and best use of the land and would need to be removed. These two structures do not enhance the value of the subject property and hence are not improvements to the land. 6. No services infrastructure was identified on land. Both the Stormwater and the Cable Networks survey plans provided show that there may be lines on the land, however, there were no visible connections to the land and may now be obsolete for any proposed redevelopment of the subject property. Consequently, these utility services are not considered an improvement to the land. 7. Coinciding with the support for medium density residential development in the immediate area it is reasonable to assume that the highest and best use of the land is for this use. Therefore, remediation / soil excavation support for land improvement is warranted given the highest and best use of the land and consequently any structures on the current land are not considered improvements in any way. 8. Human interventions which once occurred on the land do not continue to enhance the value of the land. There will be costs associated with the remediation of any contamination and therefore the human interventions as they currently exist do not enhance the value of the land. The following documentation has been submitted in support of your application: • Sales Contract • Contamination Assessment - Draft report • Photographs of the land • Sewerage and Recycled Water Infrastructure • Stormwater and Cable Networks Survey • Valuation Assessment

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 38-N.

Reasons for decision: Summary: Is the supply of the Land a supply of a freehold interest in land on which there are no improvements for the purposes of Subdivision 38-N (and in particular section 38-445)? 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. | Detailed Reasoning - Land and improvements: The meaning of "land" is not defined for the purposes of the GST Act, therefore it takes its generally accepted meaning, i.e. '1. the solid substance of the earth's surface. 2. the exposed part of the earth's surface' (Macquarie Dictionary). We consider that any solid portion of the earth's surface can be regarded as "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: 1. houses, town-houses, stratum units, separate garages, sheds and other out-buildings 2. commercial and industrial premises 3. formed driveways, swimming pools, tennis courts, and walls 4. any other similar buildings or structures 5. fencing - internal or boundary fencing 6. utilities, for example, water, electricity, gas, sewerage connected or available for connection 7. clearing of timber, scrub or other vegetation 8. excavation, grading or levelling of land 9. drainage of land 10. removal of rocks, stones or soil, and 11. filling of land. | Detailed Reasoning - Professional Valuer's Report: You have engaged a professional valuer to establish whether the land was unimproved land as at 1 July 2000. 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 should 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. The Commissioner is not bound by a professional valuer's opinion of the land. An objective consideration as to whether a human intervention enhances the value of the land should not be limited to opinions by professional valuers, although their assessments may assist in the matter. The valuer's opinion states that it has been prepared with regard to GSTR 2006/6. It further states that the assessment with respect to any improvement has been made without reference to any intended use of the land by the supplier or the recipient. The opinion acknowledges that there have been human interventions on the land but concludes that these do not enhance the value of the land. Furthermore, there will be costs associated with the remediation of any contamination and therefore the human interventions as they currently exist do not enhance the value of the land. However, the starting point from which to consider the impact and valuation of any human interventions, is the original state of the Land. | Detailed Reasoning - Your contention: In a letter dated XXYYYY, your representative, made the following submission in relation to the Draft ruling comments on Professional Valuers: "…However, we consider the Commissioner should have significant regard to the valuer's opinion as a professional valuer is trained and qualified to determine value and provides objective evidence as to 'value' in the context of the High Court's longstanding view of what is considered an improvement. In the Draft Ruling the Commissioner does not appear to give proper weight to the valuer's opinion…" Due consideration has been given to the opinion of the Valuer. We have quoted excerpts from the opinion in providing our ruling. However, we cannot agree with the conclusion reached by the Valuer. Although there may be contamination on the land which reduces the value of improvements on the land, the contamination is not such as to extinguish the value of those improvements. Furthermore, as explained in our draft ruling, the starting point from which to consider the impact and valuation of any human intervention is the original state of the land. | Detailed Reasoning - 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. Our position is that it is necessary to compare to land in its virgin state. The High Court in Commonwealth of Australia v Oldfield (1976) 133 CLR 612 (1976) 10 ALR 243 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. We consider that the highest and best use is not relevant to determining if an improvement exists. This is by reference to Trust Company of Australia Ltd v The Valuer General [2007] NSWCA 181 in which the NSW Court of Appeal confirmed the trial judge's decision that a structure on land is not an improvement if it does not enhance the land's value compared with its natural state. It was not accepted that improvements have to add value to land for the purpose of its highest and best potential use. Campbell JA, with whom Beazley JA and IPP JA agreed, discussed the ordinary meaning of 'improvements' at paragraphs 20 to 31 and then disagreed that the identity of the relevant improvements should be ascertained by reference to what is the highest and best use (at