Introduction

State governments and certain government authorities have the statutory power to compulsorily acquire land.[1] Where the owner of land is registered for GST, a question will be whether the effect of the acquisition is that the owner makes a “supply”, and a “taxable supply”, for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (Cth)(GST Act). This is important to the owner as GST may be payable. It is also important to the acquirer of the land as it may be entitled to input tax credits.[2] Given that acquisitions can be of land worth large amounts of money, a GST liability or entitlement to an input tax credit of 1/11th of the amount of compensation paid can be a substantial sum.

In 2003, Edmundson published an article entitled “GST and Involuntary Supplies”,[3] which examined the GST implications of the compulsory acquisition of real property. Having regard to the limited authorities at the time,[4] the author’s conclusion was that there was no reasoning that compelled the conclusion that the ordinary meaning of “supply” in s 9-10 of the GST Act should extend to compulsory acquisitions of land.

Since 2003, there has been a number of cases dealing with the concept of “involuntary supply” (in the context of compulsory acquisitions and otherwise) and there is cause to revisit the issue to decipher whether this conclusion continues to hold.

In undertaking this task, this article focuses on the following decisions:

• CSR Ltd v Hornsby Shire Council (2004) 57 ATR 201.
• Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461; 62 ATR 682.
• Hornsby Shire Council and Commissioner of Taxation (2008) 71 ATR 442.
• Reglon Pty Ltd v Commissioner of Taxation (2011) 81 ATR 599.
• SXGX and Commissioner of Taxation (2011) 79 ATR 882.

The first, third and fifth decisions deal with the GST implications of the compulsory acquisition of land. The remaining decisions deal with the more general concept of the scope of “supply” in s 9‑10 of the GST Act. None of the decisions directly support the principle that a compulsory acquisition does not give rise to a supply, and consequently the issue remains at large. Nevertheless, the decisions do support the view that some type of positive action needs to be taken by the supplier for there to be a “supply” within the meaning of s 9-10 of the GST Act. This view is consistent with the view of the Commissioner in GSTR 2006/9 – “Goods and Services Tax: Supplies”.

What remains unclear is the nature and extent of the requisite positive action, particularly in the statutory context in which compulsory acquisitions can occur. In this context, the article outlines the statutory process whereby land is compulsorily acquired in each State and considers some of the particular difficulties that may arise under the respective statutory regimes.

The cases

CSR Ltd v Hornsby Shire Council (2004) 57 ATR 201

CSR Ltd was the owner of land that was compulsorily acquired by Hornsby Shire Council. The Valuer-General determined the amount of compensation for the land to be $25,099,500. The Council claimed that the value included GST and deducted $2,300,000 from the compensation payment on account of GST, presumably on the assumption that the compensation was consideration for a taxable supply. CSR sought an order requiring the payment of the outstanding amount. The Council claimed that CSR must provide a tax invoice or it would otherwise be unjustly enriched as it would be paid the full amount of the compensation and could retain the GST component. If the Council received a tax invoice, it could then recover input tax credits equal to the GST component.

CSR had obtained a private ruling from the Commissioner of Taxation confirming that it did not make a supply of real property to the Council and therefore there was no taxable supply. The Council submitted that the court should reject the private ruling and conclude that there was a taxable supply. The Commissioner was not a party to the proceedings.

The court refused to make a final decision on the issue (which involved declaratory relief) in the absence of the Commissioner. Nevertheless, the court made the following comments (at [22]-[24]):

• The Council relied on authority that a compulsory acquisition of property was a “disposal” for the purpose of the Income Tax Assessment Act 1936 (Cth).[5] The court noted that a broad meaning attributable to “disposal” was understandable, given the provisions ought to encompass all situations of loss of depreciable property.
• The court referred to Shaw v Director of Housing (No 2) (2001) 10 Tas R 1 and noted the decision of Underwood J that the obligation of a judgment debtor to pay a judgment sum, extinguished by the act of payment, did not constitute a supply because it did not depend upon any action on the part of the judgment creditor. The court also noted that a not dissimilar view was adopted in a stamp duty context.[6]

Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461; 62 ATR 682

This decision of the Full Federal Court is more commonly referred to in the context of s 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth). However, one of the issues raised before the court was whether, by acquiring real property subject to an existing lease, the appellants made a supply to the lessee within the meaning of s 9-10 of the GST Act. The Commissioner was not a party to that case at first instance, but was granted leave to intervene in the appeal.

