December 2008

Compulsory Acquisitions - Would you like GST with that?

Background

In the early years after the introduction of the GST many lawyers including Bartier Perry took the view that although the GST legislation provides an extremely wide definition of "supply" there was likely to be no supply for GST purposes where the landowner had done nothing and the compulsory acquisition of an interest in land by the Government authority was something "taken" rather than supplied.

The early private rulings and then GST ruling 2006/9 issued by the Commissioner of Taxation were consistent with this view.

The Case

A decision last week by the Administrative Appeals Tribunal (AAT) - Hornsby Shire Council and Commissioner of Taxation [2008] AATA 1060 - found that GST can apply where land is compulsorily acquired as a result of an owner-initiated compulsory acquisition.

The facts

CSR owned a quarry which Hornsby Council re-zoned as Open Space. Rezoning of the land obliged Council to acquire the land if CSR required. CSR served a notice requiring Council to acquire the land as acquiring authority.

Council eventually compulsorily acquired the land. The Valuer General determined compensation at $25 million for the market value of the land and $99,500.00 for disturbance. The determination said "Any liability for the GST is a factor in the market for property and is therefore embedded in the land’s Market Value as defined in Sec 56 of the Land Acquisition (Just Terms Compensation) Act 1991, and also in allowances for certain other costs, consequently this determination is GST inclusive."

Council paid the determined compensation to CSR but withheld 1/11th of that amount waiting for a GST tax invoice from CSR.

CSR took proceedings in the Supreme Court and was successful in obtaining an order that Council had no power to withhold any amount from the Valuer General’s determination. Council complied with the order and paid CSR the GST amount withheld but never received a tax invoice from CSR.

When Council lodged its Business Activity Statement it claimed an input tax credit for the GST amount previously withheld. The Commissioner disallowed the input tax credit. The Commissioner agreed to pay Council’s costs to test the matter in the AAT.

The decision

Council argued three different grounds. The AAT found in favour of Council on the second ground. Even though it was not necessary to do so the Tribunal stated how it would have found in relation to the first and third grounds argued.

The grounds argued were:

  • There can be a supply under the GST Act even where the landowner does nothing or even resists or opposes the compulsory acquisition;

The Tribunal would not have found in favour of Council on this ground because:

Case law from other countries suggests the concept of a supply does require some form of positive action on the part of the supplier. The AAT referred to Westley Nominees Pty Ltd & Anor v Coles Supermarkets Australia Pty Ltd & Anor (2006) 152 FCR 461 noting that the question is by no means free of doubt but the AAT would follow obiter from the Full Federal Court which also suggests some positive action is required by the landowner in order to constitute a supply.

  • The GST legislation has an extremely wide definition of supply including "a grant, assignment or surrender of real property" and "an entry into, or release from an obligation to do anything, refrain from an act or to tolerate an act or situation";

The Tribunal accepted this argument because:

When CSR served the notice requiring Council to acquire the land, it incurred legal obligations and in doing so made a supply under the GST Act.

The legal obligation was that it was not free to do anything other than to obtain compensation for the land. The AAT said CSR could not have sold the land to a third party because Council would have been entitled to obtain an injunction to stop that sale.

The AAT endorsed Council’s description that the giving of the notice was equivalent to the exercise of a "statutory put option".

As the Tribunal found it was a taxable supply the effect was the ATO would have to allow Council the input tax credit.

  • Deed of Release entered into by CSR six months after the date of the compulsory acquisition so that it would receive payment of the compensation, was a supply for the purposes of GST legislation.

The Tribunal would not have found in favour of Council on this ground because:

No supply was made by CSR when it entered into the Deed of Release because the compensation was paid to CSR in consideration of the compulsory acquisition of its land and for nothing else.

What to do next

Don’t get too excited that your Authority may be able to claim input tax credits for compulsory acquisitions it has completed since the introduction of GST. The AAT said that "the Tribunal was advised that this application might not end with this decision". We interpret this as meaning it is likely the Commissioner may appeal.

Even if the AAT’s decision is correct, it would only have application if the compulsory acquisition arises from owner-initiated acquisitions. Even then all the other requirements for taxation must apply including that the landowner be registered for GST and the supply to the acquiring authority be in the course or furtherance of an enterprise, there is no other exemption and so on.

For the time being, if you are involved in an owner-initiated acquisition which meets those other requirements, you should ensure that you receive a tax invoice when settling that matter.

If the Commissioner appeals the decision there should be judicial guidance on whether compulsory acquisitions of interest in land give rise to taxable supplies. If the Commissioner is not successful on appeal, amendment to the legislation could be another option.