GST & Vacant Land

GST and Vacant Land A PAPER BY PAUL ANDERSON MARCH 2010

GST and Vacant Land

Summary A recent Federal Court decision considers when a sale of vacant land can be liable for GST.

Who Does This Impact?

Subdividers and developers of vacant land and their advisers.

What Action Should Be Taken?

Subdividers and developers need to be conscious of the decision in calculating the asking price for sales of vacant land.

Contents:

TURKSLEGAL

Facts

2

Legislation

2

Decision

3

Conclusion

3

PAPER

GST and Vacant Land by Paul Anderson

The recent Federal Court Decision of Vidler v Commissioner of Taxation considers the uncertain question of whether the sale of vacant land is liable for GST.

Facts The case concerned two blocks of vacant land in Ipswich, Queensland.

The applicant purchased the first block in Gledson Street in August 2004 for $1 million and sold the block in December 2004 for $2.35 million. The land comprised 2.7 hectares of vacant land and was zoned Residential Low Density. It was connected to the electricity supply but not to gas, water or sewerage, although access to each of these services was available at the boundaries of the lot.

The second block comprised 2,428 square metres of vacant land in Gladstone Road, zoned Character Mixed Residential. The applicant purchased the property in May 2004 for $175,000 and subsequently sold it in April 2005 for $285,000. Access to electricity, water and sewerage was available but the services were not in fact connected.

The applicant did not pay GST in relation to either sale, on the basis that they were input taxed as sales of ‘residential premises’.

Although not expressly stated, the judgment assumes that the applicant was carrying on an ‘enterprise’, which is one of the basic preconditions for liability for GST under Section 9-5 of the GST Act. The Commissioner issued an assessment for $122,727 in respect of the Gledson Street property and $10,081 in respect of the Gladstone Road property. This in itself appears to be a concession because normally GST would be payable at the rate of oneeleventh of the selling price of a property, i.e. $213,636 in respect of the Gledston Street property and $25,990 in respect of the Gladstone Road property. Instead, the Commissioner appears to have only calculated GST on the ‘margin’, i.e. the difference between the sale price and the purchase price of each block of land.

Legislation Under Section 40-65 of the GST Act Act, the sale of real property is input taxed only to: the extent that the property is residential premises to be used predominately for residential accommodation....

‘Residential premises’ are defined in Section 195-1 as meaning: Land or a building that: (a) Is occupied as a residence or for residential accommodation; or (b) Is intended to be occupied and is capable of being occupied as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a floating home.

TURKSLEGAL

PAPER

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GST and Vacant Land by Paul Anderson

The Commissioner has always taken the view that vacant land, even if zoned residential, can never be ‘residential premises’ because it lacks ‘some form of permanent structure with living facilities’. This is the view expressed by the Commissioner prior to this decision in paragraph 25 of GST ruling 2000/20.

There is no doubt that the Section itself has confused the issue by the use of the phrase ‘land or a building’ which seems to suggest that in certain circumstances vacant land could be residential premises. However, it is still necessary to comply with Subsection (b) of the definition which requires the land and building to be: intended to be occupied and to be capable of being occupied as a residence or for residential accommodation.

The applicant relied upon the Explanatory Memorandum accompanying the Bill when introduced into Parliament. In paragraph 1-167 of the Explanatory Memorandum, it was stated that to be considered residential premises, it must be permissible to use the land for residential purposes and the land must have some facilities ordinarily associated with residency (i.e. water and sewerage).

However, the Explanatory Memorandum in paragraph 1-68 also stated that sales of vacant residential land would not be input taxed under Section 40-65.

The applicant argued that, because the zoning permitted residential development and water and sewerage were available, the requirements of paragraph 1-167 of the Explanatory Memorandum had been satisfied.

Decision Stone, J concluded that to satisfy subsection (b) of the definition, ‘shelter and basic living facilities’ must be provided. Clearly, such facilities were not provided in this case and neither property could come within the definition of residential premises.

As far as his Honour was concerned, the applicant’s argument confused the capacity of the land to be used as residential premises at the relevant time with its potential to be so used at some point in the future.

The Commissioner also invited the Judge to rule that vacant land could never be considered residential premises for the purposes of the GST Act. However, while it was difficult for him to imagine a scenario in which such a characterisation would be plausible, the Judge ‘was was not inclined to make so expansive a ruling’. It was sufficient in the present case that each lot failed to provide an ‘element ‘ of shelter and basic living facilities’.

Conclusion Although the wording of Section 195-1 is itself confusing, the outcome of the case is not surprising. In the light of the decision, a developer needs to allow for the impact of GST in calculating the asking price for vacant land sold. A developer can at least reduce the impact of GST by adopting the margin scheme in relation to sales.

TURKSLEGAL

PAPER

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GST and Vacant Land by Paul Anderson

For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

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