The arguments before the court were as follows (at [12]-[15):

• The appellant submitted that it did not enter into an obligation to do anything, to refrain from an act or to tolerate an act or situation. The appellants purchased the reversion, the freehold subject to the lease, and it was no more correct to say that the appellants, in doing so, entered into an obligation of any kind described in s 9-10(2)(g) than it was to say that they purchased a right to receive rent under the lease. The right of Coles to enjoy and enforce against the appellants the benefits of the covenants originally conferred on the original lessor arose by operation of law and not by any act of the appellants by way of entering into an obligation.
• Coles submitted that the definition of “supply” was sufficient to encompass the obligation, assumed by a landlord upon acquiring a reversionary estate, to continue to provide exclusive possession to a lessee, notwithstanding that the original grant had been conferred by the landlord’s predecessor in title. It was well established as a matter of property law that the obligation to permit quiet enjoyment of the demised property ran with the land and burdened any assignee of the reversion. The new lessor acquired the land subject to the obligation to allow continued possession to the lessee and also derived the benefit of the entitlement to rent.
• The Commissioner made similar submissions to Coles, but arguably went further in contending that a supply could be a “a legal consequence”, not requiring a conscious or deliberate act on the part of the supplier  – in this sense, one might have a supply that arises by operation of law.

In considering this issue, the court found (at [17]) that the concept of “supply” in its ordinary meaning in s 9-10(1) did seem to require some act of provision, furnishment, conferral or giving of some thing. However, the inclusions in s 9-10(2) arguably extended the ordinary meaning of “supply”. In the context of s 9-10(2)(g), the ordinary meaning was extended to include the entry into an obligation to do something.[7] The findings of the court (at [22]-[23]) were as follows:

While the matter is not entirely free from doubt, we have concluded that when the appellants purchased the reversion they assumed the obligation of Lake Eerie to honour the lease according to its terms and in that sense entered into an obligation to tolerate an act or situation and in consequence, made a ‘supply’ by virtue of s 9-10(2)(g). The fact that the obligation arises by operation of law does not, in our view, impede this conclusion; after all, the reference to ‘obligation’ in s 9-10(2)(g) must be a legal obligation, although not necessarily one sourced in contract.

In the circumstances, it is unnecessary for us to determine whether there is a ‘.. “supply” by way of lease of the exclusive possession of the demised property in accordance with the lease’ as her Honour below concluded in reliance on the ordinary meaning of the word ‘supply’ in s 9-10(1). However, the indications discussed at [16] above tend to point away from that construction.</blockquote>

The decision of the court confirmed the submission made by the Commissioner that a supply for the purposes of s 9-10(2)(g) (ie the entry into a legal obligation) could arise by operation of law. Also, the court took the view that this concept of “supply” was broader than the ordinary meaning in s 9‑10(1). It is unclear from the judgment whether the court agreed with the Commissioner’s submission to the Full Court that such a supply could be a “a legal consequence”, being one not requiring a conscious or deliberate act on the part of the supplier.[8]

The Commissioner has appeared to move away from his submission to the Full Court and he distinguishes between something that is brought about solely by the operation of law (where there is no supply) and something done by an entity as a consequence of a legal requirement (where there may be a supply).[9]

Hornsby Shire Council and Commissioner of Taxation (2008) 71 ATR 442

This matter related to the proceeding heard by the New South Wales Supreme Court in 2004 in CSR Ltd v Hornsby Shire Council discussed above. The issue before the Administrative Appeals Tribunal was whether the Council was entitled to input tax credits with respect to the amount paid to CSR for the compulsory acquisition of land. This raised the threshold question of whether that compulsory acquisition constituted a supply (for the purposes of s 9-10 of the GST Act), and indeed a “taxable supply” (for the purposes of s 9-5 of the GST Act). Not surprisingly, in light of the fact that the Commissioner gave a private ruling to CSR confirming that no taxable supply was made, the Commissioner contended that the Council was not entitled to an input tax credit.

