Edited version of private advice

Authorisation Number: 1052239827259

Date of advice: 9 April 2024

Ruling

Subject: GST and compulsory acquisition of property

Question

Will you be making a taxable supply as defined in section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act) as a result of the compulsory acquisition of your property and will there be an obligation for GST withholding to be made under section 14-250 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No, you will not be making a taxable supply, and there will be no obligation for GST withholding to be made.

This ruling applies for the following period

31 October 2022 to 30 June 2025

The scheme commenced on

24 December 2015

Relevant facts and circumstances

The Propertyis x square metres in land area. The Property contains a tin shed which has been on the land since it was acquired.

The property has never been marketed for sale.

On a specified date the Property was transferred from transferors as joint tenants as to one half share as tenants in common with owner b as to the other half share. The consideration paid to the transferor was $x.

On a specified date, transferors named owner and owner B transferred their ½ share to owner D in ¼ share and owner B and owner C as joint tenants in ¼ share. The consideration on the transfer form was specified as '$Deed dated X/XX/XXXX.

The owners of the Property are now tenants in common - owner A in ½ share, owner D in ¼ share, owner B and C as joint tenants in ¼ share (you). This ownership shares are also recorded in the Title Search documents of Folio X of search date X/XX/XXXX.

All owners acquired the land as an investment.

On a specified date a named party, owner B and owner A received a letter from the Council on the subject of proposed acquisition of the Property. This letter includes:

....property is zoned xxx.

In accordance with the State Environmental Plan (SEP) the Council is the acquiring authority of land within the xxx zone.

For us to fulfil our current obligations and secure the land required for the delivery of the necessary public infrastructure works, I wish to commence negotiations to acquire your property. Our preference is to acquire the property by negotiation, subject to the suitable exchange of contracts for the Sale of Land between the parties.

Besides paying fair and reasonable market value (setting aside the public purposes for which the land is zoned) we will be responsible for your costs associated in this matter, which include reasonably incurred legal and valuation costs in accordance with the Land Acquisition (Just Terms Compensation) Act 1991.

On a specified date the Council issued a letter to a representative with reference to the proposed acquisition of the Property of a named person and owner B and owner A.

The letter advised that the acquisition of the property could not be finalised at that stage, and it was estimated the matter could be finalised in a later financial year.

On a specified date you received a letter from the Council concerning acquisition of the Property. The letter includes:

As part of the acquisition process, we would now like to negotiate the terms of purchase in accordance with the Land Acquisition (Just Terms Compensation) Act 1991 (the Act).

Under section 10(1) of the Act Council is required to advise that the Land acquisition (Just Terms Compensation) Act 1991 provides that, if and when the land is acquired by Council under that Act, the amount of compensation will not be less than market value of the land (assessed under that Act) unaffected by the proposal.

We intend to engage an independent qualified valuer and consultant to assess the potential contamination on the land if any. On completion of our investigations we intend to provide and offer. Vacant possession is be given on completion.

On a specified date you received a letter from the Council in relation to the acquisition of the Property. The following paragraph is extracted from this correspondence:

Council is prepared to purchase the subject land as referenced above and shown by attached deposited plan, having a land area of x m2 on the following terms and conditions:-

(a)  Purchase price of $x exclusive of GST in full satisfaction of all claims arising from the acquisition.

(b)  Vacant possession to be given on completion.

(c)   The vendor needs to provide contamination validation certificate, if applicable.

(d)  The vendor to leave the land being purchased clean and to remove any garden rubbish.

(e)  The Council and its contractors to have right of entry for carrying out public works and property adjustment from the date of exchange of contract.

You have provided an unexecuted Contract (Sale Contract) as part of this private ruling application. The Sale Contract includes the following:

Vendor: Owner A, owner b, owner c and owner D

Land: The property

Purchaser: The Council

Price: $x

GST: Taxable supply - yes in full

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

A New Tax System (Goods and Services Tax Act) 1999 subsection 9-10(1)

A New Tax System (Goods and Services Tax Act) 1999 subsection 9-10(2)

A New Tax System (Goods and Services Tax Act) 1999 section 9-40

Schedule 1 to the Taxation Administration Act 1953 section 14-250

Reasons for decision

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides 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 the indirect tax zone; and

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

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The existence of a 'supply' itself is an essential element in determining whether the transaction is a taxable supply under the GST legislation. For there to be a taxable supply, there must be a supply.

The term 'supply' is defined in subsection 9-10(1) as 'any form of supply whatsoever'. Under subsection 9-10(2) examples of supplies include:

•                a grant, assignment or surrender of real property;

•                a creation, grant, transfer, assignment or surrender of any right.

The meaning of the term 'supply' is discussed in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) and contains ten propositions for the purpose of analysing a transaction to identify the supply or supplies made under a particular arrangement.

Paragraphs 71 to 91 of GSTR 2006/9 concern proposition 5 which refers to the principle that to 'make a supply' an entity must 'take some action' of doing something.

Within this concept, paragraphs 80 to 84 of GSTR 2006/9 discusses the acquisition of an interest in real property by Government authorities pursuant to legislation. The following paragraphs are extracted for you information:

Extinguishment of real property rights

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. This is because the owner does not provide anything to the authority. It takes no action to cause its legal interest to be transferred or surrendered to the authority. It has no obligation to do anything, to refrain from doing something or to tolerate an act or situation.

...

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.

Application to your circumstances

In your case, we note the following factors:

The letters issued by the Council indicate the Council was seeking to acquire the Property and initiated the compulsory acquisition process pursuant to their statutory rights under the SEP.

In the letter of a specified date to you, the Council states that they are prepared to purchase the Property on terms which include the purchase price of $x exclusive of GST in full satisfaction of all claims arising from the acquisition.

You have prepared the Sale Contract for the sale of the Property to the Council for the price of $x (At the date of this ruling, the Sale Contract has not been executed).

In view of the guidelines in GSTR 2006/9 and considering all the relevant factors and circumstances including the above, the Commissioner determines you will not be making a supply as defined in section 9-10 as a result of the compulsory acquisition of the Property, and in turn there cannot be a taxable 'supply' under section 9-5. GST will not be payable when the legal interest in the Property is vested in the Council.

GST withholding

Section 14-250 of Schedule 1 to the TAA provides that recipients of certain taxable supplies of real property must pay amounts to Commissioner and includes that a recipient must pay to the Commissioner an amount if it is the recipient of a taxable supply.

Guidelines on GST withholding at settlement is available in Law Companion Ruling LCR 2018/4 Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4). The explanations in LCR 2018/4 include:

14. A purchaser has a GST withholding obligation if:

(a) they are the 'recipient' of a 'taxable supply'

....

As determined earlier in this ruling, you will not be making a supply or a taxable supply as a result of the compulsory acquisition of your Property by the Council. Accordingly, section 14-250 of Schedule 1 to the TAA will not apply and there will be no obligation to pay a GST withholding amount to the Commissioner under this section.

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