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Date of advice: 5 February 2016

Ruling

Subject: GST and compulsory acquisition

Question 1

Are you making a supply, when your Leasehold Interest is acquired as part of the compulsory acquisition of land by a state government agency under the relevant state fair compensation act?

Answer

No, based on the agreements provided, you are not making a supply when your Leasehold Interest in a property is acquired by a state government agency under the relevant state fair compensation act. As you are not making a supply there is no GST payable in respect of any compensation provided or to be provided by the state government agency.

Question 2

If you are not making a supply under the compulsory acquisition in Question 1, are you entitled to a refund of the excess GST under Division 142 of the GST Act, when you treated some of the compensation payments from the state government agency as taxable supplies?

Answer

Yes, but only when you have reimbursed the excess GST to the state government agency, however, you should consider the application of Division 142 of the GST Act.

Division 142 of the GST Act is designed to preserve the integrity of the GST system. This is achieved, when certain conditions are met, by treating the excess GST as having always been payable on a taxable supply and to clarify that the recipient can claim an input tax credit in relation to the acquisition. The issue of reimbursement of excess GST or preserving the GST outcomes of original treatment is an issue to be agreed to by the parties.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST.

You leased premises from a third party.

You were notified by a state government agency (Entity B) that the site would be potentially affected by the proposed development and that Entity B intended to compulsorily acquire the leasehold interest in the land (Interest) under the relevant state fair compensation act.

You and Entity B entered into various deeds regarding the acquisition of the Interest.

Under the Acquisition Deed Entity B will permit you to occupy the site after the acquisition date and prior to development of the project for a monthly fee (plus GST).

Relevant legislative provisions

Subsection 9-10(1) of the A New Tax System (Goods and Services Tax) Act 1999

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

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

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

Division 142 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Question 1

Detailed reasoning

For an entity to make a taxable supply, it must make a supply. The term 'supply' is broadly defined in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and in particular includes in subsection 9-10(1), 'any form of supply whatsoever'.

Goods and Services Tax Ruling Goods and Services Tax: GST consequences of court orders and out-of-court settlements 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 Goods and services tax: supplies. 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 principle that to 'make a supply' an entity must do something.

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

Paragraph 80 of GSTR 2006/9 provides that various government authorities are empowered by legislation to acquire an interest in real property. Two common mechanisms employed by legislation are:

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

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

Paragraph 81 of GSTR 2006/9 provides that an example of vesting is section 20 of the Just Terms Act 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 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. The Commissioner in paragraph 82 of GSTR 2006/9 considers that the compulsory acquisition of land from an entity does not involve a "surrender" or other supply unless the entity has taken some action to cause its interest to be transferred or surrendered to the relevant authority.

It is necessary, in this case, to examine the relevant facts and circumstances to determine whether or not there were any actions on your part to cause your interest to be transferred or surrendered to the relevant authority, such that you could be considered to have made a supply under section 9-10 of the GST Act.

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 case, rights are not transferred or surrendered.

You do not make a supply because you take no action to cause your legal interest to be transferred or surrendered to the authority.

Since the Leasehold Interest in the land is divested from you (the lessee) by the operation of the relevant state fair compensation act upon gazettal of the acquisition notice, you are not making a supply for the purposes of section 9-10 of the GST Act.

Therefore, as the compulsory acquisition of the land and the extinguishment of your Leasehold Interest does not arise from a supply, there is no GST payable in respect of any compensation provided or to be provided by Entity B.

Question 2

Division 142 of the GST Act

The object of Division 142 of the GST Act is to ensure that excess GST is not refunded if this would give an entity a windfall gain. Generally, Division 142 of the GST Act operates so that a supplier is not entitled to a refund of an amount of excess GST where the supplier has passed on the GST to another entity (the recipient), and has not reimbursed that other entity for the passed-on GST.

In this case it is necessary to determine whether there is an amount of excess GST.

Paragraph 12 of Goods and Services Tax Ruling GSTR 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 provides:

'Excess GST' is an amount of GST that has been taken into account in an entity's assessed net amount and is in excess of what was payable by the entity in the relevant tax period prior to taking into account or applying the provisions of Division 142.³

We have concluded that you are not making a supply when your Leasehold Interest in the property is acquired by Entity B under the relevant state compensation act. The GST included in the amount of some of the compensation payments paid by Entity B is considered to be excess GST for the purposes of Division 142 of the GST Act.

