GST and Vacant Land Revisited A PAPER BY PAUL ANDERSON SEPTEMBER 2010
GST and Vacant Land Revisited
Summary The full Federal Court has dismissed an appeal in the case of Vidler v Commissioner of Taxation which considered whether a sale of vacant land is liable for GST.
Who Does This Impact? Sub-dividers and developers of vacant land and their advisers.
What Action Should Be Taken? Sub-dividers 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 at First Instance
3
Decision of Full Court
3
Conclusion
4
PAPER
GST and Vacant Land Revisited by Paul Anderson
The full Federal Court has dismissed the taxpayer’s appeal in the case of Vidler v Commissioner of Taxation. The case at first instance before Stone, J was previously reported on this website in March of this year. The case concerned the question of whether vacant land was ‘residential premises’ and, therefore, input taxed for GST purposes.
Facts The case concerned two blocks of vacant land in Ipswich, Queensland. The taxpayer 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 lot comprised 2,428 square metres of vacant land in Gladstone Road, zoned ‘Character Mixed Residential’. The taxpayer 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 taxpayer was carrying on an ‘enterprise’ which is one of the basis 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 property. This in itself appears to be a concession because normally GST would be payable at the rate of one-eleventh of the selling price of a property, i.e. $213,636 in respect of the Gledson Street, and $25,990 in respect of the Gladstone property. Instead, the Commissioner appears to have only calculated GST on the ‘margin’ i.e. the difference between the sale price and 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 predominantly 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 of the occupation or intended occupation) and includes a floating home.’
TURKSLEGAL
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GST and Vacant Land Revisited by Paul Anderson
The Commission 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 sub-section (b) of the definition which requires the land for building to be: ‘Intended to be occupied and to be capable of being occupied as a residence or residential accommodation.’ The taxpayer 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 (eg. 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 taxpayer argued that, because the zoning permitted residential development and water and sewerage were available, the requirements at paragraph 1-167 of the Explanatory Memorandum had been satisfied.
Decision at First Instance Stone, J concluded that to satisfy sub-section (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 her Honour was concerned, the taxpayer’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.
Decision of Full Court The dictionary definitions of ‘residence’ connote a dwelling, abode or house in which a person may reside. The word ‘occupied’ in the phrase ‘capable of being occupied’ connotes living within or inhabiting a structure. It was ‘quite artificial’ to speak of someone ‘occupying vacant land’ as a residence or for residential accommodation. The appellant’s submission that paragraph (b) of the definition is ‘apt to deal with future use of land, that is to say where the construction of shelter or living facilities is to occur in the future, is at odds with the requirement that land or a building have the required character at the time of supply’. ‘Capable’ in the expression ‘capable of being occupied, as a residence or for residential accommodation’ must involve more than an ability in the future to make the land or building suitable for occupation as a residence or for residential accommodation. The appellant relied heavily upon the opening words of the definition of ‘residential premises’, namely ‘land or a building’ as suggesting that residential premises may be one or the other.
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GST and Vacant Land Revisited by Paul Anderson
The Full Court’s response was that the definition must be read as a whole, i.e. ‘it must be land that ….. is capable of being occupied as a residence or for residential accommodation’. As a result, although it was true that in the abstract ‘land’ included vacant land, context may vary the meaning. The appellant also relied heavily upon the Explanatory Memorandum accompanying the Bill which is referred to above. The appellant sought to derive from the Bill that land is ‘capable’ of being occupied as a residence, even if it is vacant, if it is able to be connected to water and sewerage facilities. The Full Court’s response was that the Explanatory Memorandum contemplated the existence on the land of structures serviced by water and sewerage and not merely the ability to connect vacant land to such services. It would be absurd if the mere existence of a tap in the middle of an area of vacant land transformed the land into ‘residential premises’. In short, the Full Court found that Stone, J had not erred in her decision and dismissed the appeal.
Conclusion The wording of Section 195-1 is confusing when it refers to ‘land or a building’. The problem could have been avoided by a simple change in the wording so as to read ‘land and building’. However, despite the confusion, the decision reached at first instance and on appeal is not surprising. In 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.
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GST and Vacant Land Revisited by Paul Anderson
For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au
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