In looking at this case, the facts are important. The relevant legislation provided that, where land was zoned a particular way, the owner could require the local council to compulsorily acquire that land. CSR made such a request in respect of land that it owned and, in accordance with that request, the Council compulsorily acquired the land.

The Council raised three arguments before the tribunal:

1. There can be a supply within s 9-10(1) of the GST Act even where the owner of the property does not perform any action of any kind in respect of the acquisition.
2. The term “supply” is cast in very wide arms. Section 9-10(1) is expanded by s 9-10(2), in particular subss (d) and (g), on which the Council relied. Further, CSR was not a passive or even resisting party, and CSR exercised a right that was analogous to a statutory put option.
3. The deed of release executed by CSR was a supply within s 9-10.

The tribunal initially considered the second argument. The Commissioner argued that the request made by CSR did not constitute a disposal of property and that the land vested in the Council in consequence of the publication of the notice in the Gazette – it was the notice in the Gazette that had the relevant nexus with the acquisition of the land. The tribunal (at [38]) rejected this contention and agreed with the Council that the making of the request was the “driving force”, which resulted in the acquisition of the land by the Council. The tribunal found particular assistance in the decision of the Full Federal Court in Westley Nominees and noted that when CSR made the request it incurred legal obligations[10] (ie to hand over the land to the Council) and made a supply within s 9-10(2)(g). The tribunal agreed with the Council’s description of the giving of the notice as equivalent to the exercise of a statutory put option.

Having made these findings, the tribunal did not need to consider the first and third arguments, but nevertheless made the following observations:

• Regarding the third argument, the compensation was paid to CSR in consideration for the land and for nothing else (ie no part of the consideration was for the deed of release).
• With regard to the first argument, the tribunal accepted that the overseas case law[11] suggested that the concept of supply did require some form of positive action on the part of the supplier. However, it was also noted that in these jurisdictions the legislation was different and, in particular, there was no provision similar to s 9-10(2)(g).

In conclusion, the tribunal found that, having regard to the judgment in Westley Nominees, the question was by no means free of doubt. However, if it was required to do so, the tribunal would have found that some positive action by the supplier is required for there to be a supply. Such a conclusion gained support from the decision in Shaw v Director of Housing.

Reglon Pty Ltd v Commissioner of Taxation (2011) 81 ATR 599

The taxpayer obtained a judgment in the Supreme Court of New South Wales against the defendant for conversion of the taxpayer’s scaffolding. The judgment was for $1,478,125, which was arrived at by reference to expert opinion as to the auction value of the scaffolding. The Commissioner conducted an audit of the taxpayer and issued assessments on the basis that the taxpayer had made a taxable supply of the scaffolding for the consideration of $1,478,125, giving rise to a GST shortfall of $134,375.

An issue before the court was whether the taxpayer made a supply for consideration. The court approached the issue of whether the judgment gave rise to a supply by looking at the nature of a claim in conversion. In finding there was no supply, the court said as follows (at [26]):

The effect of the payment in full by Citadel of the judgment in conversion against it was to vest in Citadel the ownership of the Taxpayer’s scaffolding. However, the mere obtaining of judgment in conversion against a defendant does not of itself affect the ownership of the converted goods. Nor does the formal entry of judgment. It is the satisfaction of the judgment that effects a transfer to the defendant of property in the goods that were the subject of the conversion.

And further (at [32]):

The payment made in satisfaction of that judgment resulted in ownership and was triggered by the payment of the judgment sum by Citadel. That payment did not depend upon any action of the Taxpayer. I do not consider that, in those circumstances, the Taxpayer may be said to have made a supply. There was no taxable supply by the Taxpayer. 

