Edited version of private advice

Authorisation Number: 1052008351060

Date of advice: 15 July 2022

Ruling

Subject: GST - compulsory acquisitions

Question

Will the supply of the 'Site', to the Commissioner of Mainroads be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Relevant facts and circumstances

You, <individual name>, are the sole title holder of the property located at <address>.

This property is formerly known as Lot <number> on Deposit Plan<number> (the property) being the whole of the land in Certificate of Title Volume <number> Folio <number>.

You acquired the property on <date> and have since conducted a farming enterprise (growing fruit and vegetables) from the property. You are currently registered for GST.

The property consists of approximately <number> hectares in size and is zoned rural. It contains your residential premises, a number of sheds and fields which you use for farming.

Existing encumbrances on the property include:

a)    Mortgage J<number>; and

b)    Notice of Intention to Take O<number>.

The Commissioner of Mainroads initially notified you of their necessity to acquire a portion of your property for the purpose of public works on <date> via correspondence.

You engaged the services of <third party individual name> of <Company Name> trading as <trading name> (third party) on <date>, to facilitate your negotiations with the Commissioner of Mainroads.

You provided a copy of the Services Agreement as part of your private ruling application.

The Commissioner of Mainroads issued a Notice of Intention to Take O<number> dated <date> and served you with a copy on <date>. This notice was registered at Landgate, against the property, on <date> by the Commissioner of Mainroads.

The notice provides that the Commissioner of Mainroads requires to 'Take' a portion of your property consisting of approx. <number> hectares for the purpose of public works/roads (<location> Stage 2 Project). This portion of land that is required for road purposes is delineated and shaded on the plan Drawing Number <number>[1]. This portion of land is from here on end referred to as the 'Site'.

The Commissioner of Mainroads has the authority to acquire real property pursuant to the Land Administration Act 1997 (WA) (LAA) for the purpose of public works.

The Commissioner of Mainroads is registered for GST.

The Site contains fruit trees (olive trees) used in your farming enterprise - there are no buildings situated on the Site.

You have not taken any action nor requested the Commissioner of Mainroads acquire the Site.

You will not be entering into negotiations with the Commissioner of Mainroads with respect to selling any of remaining land after the Site has been acquired in accordance with the notice and the section 168 Deed (the Deed).

Section 168 Deed

As result of the negotiations a draft Deed between you and the Commissioner of Mainroads was issued on <date>.

Whilst the deed has not been executed by either party, you have requested a private ruling based on the draft Deed.

You supplied a copy of the Draft Deed for the purposes of the private ruling application.

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 section 9-40

Reasons for decision

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

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which provides:

You make a taxable supply if:

a)    the entity makes the supply for consideration

b)    the supply is made in the course or furtherance of an enterprise that the entity carries on

c)    the supply is connected with Australia, and

d)    the entity is 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 Act. For there to be a taxable supply, there must be a supply. The term 'supply' is defined in section 9-10 of the GST Act 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.

For GST purposes we need to consider whether the 'Notice to take' made by the Commissioner of Mainroads to acquire your property will result in a supply of the 'Site' by you.

The term 'supply' is broadly defined for GST purposes and is defined in subsection 9-10(1) to include, 'any form of supply whatsoever'.

The meaning of the term 'supply' is discussed further in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR2006/9) and 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 principal that to 'make a supply' an entity must 'take some action' of doing something. In your case, this means that you must take some action or do something for a supply of the land to occur.

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

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 because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

82A. However, in other cases the owner may do something or undertake some action such 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 a supply of its land by way of entry into an obligation and the surrender of its land when it issued a notice, pursuant to statute, compelling the Hornsby Shire Council to acquire its land.

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.

Application of the facts to your circumstances

Under the Deed you agreed to the 'Site', consisting of approx. <number> hectares, being excised from your property - Lot <number> on deposit plan <number> - and transferred to the Commissioner of Mainroads for road works. You will retain ownership of the balance of Lot <number> on deposit plan <number> after the excision.

In return for the taking of the 'Site' the Commissioner of Mainroads will pay you a monetary sum of $<number> and transfer you the 'Surplus Land' (consisting of 'Additional Land', 'Construction Land' and 'Driveway Land')[2]. The 'Surplus Land' will be amalgamated with the balance of Lot <number> on deposit plan <number> to create the 'Amalgamated Land' for which a separate Certificate of Tittle is expected to be issued to you. Upon the registration of the Transfer at Landgate you will grant the Commissioner of Mainroads a lease of the 'Construction Land' for a 'peppercorn rent' as set out in clause 19 of the Deed.

Your interest in land is being taken pursuant to a Notice of Intention to Take dated <number> which was registered with Landgate.

Whilst you engaged the services of a third party to facilitate negotiations with the Commissioner of Mainroads you did not initiate the process. The compulsory acquisition process was initiated by the Commissioner of Mainroads under its statutory right pursuant to LAA. You did not take action to cause the legal interests in the Site to be transferred or surrendered to the authority.

Recital C of the draft Deed provides that the Commissioner of Mainroads has a compensation liability arising under Part 10 of the LAA by reason of 'Taking' of the Site.

Paragraph 84 of GST2006/9 explains the 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. 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 and not by an action taken by the landowner.

For an entity to make a taxable supply, it must make a supply. Based on the facts, we consider you will not be making a supply as defined in section 9-10 as a result of the compulsory acquisition of the Site by the Commissioner of Mainroads.

As you are not making a supply, the requirements of section 9-5(a) will not be satisfied. Therefore, in accordance with section 9-5, you will not be making a taxable supply in relation to your interests in land being compulsorily acquired by the Commissioner of Mainroads.

[1] Plan drawing number 2060-018-1 is marked 'A' and is annexed in the draft Section 168 Deed the between XXXX and the Commissioner of Mainroads which was issued on 9 February 20XX.

[2] Known as '115' on the plan annexed marked "B" in the draft Section 168 Deed.