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Authorisation Number: 1012960431778

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Date of advice: 5 February 2016

Ruling

Subject: GST and compulsory acquisition

Question 1

Is the compulsory acquisition by you, of Entity B's Leasehold Interest in a property, a taxable supply under the GST Act?

Answer

No, based on the agreements provided, there is no supply made when the Leasehold Interest is acquired by you under the relevant state fair compensation act.

Question 2

Where excess GST has arisen as a result of the inclusion of GST in some of the compensation payments made by you to Entity B, are you entitled to input tax credits?

Answer

Yes, we consider that the excess GST amounts have been passed on to you by Entity B.

Therefore, section 142-10 of the GST Act operates 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 (you).

If Entity B does not reimburse you for the excess GST you will be entitled to claim input tax credits if you meet the requirements of a creditable acquisition under section 11-20 of the GST Act.

If Entity B reimburses you the excess GST section 142-10 of the GST Act ceases to apply and you will not be entitled to input tax credits and you would also have to make an increasing adjustment in your current BAS after receiving the reimbursement.

Relevant facts and circumstances

You are registered for GST.

You are a state government agency.

Entity B leased premises from a third party.

You notified Entity B that the site would be potentially affected by a proposed development and that you 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 you will permit Entity B to occupy the site after the acquisition date and prior to development 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.

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'.

GSTR 2001/4 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.

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. The Compulsory acquisition by you of the Leasehold Interests pursuant to your statutory rights has the effect of extinguishing the lessees interests in the land, creating new rights in the land and providing these to the acquiring authority (you).

The lessee (Entity B) does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

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

As the compulsory acquisition of the Leasehold Interest does not arise from a supply, the compulsory acquisition of the Leasehold Interest in the site cannot be a taxable supply for the purposes of section 9-5 of the GST Act.

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.

Is there 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

In your case there is an amount of excess GST. The excess GST resulted from the inclusion of GST in some of the compensation payments made by you to Entity B for the compulsory acquisition of the Leasehold Interest.

When is excess GST passed on?

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 or not.

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. Paragraph 31 of GSTR 2015/1 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 Entity B to you. This is evidenced by the issuing of tax invoices, inclusive of GST, by Entity B, to you 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 for the compensation payments made under the relevant state fair compensation act the GST will be passed onto you.

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 to you, under section 142-10 of the GST Act the excess GST is treated as having always been payable on a taxable supply.

Section 142-10 of the GST Act clarifies 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.

If Entity B does not reimburse you for the excess GST you will be entitled to claim input tax credits if you meet the requirements of a creditable acquisition under section 11-20 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 refer to GSTR 2015/1 for information regarding reimbursement