This decision is consistent with the view that some positive action is required by the supplier for there to be a supply. The Commissioner filed a notice of appeal to the Court of Appeal but the appeal was discontinued. The Commissioner subsequently published a Decision Impact Statement, whereby he accepted that an entity does not, merely by bringing a successful action for conversion, make a supply. The Decision Impact Statement does not disclose why the Commissioner chose to discontinue the appeal.

SXGX and Commissioner of Taxation (2011) 79 ATR 882

The applicant owned land in an area that was likely to be affected by the proposed construction of the Eastern Busway in Queensland. In November 2006 the applicant was informed that its land would be required if the project proceeded in its then current form. In early 2008 the project was approved and the applicant was informed by letter that its property was required for the project. The letter stated that property owners would be compensated at fair market value for their property. The letter also stated the following: “Please note that this is not the start of formal resumptions.”

The applicant requested the Department of Main Roads to acquire the land as soon as possible under a “hardship policy”, which had been adopted by the Queensland government to allow owners of properties, who could demonstrate that he or she would suffer hardship if there was a delay in acquisition, might request the government authority to purchase the property forthwith.

The parties were able to reach an agreement and a standard form contract was entered into. The contract contained the following clause:

The parties agree that the Purchaser is acquiring the Property on a ‘hardship’ basis and that the Purchase Price is in full and final settlement of all claims that the Vendor may have against the Purchaser and the Purchaser acknowledges that the Purchase Price includes an amount to compensate for some of the costs and expenses incurred by the Vendor in respect of this purchase on a similar basis to the way such costs and expenses are recompensed in a formal resumption under the Acquisition of Land Act 1967.

The applicant argued that it did not make a supply when the land was conveyed to the State of Queensland. This was because at the time of the contract the compulsory acquisition process had commenced and such acquisitions are not liable to GST. The tribunal commented that there was support for this contention in the decision of the tribunal in Hornsby Shire Council and to GSTR 2006/9, but found it was unnecessary to consider the correctness of this proposition as this was not a case of compulsory acquisition, but rather a supply.

The tribunal found that the resumption process had not commenced and that the applicant made a supply by selling the land. The reasoning of the tribunal was expressed as follows (at [27]):

Whatever might have happened had the applicant done nothing and waited for the resumption process to take its course, the fact remains that it executed a contract of sale whereby it agreed to convey the land to the State of Queensland. At that time the statutory process of resumption was in prospect but it had not come to fruition. In my view the sale by the applicant to the State constituted a supply and it was a supply for consideration.

The tribunal also noted (at [25]) that this was not a case where the applicant “took no action” and that the contrast with the owner of resumed land was stark. In the present case, the applicant negotiated and agreed upon a price to be paid, it executed an agreement to sell and it gave effect to that agreement by executing and delivering a transfer of the land. One might also include in this list the applicant’s request that the land be acquired by the State government.

While this decision did not directly deal with the GST consequences of compulsory acquisitions, it lends support to the view that some type of positive action is required by the owner of the land before there can be a supply.

The current state of the law

The Commissioner’s view

In GSTR 2006/9 – “Goods and Services Tax: Supplies” (at [81]-[91]) the Commissioner published his view on the GST implications of compulsory acquisitions.[12]

The views of the Commissioner can be summarised as follows:

• In cases where land vests in the authority as a result of the authority seeking to acquire the land, and the authority initiates the compulsory acquisition process pursuant to its statutory right, 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.
• 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 – eg in Hornsby Shire Council where CSR issued a statutory notice compelling the Council to acquire the land.
• Where only part of the land is to be compulsorily acquired and, prior to the vesting of the land, the owner and the authority agree that the remaining land is to be acquired as it will be of no practical use or value to the owner, no supply is made of the remaining land. Where, after the vesting of part of the land, the owner requests the Council to acquire the remaining land on the basis that it is of no practical use or value, consistent with the decision in Hornsby Shire Council, the owner makes a supply of the remainder of the land.
• Acceptance by the owner of the terms of the acquisition and the amount of the compensation does not provide a sufficient nexus between the payment and the transfer. The land is acquired by operation of the statute, upon publication of the acquisition notice, not by action taken by the landowner.
• If, 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 is not vested in the authority as part of the compulsory acquisition process but involves a supply of land to the authority.