As it has been established that excess GST exists it is necessary to determine if that excess GST has been passed on by you.

Paragraphs 23 to 33 of GSTR 2015/1 provide the view of the Commissioner as to when excess GST has been passed on:

Paragraph 23 of GSTR 2015/1 states that whether the excess GST has been passed on is a question of fact and must be determined on a case by case basis taking into account the particular circumstances of each case. However, section 142-25, and the policy and scheme of the GST Act more generally, give rise to an expectation that the excess GST will be passed on in most cases.

Expectation that excess GST has been passed on

Paragraphs 24 to 27 of GSTR 2015/1 explain the GST Act envisages that the supplier 'passes on' the GST to the recipient of the supply and this simply reflects the design of the GST as an indirect tax which is generally expected to be passed on to the customer when a supply is treated as a taxable supply. If excess GST is included on a tax invoice, this is prima facie evidence that the excess GST has been passed on. While there is a general expectation that, in ordinary circumstances, excess GST has been passed on, the particular facts and circumstances of an individual case may demonstrate that excess GST has not in fact been passed on.

A supplier claiming a refund, because it considers that the excess GST has not been passed on will need to clearly substantiate the grounds on which it claims the refund. In any dispute, the taxpayer would have the onus of proving that its circumstances are outside the ordinary and that it did not pass on the excess GST. See Paragraph 27 of GSTR 2015/1.

Matters relevant to determining whether GST has been passed on

In paragraph 28 of GSTR 2015/1 the Commissioner considers that the matters relevant to whether GST has been passed on include:

• the manner in which the excess GST arose

• the supplier's pricing policy and practice

• the documentary evidence surrounding the transaction, and

• any other relevant circumstances

The question of passing on is one of fact and not of fairness - considerations of fairness may be relevant in deciding whether the Commissioner exercises the discretion under subsection 142-15(1), but are not relevant to whether excess GST has been passed on.

The manner in which the excess GST arose

The manner in which an amount of excess GST arises is relevant in considering whether or not the excess GST was passed on. GSTR 2015/1 at paragraph 31 considers four common circumstances:

• incorrectly treating something which is not a supply as a taxable supply

• miscalculating a GST liability under the GST law

• incorrectly reporting an amount of GST on a GST return, and

• incorrectly treating a GST-free or input taxed supply as a taxable supply (including incorrectly apportioning the taxable and non-taxable components of a mixed supply).

In your case we consider that it is clear from the information provided that the excess GST has been passed on, by you, to Entity B. This is evidenced by the issuing of tax invoices, inclusive of GST, by you to Entity B for some of the compensation payments made under the relevant state fair compensation act.

In addition, the deeds provided clearly indicate that should GST be payable on the compensation payments made under the relevant state fair compensation act the GST will be passed onto Entity B.

Does section 142-10 the GST Act apply in this case?

Paragraph 17 of GSTR 2015/1 describes when section 142-10 of the GST applies:

17. If the excess GST has been passed on to the recipient, section 142-10 applies to treat the excess GST as always having been payable, and payable on a taxable supply, until the excess GST has been reimbursed to the recipient. Once section 142-10 ceases to apply, the supplier can claim a refund of the excess GST.⁸

As there is excess GST and it has been passed on by you, under section 142-10 of the GST Act the excess GST is treated as having always been payable on a taxable supply until and unless you reimburse the excess GST to your recipients.

Section 142-10 of the GST Act provides that a recipient who is registered for GST and who would ordinarily have claimed input tax credits on the acquisition of the thing supplied (subject to the normal GST rules), can continue to treat the excess GST in the same way that they treat the GST payable on the transaction for the purpose of working out the amount of its input tax credits under Division 11 of the GST Act. The issue of reimbursement of excess GST or preserving the GST outcomes of the original treatment is an issue to be agreed to by the parties.

Please see GSTR 2015/1 for details of what the Commissioner considers to be reimbursement for the purposes of division 142 of the GST act.

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