Edited version of private advice

Authorisation Number: 1051764407642

Date of advice: 08 October 2020

Ruling

Subject: GST and property

Question 1

Will the supply of the Property by you, be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services) Tax Act 1999 (GST Act)?

Answer

No.

Question 2

Will any compensation payable by the government entity be consideration pursuant to section 9-15 of the GST Act for a taxable supply by you?

Answer

No.

Relevant facts and circumstances

You, inherited a property located in Australia (the Property). The Property consists of two lots. Lot 1 contains a house which is your family residence. Lot 2 is X hectares and contains amongst other things a cottage. You also own other properties.

You were registered for GST from ddmmyyyy to ddmmyyyy.

Prior to and since you inherited the Property, you continuously used it in carrying on your farming business until ddmmyyy. In mmyyyy you applied to cancel your GST registration back to ddmmyyyy.

On ddmmyyyy, an amendment to the relevant planning scheme was published and part of the Property became subject to a public acquisition overlay. This gave you the right to claim compensation pursuant to relevant legislation for financial loss due to the property being reserved for a public purpose.

On ddmmyyy you received an offer of $X million for your properties. The offer was from an undisclosed buyer and did not proceed.

Some time prior to mmyyyy another purchaser (the Purchaser) approached you to buy the Property.

On ddmmyyyy your lawyer notified the government authority of your intention to sell the Property and make a claim for loss of sale proceeds due to the resumption of a portion of your property.

On ddmmyyyy, you entered into a Heads of Agreement (the Heads) for the sale of the Property with the Purchaser.

As the Purchaser had not paid the full deposit required under the Heads your sought to rescind the contract.

On or about ddmmyyyy, the Purchaser commenced court proceedings to, amongst other things, seek declaratory relief that you were not entitled to rescind the Heads. The court matter did not proceed to judgement, instead it settled at mediation. As part of that settlement, it was required that the parties enter into a Contract of Sale.

The Contract of Sale for the Property was executed on ddmmyyyy.

The Sale Contract was described as a 'Terms Contract' and you were paid the first X instalments and settlement is due following X more instalments.

You agreed to arrange for a family member to continue to use the farm and you ceased farming operations on ddmmyyyy. You then licensed the farm to a family member for nil consideration.

You also allowed the Purchaser to access the land for its development of the property prior to settlement.

You cancelled your GST registration with effect from ddmmyyy. You remain not registered for GST and your GST turnover will remain below the GST registration threshold until settlement.

A family member now operates their farming business on the Property as required under the Sale Contract. You have not entered into a formal lease of the Property with the family member and you have not, nor do not receive any monetary or non-monetary payments for allowing the family member to use of the Property. The family member is registered for GST.

The decision to sell the Property and your planned retirement coincided with your diagnosis of serious medical conditions. As set out earlier you were approached by the Purchaser to buy your land and the sale process then formed part of your retirement plan.

Nothing has been done by you either prior to, or after, entry into the Sale Contract to develop the Property.

Reasons for decision

In this reasoning, please note:

·   all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·   all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

·   all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

Question 1

You are liable for GST on any taxable supplies that you make.

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (Australia), 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.

You have ceased your farming enterprise and cancelled your GST registration. However, we consider you are continuing to carry on an enterprise in the form of a license of the Land pursuant to section 9-20(1)(c). Specifically, your granting of the right of access to the Land to the Purchaser under clause X of the Sale Contract.

You entered into the Sale Contract to sell the Land with settlement in yyyy.

Supply

Section 9-10 provides that a supply is any form of supply whatsoever including relevantly a creation, grant, transfer, assignment or surrender of any right and an entry into, or release from, an obligation.

The Sale Contract is a 'Terms Contract' and we consider there are a number of supplies made under the Sale Contract to the Purchaser including but not limited to:

·   the supply of the Land

·   the obligation to continue or cause a direct family member to continue to carry out primary production on the Land

·   a number of rights allowing the Purchaser to deal with and/or access your Land prior to settlement.

Consideration

Section 9-15 provides that a payment will be consideration for a supply if the payment is 'in connection with' a supply and 'in response to' or 'for the inducement' of a supply. Thus, there must be a sufficient nexus between a particular supply and a particular payment, which is provided for that supply, for there to be a supply for consideration.

We do not consider the $Xm payment under the Sale Contract has a sufficient nexus with any other supply and is therefore consideration only for your supply of the Land.

GST registration

Section 23-5 provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold, currently $75,000.

We have already established that you are continuing to carry on an enterprise of licensing the Land.

Relevantly, your GST turnover will not exceed the registration turnover threshold if your projected turnover is at or below $75,000

Section 188-25 provides when working out your projected GST turnover you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours. Therefore, the proceeds of the sale of the Land is excluded.

Further, you do not receive any consideration from the family member in relation to your licence of the Land and as outlined above you do not receive any consideration for your other supplies under the Sale Contract.

Therefore, as your projected turnover does not exceed the registration turnover threshold you are not required to be registered for GST.

Conclusion

As you are not registered or required to be registered for GST your supply of the Property will not be taxable.

Question 2

The issue of whether or not compensation payable by a government authority is consideration for a taxable supply by the persons whose land is resumed is considered in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies. Paragraphs 81 to 84 of GSTR 2006/9 state:

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.

82A. However, in other cases the owner may provide something or undertake some action so that it does make a supply of the land that vests in the authority. For example, see the decision in Re Hornsby Shire Council v. Commissioner of Taxation ^... in which the Administrative Appeals Tribunal found that, in the circumstances^... the owner, CSR Limited, made supplies by way of entry into obligations as well as by surrender of land when it issued a notice.^...

83. Some statutes provide that land remaining, where only part of the land (the 'target land') is to be compulsorily acquired, will also be compulsorily acquired if the owner and the acquiring authority agree that the remaining land will be of no practical use or value to the owner. In cases where, prior to the vesting of the target land, the owner and authority agree that the remaining land will also be acquired, and the remaining land is acquired contemporaneously with the target land, it is the Commissioner's view that the owner does not make a supply of the remaining land to the acquiring authority. Although the owner may have requested that the remaining land be acquired, the agreement reached between the parties, and the resulting acquisition of the remaining land is integral, ancillary or incidental to the compulsory acquisition of the target land.

83A. In contrast to the circumstances described in paragraph 83 of this Ruling, the land owner may, at a time subsequent to the authority's acquisition of the target land, request that the authority acquire the remaining land on the basis that it is of no practical use or value to the owner. Consistent with the decision in Re Hornsby Shire Council v. Commissioner of Taxation,^... in these circumstances it is the Commissioner's view that the owner has taken some action by requesting that the remaining land be acquired and makes a supply of the remaining land by way of surrender to the authority. In such cases, the acquisition of the remaining land is not integral, ancillary or incidental to the authority's compulsory acquisition of the target land.

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.

In your case we consider that your situation aligns with paragraph 82 above. As such, the consideration to be paid by the government authority is not consideration for any supply by you and not in the course of any enterprise by you. Therefore, you are not making a taxable supply pursuant to section 9-5 when the Land is acquired by the relevant government authority.