After the decision of the tribunal in Hornsby Shire Council, the Commissioner issued a Decision Impact Statement on 25 February 2009, which appears to outline the views of the Commissioner as follows:

• an owner of real property does not make a supply when an acquiring authority initiates the process of compulsorily acquiring real property and the relevant interest is vested in the relevant government authority by extinguishing any previous interests in land (as opposed to an acquisition of the real property by agreement);
• where the owner of land takes positive action by initiating the process that directly led to the compulsory acquisition of the land, the entry into legal obligations by the owner is a precursor to, or a part of, the surrender of the land.

The Commissioner has not published a Decision Impact Statement for SXGX. Also, GSTR 2009/6 does not refer to the decision.

The legislative process whereby land is acquired

As shown by the decision in Hornsby Shire Council (and acknowledged by the Commissioner in GSTR 2006/9 at [82]), it is critical to examine the relevant facts and circumstances to determine whether the owner makes a supply of the land to the authority acquiring the land, including the relevant statutory process by which land is acquired.

The statutory process of compulsory acquisition in each State is different, but as a general rule the following process is followed:[13]

• To begin the process, the authority must serve on the owner a notice stating its intention to acquire the land.[14] In SXGX the tribunal stated (at [23]) that “at least in Queensland, the compulsory process is initiated upon the service of the notice to resume”.
• The notice of intention does not effect a transfer of property rights, but in some States it does restrict the rights of the owner to deal with the land.[15]
• In some jurisdictions the owner can object to the notice of intention.[16]
• The authority publishes a notice of acquisition (generally published in the government Gazette).[17]
• The effect of the notice of acquisition is that the land is vested in the authority.[18]
• The authority and the owner seek to agree on consideration for the land. If the parties cannot agree, the matter can be referred to a court or tribunal.

Involuntary acquisitions

The authorities referred to above support the conclusion that the compulsory acquisition of land, where the owner takes no positive role in the acquisition – or indeed fights the acquisition all the way – does not give rise to a “supply” within the meaning of s 9-10(1) of the GST Act. Accordingly, a “purely involuntary” compulsory acquisition of land will not give rise to a supply.

However, it is to be noted that the decision in Westley Nominees supports the view that s 9‑10(2)(g) is broader than s 9-10(1) and that the provision may be engaged by the operation of law. It also remains unclear whether positive acts of the supplier are required – indeed, in that appeal, the Commissioner submitted to the Full Court that there could be a supply without any conscious or deliberate act of the supplier. It is probably only a matter of time before a court is required to finally determine the issue.

Voluntary or consensual compulsory acquisitions

When one has regard to the Decision Impact Statement issued after the decision in Hornsby Shire Council, the Commissioner appears to regard the finding of a supply to depend upon whether the acquisition was “initiated” by the acquirer or the owner. If the acquisition was “initiated” by the owner, there will be a supply. If the acquisition was initiated by the acquirer, there will not be a supply.

In a case such as Hornsby Shire Council the question is easily answered, as the statute gave the owner the right to require the Council to acquire the land. Similarly, where the owner takes no positive role in the process, it is also clear that the acquisition was “initiated” by the acquirer. Also, in a case such as SXGX the question is easily answered as the formal resumption process had not commenced and the owner simply entered into an agreement to sell the land to the State government.

It gets more difficult where the compulsory acquisition process is used to acquire the land, or at least that process has commenced, and the owner is a consenting or active party in the process whereby ownership of the land ends up in the hands of the State government. Some of the potential issues can be illustrated by the following statutory provisions:

