Edited version of private advice

Authorisation Number: 1052057137374

Date of advice: 6 December 2022

Ruling

Subject: CGT - replacement asset

Question1

Will a taxable supply be made under section 9-5 of the A New Tax System (Goods and Services Tax Act 1999 (GST Act) under the draft Deed of Compulsory Acquisition by Agreement or in connection with the acquisition of the land by the Acquiring Entity?

Answer

No.

Question 2

Will an event specified in subsection 124-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the Land under the draft Deed of Compulsory Acquisition by Agreement or in connection with the disposal of the Land?

Answer

Yes,when there is a mutually negotiated disposal of the Land by Entity A and acquisition of the Land by the Acquiring Entity) at the earliest of the times set out in subsection 104-10(6) of the ITAA 1997.

This ruling applies for the following period:

Year ending 30 June 20XX

Relevant facts and circumstances

Entity A is registered proprietor of land located at XXXX (Land).

Entity A is registered for GST and has been since XXXX.

Entity A purchased the Land in XXXX.

Acquiring Entity is a corporation sole formed under the XXXX Act.

Acquiring Entity is empowered under the Act to compulsorily acquire land by agreement or by compulsory process in accordance with the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act) for the purposes of exercising its functions.

On XXXX, Acquiring Entity issued a letter to Entity A pursuant to section 10A of the Just Terms Act confirming Acquiring Entity's intention to compulsorily acquire Entity A's freehold interest in the Land. Acquiring Entity advised that it was their intention to commence negotiations from this date to acquire the Land and if negotiations were unsuccessful at the expiry of the 6 month pre-acquisition negotiation period, Acquiring Entity may seek to acquire the Land by compulsory acquisition pursuant to the Just Terms Act.

On XXXX, Acquiring Entity wrote to Entity A (through its lawyers) stating that Acquiring Entity is taking steps to acquire the Land and will not be taking any steps to fulfill its end of lease requirements.

On XXXX, Acquiring Entity wrote to Entity A confirming that Acquiring Entity was committed to compulsorily acquiring the Land by agreement and made an offer of $XXXX as the total compensation amount for the freehold interest in the Land.

On XXXX, Acquiring Entity wrote to Entity A advising that Acquiring Entity was continuing to take real steps to compulsorily acquire the Land and would move towards compulsory acquisition at the expiry of the 6 month pre-acquisition negotiation period if no agreement has been reached.

On XXXX, Entity A wrote to Acquiring Entity rejecting the conditional offer. Entity A advised that it was willing to negotiate whilst reserving its rights, and that if an agreement is reached, an agreement under section 30 of the Just Terms Act may be entered into.

On XXXX, Entity A wrote to Acquiring Entity stating that any agreement on compensation is subject to the preparation of a draft section 30 agreement by both parties and obtaining a private ruling in relation to its liability for capital gains tax and GST.

On XXXX, Acquiring Entity wrote to Entity A with an offer of $XXXX for the full and final satisfaction of compensation for the acquisition of the Land.

On XXXX, Entity A wrote to Acquiring Entity confirming that there was an in-principle agreement on the quantum of the total compensation claimed.

The current draft Deed of Compulsory Acquisition by Agreement (Draft Deed), once it is finalised and signed, it will be an agreement for the purposes of section 30 of the Just Terms Act.

Under the Draft Deed:

•         Acquiring Entity will acquire the Land in accordance with the Draft Deed and the Just Terms Act;

•         Acquiring Entity must give Entity A at least 5 Business Days' prior notice of the Acquisition Date. This is the date that the Acquisition Notice (as defined in section 4 of the Just Terms Act) is to be published in the Gazette;

•         as soon as practicable after the Acquisition Date, Acquiring Entity must give Entity A notice of the publication of the Acquisition Notice in the Gazette;

•         Acquiring Entity will pay the Compensation Amount of $XXXX to Entity A; and

•         Entity A releases and indemnifies Acquiring Entity from any claims it may have against Acquiring Entity and warrants that it will not make any such claims.

The Draft Deed does not itself effect the acquisition of the Land. This is done by publication of the Acquisition Notice in the Gazette. Section 20 of the Just Terms Act provides:

20 Effect of acquisition notice

(1)    On the date of publication in the Gazette of an acquisition notice, the land described in the notice is, by force of this Act:

(a) vested in the authority of the State acquiring the land, and

(b) freed and discharged from all estates, interests, trusts, restrictions, dedications, reservations, easements, rights, charges, rates and contracts in, over or in connection with the land.

(1A) Subsection (1) is subject to any express provision of an Act that authorises the acquisition of land by compulsory process but preserves the operation of any trusts, restrictions, dedications, reservations, declarations, setting apart of or other matters relating to the land concerned.

(2) If-

(a) the acquisition notice excepted an easement from acquisition, and

(b) immediately before the vesting, the benefit of a restriction as to user was annexed to the easement,

then (unless otherwise specified in the acquisition notice) the restriction continues to have effect as if the acquisition had not taken place.

