How GST Concessions Can Maximise Returns
Local Councils who are considering selling surplus land or have sold large parcels of land within the past four years may be able to maximise net sales proceeds by applying certain concessions in the Goods and Services Tax (GST) law that are available specifically for government entities.
Gerard Coutts & Associates and PwC have recently assisted and are currently engaged with Local Councils across Australia developing and implementing strategies to maximise returns. These include strategies with respect to land aggregation, development, procurement and master planning and utilising these strategies for the provision of GST concessions.
The GST concessions arise as Local Councils are considered to be ‘the State’ for GST purposes, following recent court cases and pronouncements by the Australian Taxation Office (ATO). This designation can be applied to achieve a reduction in GST on future sales and unlock potential GST refunds on certain historical sales of land that is ‘unimproved’ for GST purposes. The concessions are broadly explained as follows:
1. Land that is ‘unimproved’ at the time of sale
The first sale of land by a Local Council ‘on which there are no improvements’ at the time of sale is generally not subject to GST. This can either impact the sale price (if the price is ‘plus GST’) or the net proceeds (if the price is ‘GST inclusive’). The GST-free treatment applies as a matter of law and no election is necessary.
2. Subdivided land that was ‘unimproved’ as at 1 July 2000
Sale by a Local Council of land that is ‘improved’ at the time of sale (eg. partially developed) and that was held by the Local Council as at 1 July 2000 (ie. the commencement of GST in Australia) is not GST-free, but may nevertheless qualify for concessional GST treatment if it was ‘unimproved’ as at 1 July 2000.
This concession is also unique to government entities, including Local Councils, and quite often results in substantial GST savings by reducing the margin upon which GST is calculated. GST is only payable on the value of any improvements on the land as at the day of sale rather than the entire value added since 1 July 2000.
The concept of ‘unimproved’ for GST purposes
A pre-requisite for both concessions is that the land is ‘unimproved’ as at the relevant date – the time of sale or 1 July 2000 respectively. Broadly, the concept of ‘improvements’ for GST purposes refers to human interventions on land that continue to enhance its value as at the relevant date. If a human intervention on the land (eg. removal of trees or construction of a building) no longer enhances its value, then there are no improvements on the land for GST purposes.
We have seen the following examples of land that was considered ‘unimproved’ for GST purposes:
Land in the CBD of a capital city on which there are buildings in a state of disrepair;
Rural land containing dilapidated buildings or remnants of demolished structures;
Farmland left fallow for a period that it now overgrown with weeds; and
Land that is contaminated as a result of past activity on the land.
If correctly applied, these GST concessions can result in either nil or a reduced amount of GST payable than would otherwise be the case. The concessions are accepted by the ATO and are useful to legitimately reduce the amount of GST payable on the sale of real property leading to increased returns from the disposal of Council owned property.
Finally, there have been changes to the GST legislation which impact the ability to claim refunds for ‘overpaid’ GST in a real property context, meaning that you must get the GST treatment correct in the first instance or risk forfeiting any overpaid GST amounts.