paragraphs 33 to 36). In your case the land has been occupied for various uses since the early 1900's including: 1. Various commercial buildings 2. Low density residential buildings 3. Service station and Vehicle Workshop A report contains the following site description of the property: … The topography of the Site generally falls from ………, having been previously terraced with an approximate level difference between the upper and lower terraces. A concrete block retaining wall with a sloped embankment was observed to separate the upper terrace and the lower terrace. The surface of the Site was observed to comprise of asphalt, a concrete base (from the former business) with several grassed areas and garden beds. … The report contains a further paragraph regarding Hydrology and Drainage as follows: … The site is located on a ridge with moderate slopes, falling towards drainage channels along boundaries. All overland flowpaths appear to drain in various directions with the high point being a raised bitumen carpark and access driveway along the boundary. The highest elevation identified on the site is to the … Stormwater flow is diverted towards …Street through underground stormwater pipes and concrete channel drains. … since the removal of the former building and associated underground infrastructure, the overland flow pathways have been modified. There is expected to be some surface water inflow. Past environmental reports and assessments were prepared for the subject property. The following observations have been extracted from the report: a. The building was removed and validated. b. The site is terraced with approximate level differences between the upper and lower terraces. c. Asbestos in Soil: Identified asbestos impacts will require remediation to render the Site suitable for the proposed land use. Based on the available data, a cost breakdown of the tasks required to excavate, disposal and validate asbestos impacted soil material present at the site has been provided. Photographs of the subject property have been provided which confirm that the site is cleared and levelled with retaining walls of varying nature and degree. There is also a pathway from the lower terrace which is bounded by a handrail and fencing on one side. Photographs indicate that the property has been used for casual parking. The human interventions, which may enhance the value of land and which are relevant in relation to your Land, are: | Detailed Reasoning - Levelling and clearing of land: As outlined above, the land has been levelled and cleared. It is terraced and includes retaining walls of concrete brick and log construction. The surface of the Site is comprised of asphalt, a concrete base (from the former building) with several grassed areas and garden beds. Its current use would seem to be as an informal car park. Although there has been deterioration in the subject property, it is still substantially levelled and cleared. Therefore, levelling of the Land is a human intervention that enhances the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6. | Detailed Reasoning - Your Contentions: In a letter dated XXYYYY, your representative, made the following submission in relation to the Draft ruling comments on clearing and levelling: '…The Commissioner's conclusion in the Draft Ruling is inconsistent with GSTR 2006/6 at paragraph 28 which states: … The land on the relevant property has sinkholes and has been eroded in places due to clearing and levelling. The professional valuer's report indicates that this clearing and levelling is not an improvement. We submit the Commissioner's conclusion as to the clearing and levelling is not reasonable as the clearing and levelling has clearly deteriorated the land. We further note the Commissioner concludes the land is still useful as it is used as an informal carpark. We acknowledge that some photographs submitted to the Commissioner have cars located on the land. However, the land ceased being used as a car park long before the date of supply. We submit that the land cannot be put to any use in its current condition (including at the date of supply) - it is not safe to be public open space and nothing can be built on the unstable land without work being completed. Therefore, we submit that the levelling and clearing are not improvements that enhance the value of the land. The description of the property outlined in the Draft ruling was taken from a draft report dated XXYYYY provided to this office. The Site characteristics concerning this indicator are contained in paragraph ZZ Based on the above and the photographs of the property, we do not consider that that there has been sufficient deterioration in the clearing and levelling of the land to extinguish these improvements in their entirety. | Detailed Reasoning - Drainage of land: A report has identified both overland flow paths which drain in both directions and underground stormwater pipes and concrete channel drains. The drainage system on the land is a human intervention that enhances the value of the land in accordance with GSTR 2006/6. | Detailed Reasoning - Your contentions: In a letter dated XXYYYY, your representative, made the following submission in relation to the Draft ruling comments on drainage: "The Commissioner concludes that pursuant to the above, as there are overland flow paths which drain in both directions and underground stormwater pipes and concrete channel drains, these enhance the value of the land. However, the Commissioner does not appear to consider the comments by …. in the later report: …. note that since the removal of the former service … and associated underground infrastructure, the overland flow paths have been modified. There is expected to be some surface water inflow into the backfilled former tank farm The later report demonstrates that what may have once been an improvement to the land, has now been modified and is no longer useful. In GSTR 2006/6 at paragraph 28 and 29, the Commissioner acknowledges that human interventions that were once improvements but have deteriorated over time may no longer enhance the value of the land and are not improvements. Drainage that no longer works and results in backfill should no longer be seen as an improvement