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 9-15

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

Income Tax Assessment Act 1997, Subdivision 124-B

Income Tax Assessment Act 1997, Section 124-70

Income Tax Assessment Act 1997, paragraph 124-70(1)(c)

Income Tax Assessment Act 1997, subparagraph 124-70(1)(c)(i)

Income Tax Assessment Act 1997, subparagraph 124-70(1)(c)(ii)

Income Tax Assessment Act 1997, subparagraph 124-70(1)(c)(iii)

Income Tax Assessment Act 199,7 subparagraph 124-70(1)(c)(iv)

Income Tax Assessment Act 1997, subsection 124-70(1A)

Reasons for decision

Question 1

Summary

There is no supply being made by Entity A to Acquiring Entity under the Draft Deed or in connection with the acquisition of the land. Acquiring Entity is vesting its authority to compulsory acquire the Land within its powers under the Just Terms Act and the Draft Deed is the mere acceptance by Entity A of the amount of compensation payable. This does not provide a sufficient nexus between the Land which passes and the means by which it passes and therefore it is not a supply in its own right.

Detailed reasoning

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 acquisition by Agreement under the Draft Deed to acquire the Land will result in a supply being made by Entity A to Acquiring Entity.

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 principle 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.

Example 1: compulsory acquisition

85. A government authority is compulsorily acquiring land and interests relating to that land, including the native title rights under a particular statute. The effect of compulsory acquisition is that every registered and unregistered interest in the land is extinguished, and each person who formerly held such an interest has that holding converted into a claim for compensation.

86. As required by the statute, the authority has made a public announcement that it is acquiring the land, and as a result, a number of groups of claimants have registered their respective native title over the land.

87. The authority has negotiated with each of the claimant groups as required by the statute, as to just compensation for the extinguishment of their rights over the land, and has entered into a deed with them. The deed sets out, among other things, that:

•        the claimants accept the compulsory acquisition and extinguishment of any and all native title rights and interests in the land and agree to withdraw a related objection made under the statute to compulsory acquisition; and

•        the authority undertakes to provide compensation to the native titled claimants in the form of funding, land and certain services.

88. Although the claimants have agreed to accept the compulsory acquisition and the amount of the compensation, the agreement does not cause claimants' rights to be extinguished. These rights over the land are extinguished when all the limitations, reservations and restrictions over the land are revoked by the operation of the statute. The claimants are not making a supply of surrendering their rights.

89. It may be argued that the native title claimants are making a supply of entering into an obligation to withdraw any objections made under the relevant native title statute. However, no part of the compensation is consideration for a supply of withdrawing objections to the compulsory acquisition. The compensation relates to the loss suffered by the claimants on the extinguishment of their interest in the land.

90. In contrast, the extinguishment of an owner's interest by statute needs to be distinguished from the doing of a thing that is compelled by statute.³⁶

Acquisition by agreement under a standard land contract

91. It may transpire that, before a compulsory acquisition under a statute is made, an owner and an authority enter into negotiations that result in the owner selling land under a standard land contract. The land in this case is not vested in the authority through the compulsory acquisition process. Instead, the interest in the land transfers as a result of settlement of the contract and execution of a transfer instrument. As such, the owner makes a supply of land to the authority.

There is no supply being made by Entity A to Acquiring Entity under the Draft Deed or in connection with the acquisition of the land. Acquiring Entity is vesting its authority to compulsorily acquire the Land within its powers under the Just Terms Act, as explained in paragraph 81 of GSTR 2006/9 and the Draft Deed is the mere acceptance by Entity A of the amount of compensation payable as explained in paragraph 84 of GSTR 2006/9. This does not provide a sufficient nexus between the Land which passes and the means by which it passes and therefore it is not a supply in its own right. Further the Draft Deed is not a standard land contract, so paragraph 91 of GSTR 2006/9 does not apply.

Question 2

Summary

The Land would be disposed of to the Acquiring Entity for the purposes of paragraph 124-70(1)(c) of the ITAA 1997 at the earliest of the times set out in subsection 104-10(6) of the ITAA 1997.

Detailed reasoning

Section 124-70 of the ITAA 1997 describes different events when a roll-over under Subdivision 124-B of the ITAA 1997 is available to an entity if that event happens to the CGT asset of that entity.

Relevantly, paragraph 124-70(1)(c) of the ITAA 1997 provides that a rollover is also available for an asset where:

(c) you dispose of it to an Australian government agency after a notice was served on you by or on behalf of the agency:

(i) the disposal takes place after a notice was served on you by or on behalf of the entity;

(ii) the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement;

(iii) the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity;

(iv) the compulsory acquisition would have been under a power of compulsory acquisition conferred by a law covered under subsection (1A);

A law under subsection 124-70(1A) is an Australian law other than Chapter 6A of the Corporations Act 2001, or a foreign law other than a foreign law corresponding to Chapter 6A of the Corporations Act 2001.

On 17 November 2021, Acquiring Entity issued a letter to Entity A pursuant to section 10A of the Just Terms Act confirming Acquiring Entity's intention to compulsorily acquire Entity A freehold interest in the Land. Acquiring Entity advised that it was their intention to commence negotiations from this date to acquire the Land and if negotiations were unsuccessful at the expiry of the 6 month pre-acquisition negotiation period, Acquiring Entity would seek to acquire the Land by compulsory acquisition pursuant to the Just Terms The Just Terms Act is an Australian law for the purposes of subsection 124-70(1A).

Therefore, the disposal of the Land will meet the conditions set out in paragraph 124-70(1)(c) of the ITAA 1997.