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Ruling

Subject: GST and entitlement to input tax credit for compulsory acquisition

Question

Are you entitled to an input tax credit when you pay compensation to the land owner for land which is acquired by agreement pursuant to a statute?

Answer

No, you are entitled to an input tax credit when you pay compensation to the land owner for land which is acquired by agreement pursuant to a statute.

Relevant facts and circumstances

You are registered for GST.

You intend to compulsorily acquire land owned by the land owner under a statute.

You issued a notice of intention to resume the land.

Under the statute, you may acquire the land by agreement. The taking of land by agreement results in the issue of a gazette resumption notice which passes ownership to you. The statute also allows you and the land owner to reach an agreement in writing as to the amount of compensation to be paid.

The statute provides that any remaining land will also be compulsorily acquired if you and the land owner agree that it is of no practical use or value to the entity.

Under the statute, the effect of land taken by a gazette resumption notice is that:

· the legal ownership of the land described in the notice is vested with the authority acquiring the land, on and from the date of the notice, and

· all of the land becomes absolutely freed and is discharged from all trusts, obligations, mortgages, charges, rates, contracts, claims, estates or interest of what kind soever.

The statute provides that in assessing the compensation to be paid, regard shall be had not only to the value of the land taken but also to:

· the damage if any caused by the severing of the land taken from other land of the claimant;

· the exercise of any statutory powers by the constructing authority otherwise injuriously affecting the claimants other land; and

· to the claimant's costs attributable to disturbance.

You have entered into a resumption agreement to acquire the land owned by the land owner.

The land owner is registered for GST.

A copy of the resumption agreement was supplied.

The resumption agreement specifies the compensation amounts, the dates that it is to be paid and how the compensation is to be used.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition where all of the following requirements are satisfied:

(a) you acquire anything solely or partly for a creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

(d) you are registered, or required to be registered.

In order for you to make a creditable acquisition and claim an input tax credit in relation to the compensation payment, there must be amongst other things a taxable supply of land or of something else to you. In addition, the land owner must make the supply for consideration pursuant to subsection 9-5(a) of the GST Act otherwise the acquisition will not be creditable.

Section 9-15 of the GST Act provides that a payment will be consideration for a supply if the payment is 'in connection with' a supply and 'in response to' or 'for the inducement' of a supply. Therefore there must be a sufficient connection between a particular supply and a particular payment for there to be a supply for consideration.

For an entity to make a taxable supply, it must make a supply. The term 'supply' is broadly defined for GST purposes and is defined in subsection 9-10(1) of the GST Act to include, 'any form of supply whatsoever'.

Goods and Services Tax Ruling GSTR 2001/4 explains the meaning of the term 'supply'. Paragraph 25 of GSTR 2001/4 states:

25. Subsection 9-10(2) refers to two aspects of a supply; the thing which passes, such as goods, services, a right or obligation; and the means by which it passes, such as its provision, creation, grant, assignment, surrender or release.

The meaning of the term 'supply' is discussed further in Goods and Services Tax Ruling GSTR 2006/9. GSTR 2006/9 contains ten propositions for the purpose of analysing a transaction to identify the supply or supplies made in that transaction. Paragraphs 71 to 91 of GSTR 2006/9 concern proposition 5 which refers to the principal that to 'make a supply' an entity must do something. In your case, this means that the land owner must take some action or do something for a supply of the land to occur.

Paragraphs 80 to 84 of GSTR 2006/9 provide guidance on the legal effect of a legislative acquisition of real property:

80. Various government authorities are empowered by legislation to acquire an interest in real property. Two common mechanisms employed by legislation are:

· the vesting of the interest in the relevant government authority and extinguishing any previous interests in the real property; and

· the particular statute may allow the government authority to acquire the real property by agreement.

Vesting in the government authority

81. An example of vesting is provided by section 20 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW), where the required acquisition notices are gazetted, the relevant land is:

'vested in the authority of the State acquiring the land'; and

'freed and discharged from all estates, interests, trust, restrictions, dedications, reservations, easements, rights, charges, rates and contracts in, over or in connection with the land'.

The entity whose interest in the land is extinguished is compensated for the loss of that interest. That entity may agree to the compensation determined by the Valuer-General and execute a form of release. If the entity disputes the compensation amount, there is provision for payment of 90% of the initial valuation until the matter is resolved.