as it no longer has functional use and would no enhance the value of the land." The paragraph quoted above, states that the overland flow pathways have been modified. It does not state that the pathways cannot be improved / modified to prevent any surface water inflow into the backfilled former areas, were this to occur. The report does not state that this will occur, only that it is expected that there may be some surface water inflow. Based on the above, we do not consider that that there has been sufficient deterioration in the improvements or land to extinguish the drainage improvements on the land in their entirety. | Detailed Reasoning - Fencing: There is fencing along the boundary of the property. Although there are indications that the fencing has deteriorated in a number of locations, this could be repaired and adds value to its current use in accordance with GSTR 2006/6. | Detailed Reasoning - Your contentions: In a letter dated XXYYYY, your representative, made the following submission in relation to the Draft ruling comments on fencing: We do not agree with the Commissioner's finding in relation to the fencing. The fence has deteriorated in a number of places and is no longer useful. The commissioner reasons that the fence could be repaired, however it is inconsistent with the principles outlined in GSTR 2006/6 to find that a human intervention is an improvement because with further action (i.e. repair works) it may add value to the land. It is necessary to examine the land at the time of the supply to determine whether there are improvements on the land. The fencing at the time of the supply was deteriorated and not useful at this time. Further, the professional valuer concluded in his report that the fencing does not enhance the value of the land. As such we submit that the fencing is not an improvement of the land. Although the fencing may require repairs in some areas, it is substantially in good condition. We have made this conclusion from photographic evidence obtained from Google Maps (www.google.com/maps - image captured April 2015) and the photographs supplied in the report. The fencing is useful as it encloses the area and controls entrance and egress from the subject property. Based on the above, we do not consider that that there has been sufficient deterioration in the fencing to extinguish this improvement on the land in its entirety. | Detailed Reasoning - Remediation of land: Remedial works were conducted on the subject property. This included the excavation, remediation and validation of the present Site. At the conclusion of the process, it was concluded that the site had been appropriately investigated, remediated and validated. Soil validation and stockpile characterisation results have demonstrated that the site is suitable for unrestricted land use and should be removed from the Environmental Management Register. This is a human intervention on the land which enhances the value of the land in accordance with GSTR 2006/6. | Detailed Reasoning - Asbestos in Soil: The report considers that the identified asbestos impacts will require remediation to render the Site suitable for the proposed land use . The cost of the remediation works is estimated at approximately $. Although the need for remedial work erodes the value of the clearing, levelling and remediation work already undertaken, it does not extinguish the benefit associated with these human interventions on the land. Further, the additional remediation work is required to render the site suitable for residential use which is the preferred option for your client. That is, if the site were not for residential use, such works may not be required. | Detailed Reasoning - Your contention: In a letter dated XXYYYY, your representative, made the following submission in relation to the Draft ruling comments on Remediation of land: "Applying this proposition, we do not consider that remedial works undertaken on land can enhance the value of land compared to its natural state. Remedial work may enhance the value of degraded land, but land which is degraded from contamination and them remediated, will not be worth more than natural land that has never had any contamination. At best, the remediation may improve the land so that it is equal to the value of the land in its natural state. therefore, we submit that the Commissioner's reasoning that as Entity XX and Entity YY considered the site was suitable to be removed from the Environmental Management Register it must have an enhanced value is not consistent with the principles in GSTR 2006/6… When considering paragraph 20 of GSTR 2006/6, we are considering improvements made to land on which no human intervention has occurred. In this case, the remedial works undertaken on the land were not undertaken to return the land to its natural state, but to repair or correct adverse human interventions on the land. As stated above, the remedial works may impact the value of improvements on the land but they do not extinguish the benefit of such improvements. We acknowledge that the following statement made in your response to the draft ruling has merit: Therefore, we submit that the Commissioner's reasoning that as Entity XX and Entity YY considered the site was suitable to be removed from the Environmental Management Register it must have an enhanced value is not consistent with the principles in GSTR 2006/6. It should have been more clearly explained, that the remedial works which have been undertaken on the property have removed many of the considerations regarding the impact of contamination on the site. As explained in the Draft ruling, Entity XX and Entity YY's conclusion that the site had been appropriately investigated, remediated and validated to the extent that they recommended its removal from the Environmental Management Register, further supports the view that any contamination remaining on the land, although it may reduce the value of improvements on the land, does not extinguish such improvements in their entirety. | Detailed Reasoning - Conclusion: Based on the above information, we consider that the subject property is improved land for the purposes of section 38-445.

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au