Edited version of your private ruling

Authorisation Number: 1012541777380

Ruling

Subject: GST and easement over land

Question 1

Will the Estate in granting the easement to the Grantee by way of compulsory acquisition be making a taxable supply?

Answer

No.

Question 2

Will the Estate in voluntarily granting the easement to the Grantee be making a taxable supply?

Answer

No.

Relevant facts and circumstances

X acquired the Property in the 1950s. X operated a business during the entire term of ownership until death and the Property was also X's principal residence. X had an Australian Business Number (ABN), but was not registered for GST.

When X died the Property passed to the Estate. The Estate was issued with an ABN and is registered for GST.

A primary production business is still being operated on the Property whilst the Estate is being finalised. The Grantee seeks an easement over the Property.

At this stage it appears the Estate and the Grantee may come to a voluntary agreement, however, it is your understanding that the Grantee has the power to compulsorily acquire the easement under the relevant legislation.

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 9-5.

Reasons for decision

Summary

The Estate in granting the easement to the Grantee by way of compulsory acquisition will not be making a supply for GST purposes. Further, the Estate in voluntarily granting the easement to the Grantee in the manner outlined in the Grantee's offer will not be making a supply for GST purposes.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

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.

(*Denotes a term defined in section 195-1 of the GST Act)

The Estate, in making any notional supply, will satisfy the requirements of paragraph 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act. That is, it will make the supply in return for consideration, its supply is connected with Australia as the Property is situated in Australia and the Estate is registered for GST.

With regard to paragraph 9-5(b) of the GST Act, the supply made must be in the course or furtherance of an enterprise that the Estate carries on. The Estate currently operates a primary production business on the Property.

At issue however, is the concept of 'supply' and whether a supply is actually made where there is an element of compulsion. It is the Commissioner's view, espoused in the Goods and Services Tax Ruling GSTR 2006/9 that in order to make a supply, an entity must do something.

As the first requirement of a taxable supply requires that a supplier must make a supply for consideration, it is necessary that the supplier take some action, whether voluntarily or involuntarily, to cause a supply to be made.

A transfer of the legal interest in or right over land, or the surrender of any rights in the real property is within the definition of supply contained in section 9-10 of the GST Act.

The Grantee intends to acquire an Easement over part of the Property. If not done with the Estate's consent the Grantee has advised that it will acquire the relevant property rights through its powers of acquisition in the relevant legislation.

According to paragraph 80 of Goods and Services Tax Ruling GSTR 2006/9, 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 interest in the real property; and

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

In a case involving the compulsory acquisition of an easement, any interest in or right over the part of the owner's land subject to the easement, is taken by the acquirer. The owner does not grant, assign or surrender the real property or any interest in or right over the land or undertake any activity to transfer or supply the property.

In the Estate's case if compulsory acquisition occurs, the Estate will not be taking any action to surrender or transfer any rights over the easement area, but some ownership rights will be compulsorily reduced by the operation of statutes.

No action or inaction by the Estate will cause a supply. Since the Estate's reduction in rights over the segment of the Property taken by easement will occur by statute and will not have been transferred or surrendered by the Estate either voluntarily or involuntarily, the Estate you will not be making a supply. Where there is no supply, the requirements of section 9-5 of the GST Act are not met and GST is not applicable.

In regard to the voluntary acceptance of the Grantee's offer of compensation, mere acceptance by the Estate of an amount of compensation payable on the compulsory acquisition does not provide a sufficient nexus between the Property which passes and the means by which it passes. The fact that the Estate will not dispute the acquisition is not an activity that effects the supply of the land. Even if the Estate agrees to the terms of the acquisition (by signing the Grantee's offer) and the amount of compensation, the Property is acquired by operation of the statutes, not by an action taken by the landowner.

Therefore, where the Estate agrees to the Easement voluntarily, in the manner outlined in the Grantee's correspondence, the Estate will not make a supply and the grant will not be subject to GST.

Further issues for you to consider

If the Estate, before a compulsory acquisition is made under either of the proposed methods, successfully negotiates with the Grantee to grant an easement and this is done on a commercial footing, GST will apply as the requirements of section 9-5 of the GST Act will be met. The affected Property in this case will not be vested in the authority through the compulsory acquisition process. Instead, the interest in the Property will transfer as a result of settlement of a contract or agreement and the execution of a transfer instrument. As such, the Estate will make a supply of an interest or right over the Property to the Grantee.