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Edited version of your private ruling
Authorisation Number: 1012471575012
Ruling
Subject: GST and compulsory acquisition of leases of land
Question
Are the proposed payments set out under the draft Deed consideration for a supply made within the meaning of section 9-5(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) by the owners?
Advice/Answers
No.
Relevant facts and circumstances
On or around a specified date, you will receive funds from a government entity (Entity A). These payments are in connection with statutorily imposed leases of land held by the owners.
The relevant owners hold a number of parcels of land. The requirement to lease these parcels of land was imposed under the ABC Act. The leases were terminated on a certain date.
Leases
Under the ABC Act, Entity A compulsorily acquired leases of land from the owners.
There were no consultations with owners of the land regarding the acquisitions, and consent was not required.
The creation of the statutory leases under the ABC Act effected an acquisition of property.
Under the ABC Act, Entity A is liable to pay a reasonable amount of compensation in respect of the acquisition of the leases.
Deed
You and Entity A have entered into a Deed whereby Entity A has agreed to provide various amounts of compensation to you for the various leases.
The Deed includes Schedules. You have provided a copy of Schedule 1 to the Deed. A description of the parcels of land to which the deed relates is contained within Schedule 1 to the Deed.
The draft Deed states that the Parties acknowledge and agree that the Settlement Sum is not a payment in consideration of a supply attracting GST. The terms in the draft Deed are agreed, other than provisions relating to GST.
Relevant legislative provisions
A New Tax System (Goods and services Tax) Act 1999 section 9-5
A New Tax System (Goods and services Tax) Act 1999 section 9-10
Reasons for decision
In this ruling,
· 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
Under section 9-5, you make a taxable supply if:
(a) you make the supply for *consideration; and
(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and
(c) the supply is *connected with Australia; and
(d) you are *registered, or *required to be registered.
However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.
The terms marked with an asterisk are defined in section 195-1.
The first requirement, therefore, is that you make a supply for consideration. Supply is defined in section 9-10.
9-10 Meaning of supply
(1) A supply is any form of supply whatsoever.
(2) Without limiting subsection (1), supply includes any of these:
(a) a supply of goods;
(b) a supply of services;
(c) a provision of advice or information;
(d) a grant, assignment or surrender of *real property;
(e) a creation, grant, transfer, assignment or surrender of any right;
(f) a *financial supply;
(g) an entry into, or release from, an obligation:
(i) to do anything; or
(ii) to refrain from an act; or
(iii) to tolerate an act or situation;
(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).
(3) It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.
...
Goods and Services Tax Ruling GSTR 2006/9: supplies (GSTR 2006/9) includes a discussion on the characteristics of 'supply' in the context a two party transaction.
In this case, we consider the paragraphs relating to proposition 5, which analyses that to 'make a supply' an entity must do something, is relevant. Paragraph 71 of GSTR 2006/9 states:
In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'.27 The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9,28 a ruling which is about the assumption of liabilities:
In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'.
Accordingly, we consider the use of the word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) requires the supplier to take some actions to cause a supply to be made by it to a recipient.
Paragraph 72 of GSTR 2006/9 further provides:
The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw')29 in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.
At paragraph 78 of GSTR 2006/9, the Commissioner distinguishes something brought about solely by operation of law where there is no supply, from something done by an entity as a consequence of a legal requirement where there may be a supply.
GSTR 2006/9 further explains that in relation to compulsory acquisitions:
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.
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.
By the operation of the ABC Act, Entity A compulsorily acquired certain leases of the land. According to the facts, there were no consultations with the owners of the land regarding the acquisitions, and consent was not required.
On the basis of these facts, we consider the leases acquired by Entity A were brought about solely by the operation of law and that the owners did not take any positive action to cause the supply of those leases to take place.
Further, the acceptance by the owners of the compensation and rent payable set out in the Deed and in consequence of the operation of the ABC Act do not provide a sufficient nexus between the land which passes and the means by which it passes, nor does it alter the finding that the leases of land are still acquired by the operation of the statute and not by any action taken by the owners.
Accordingly, the payments proposed in the Deed in respect of the leases will not be consideration for a supply within the meaning of paragraph 9-5(a), with the result that no taxable supply of the leases is made by the owners.
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