82. The effect of the gazettal notice is that the legal ownership of the land, described in the notice, is vested in the authority acquiring the land, and that the land becomes freed from any other interests. The entity's interest in the land, whether legal or equitable, is extinguished. When land vests in an authority in consequence of a gazettal notice, it is necessary to examine the relevant facts and circumstances to determine whether or not the owner makes a supply of the land to the authority. In cases where land vests in the authority as a result of the authority seeking to acquire the land, and initiating the compulsory acquisition process pursuant to its statutory right, then the owner does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

82A. However, in other cases the owner may do something or undertake some action such that it does make a supply of the land that vests in the authority. For example, see the decision in Re Hornsby Shire Council v. Commissioner of Taxation in which the Administrative Appeals Tribunal found that, in the circumstances the owner, CSR Limited, made a supply of its land by way of entry into an obligation and the surrender of its land when it issued a notice, pursuant to statute, compelling the Hornsby Shire Council to acquire its land.

83. Some statutes provide that land remaining, where only part of the land (the 'target land') is to be compulsorily acquired, will also be compulsorily acquired if the owner and the acquiring authority agree that the remaining land will be of no practical use or value to the owner. In cases where, prior to the vesting of the target land, the owner and authority agree that the remaining land will also be acquired, and the remaining land is acquired contemporaneously with the target land, it is the Commissioner's view that the owner does not make a supply of the remaining land to the acquiring authority. Although the owner may have requested that the remaining land be acquired, the agreement reached between the parties, and the resulting acquisition of the remaining land is integral, ancillary or incidental to the compulsory acquisition of the target land.

83A. In contrast to the circumstances described in paragraph 83 of this Ruling, the land owner may, at a time subsequent to the authority's acquisition of the target land, request that the authority acquire the remaining land on the basis that it is of no practical use or value to the owner. Consistent with the decision in Re Hornsby Shire Council v. Commissioner of Taxation in these circumstances it is the Commissioner's view that the owner has taken some action by requesting that the remaining land be acquired and makes a supply of the remaining land by way of surrender to the authority. In such cases, the acquisition of the remaining land is not integral, ancillary or incidental to the authority's compulsory acquisition of the target land.

84. Mere acceptance by an owner of an amount of compensation payable on the compulsory acquisition does not provide a sufficient nexus between the land which passes and the means by which it passes. The fact that the owner does not dispute the acquisition is not an activity that effects the supply of the land. Even if the owner agrees to the terms of the acquisition and the amount of compensation, the land is acquired by operation of the statute, upon publication of the acquisition notice, not by an action taken by the landowner.

In accordance with the statute, you plan to compulsorily acquire the land by way of gazettal of a resumption notice, after you and the land owner have agreed in writing to certain terms and conditions in relation to the land acquisition.

The statute provides that the effect of the gazettal notice is that the land becomes freed from any and all interests, and the legal ownership of the land described in the notice is vested in the acquiring authority.

A transfer of the legal interest in land, or the surrender of real property, is within the definition of supply in section 9-10 of the GST Act. However, in this instance, rights are not transferred or surrendered. The acquisition of the land under the statute has the effect of extinguishing the owner's interests in the land, creating new rights in the land and providing these to the acquiring authority.

The agreement by the land owner to the terms upon which:

· the land is to be acquired, including the taking of additional land and

· the terms under which compensation is payable

does not provide a sufficient nexus between the land which passes and the means by which it passes. Even though the land owner agrees to the terms of the acquisition and the compensation, the land is acquired by operation of the statute, upon publication of the acquisition notice in the gazette, not by an action of the land owner. The acts of requesting that additional land be taken and specifying the terms of the compensation are not actions that cause the land owner's legal interest in the land to be transferred or surrendered. Therefore the land owner does not do something or undertake some action such that it will make a supply of the land that will vest in the authority when the land is acquired by the operation of the statute.

Since the land owner's legal interest in the land will be divested from it by the operation of the statute upon gazettal of the resumption notice, the land owner is not making a supply to you for the purposes of section 9-10 of the GST Act.

As the acquisition of the land does not arise from a supply, you will not be making a creditable acquisition under section 11-5 of the GST. Therefore you are not entitled to an input tax credit under section 11-20 of the GST Act in relation to the payment of compensation.

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