• Under s 23 of the New South Wales Act a landowner may require authority of the council or other State agency to acquire their land, where that land is designated for acquisition by that authority for a public purpose and the owner may suffer hardship if there is a delay with the acquisition. This would appear to fall into the same category as that in Hornsby Shire Council and would give rise to a supply.
• Section 30 of the New South Wales Act provides for compulsory acquisition “by consent”.[19] In other words, parties can agree to the authority compulsorily acquiring the land rather than acquiring the land by private agreement. It is unclear which side of the line this would fall. There would appear to be little difference between the example in GSTR 2006/9 (where the owner gives consent to the acquisition and agrees on compensation) and an agreement entered into pursuant to s 30. However, it would arguably be a strange result if the parties could effectively elect whether GST is applicable by choosing whether to utilise the compulsory acquisition route or the agreement route.
• Similarly, s 18 of the Victorian Act[20]allows the authority, at any time after the issue of the notice of intention and while it is still operative, to acquire the land by agreement. Land acquired in this way is to be treated as having been compulsorily acquired. The authority has initiated the process by issuing the notice and the land is compulsorily acquired, but the parties have given effect to this process by entering into an agreement to sell the land. In considering this issue, it is relevant to note the following statement of the tribunal in SXGX (at [23]-[24], [26]):

There may well be situations where, after the service of the notice of intention, the parties agree on a sale rather than the continuation of the statutory process. For complete accuracy it might be preferable to refer to the fact of acquisition of the land as the result of the compulsory process rather than initiating the compulsory process…

It seems to me not to matter whether, as the applicant contended, the resumption process had commenced; certainly there was no use by the Queensland Government of its powers under the Acquisition of Land Act. But whether it had commenced or not the issue, at least in the language of the Ruling, is whether the land had vested in the Authority. As a consequence of the agreement to sell the State of Queensland became the registered proprietor of the land.

…

Ultimately however the case falls to be determined by reference to the statute, not to the Commissioner’s Ruling. It is not open to doubt that the conveyance of real property constitutes a supply.

These statements of the tribunal would appear to support the conclusion that if the parties enter in an agreement to sell the land, the vendor will make a supply.

• Section 168 of the Western Australian Act empowers an acquiring authority to enter into an agreement to purchase interests in land, without necessarily preparing, lodging and serving a notice of intention. The intention behind the acquisition is the same (ie acquiring the land for public purposes) – yet, under this process, the GST treatment would arguably be different because the parties choose to resolve the issue by way of agreement (and before the issue of a formal notice of intention) rather than by allowing the land to be compulsorily acquired.
• Section 11 of the Tasmanian Act provides for a “notice to treat” to be given to owners specifying, inter alia, that “the acquiring authority is willing to negotiate for the purchase of land but, if agreement for the purchase of the land is not reached within 30 days after service of the notice, the authority may take the land compulsorily”. Again, the authority has initiated the process, but the GST treatment may depend upon whether the owner agrees to negotiate an agreement with the authority or to require the land to be taken compulsorily.

When one has regard to the above provisions, there may be a tension between the vesting of the land pursuant to the various provisions of the State Acts providing for compulsory acquisition and acts of the owner, which may be seen as a “driving force”, or at least a “participatory force”, behind the vesting of the land. In Hornsby Shire Council,that “driving force” was the exercise of CSR’s statutory right to require the Council to acquire the land. An issue left unresolved is whether, in circumstances where the authority initiates the statutory process of acquisition (eg by issuing a notice of intent to acquire), the active participation of the owner in the process leading up to the vesting of the land in the authority (either by way of publication of the notice of acquisition or the entry into an agreement) can give rise to a supply.

Conclusion

The conclusion in Edmundson’s article in 2003 – that the “ordinary meaning” of supply should not extend to compulsory acquisitions – appears to have held up well. However, the uncertainty as to the scope and application of s 9-10(2)(g) does potentially complicate matters, particularly whether that section extends the statutory meaning of “supply” to include obligations arising by the operation of law.

At this time, it would seem it is not possible to make any definitive statements of principle, other than:

• purely involuntary supplies are likely not be a supply; and
• those acquisitions that are not purely involuntary, as they involve some positive action by the supplier, “may” be a supply. In each case the facts and circumstances will need to be carefully considered.

The GST implications for compulsory acquisitions of land are complex and difficult, with no “bright line test” of what is a supply and what is not. Advisors for both owners and acquiring authorities therefore need to consider GST in light of the particular circumstances of each case.

Chris Sievers

Lonsdale Chambers