Introduction

Governments and certain government authorities have the statutory power to compulsorily acquire land.  Where the owner of land is registered for GST, a question will be whether that acquisition is a “taxable supply” for the purposes of the GST Act.  This is important to the owner as GST may be payable.  It is also important to the acquirer as it may be entitled to input tax credits.  Given that acquisitions can be very large, a GST liability or entitlement to an input tax credit of 1/11th of the amount paid can be a substantial amount.

In 2003, Peter Edmundson published an article entitled “GST and Involuntary Supplies”, which examined the GST implications of the compulsory acquisition of real property.  Having regard to the limited authorities at the time (mainly referring to Shaw v Director of Housing and State of Tasmania (No.2) [2001] TASSC 2), the conclusion was that there was no reasoning that compelled the conclusion that the ordinary meaning of “supply” should extend to compulsory acquisitions of land.  That was the view adopted by the Commissioner at that time.

Since 2003, there have 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 see whether this conclusion continues to hold.

In undertaking this task, I have focused on the following decisions:

• CSR Ltd v Hornsby Shire Council [2004] NSWSC 946
• Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115
• Hornsby Shire Council and Commissioner of Taxation [2008] AATA 1060
• Reglon Pty Limited v Commissioner of Taxation [2011] FCA 805

None of these decisions directly support the principle that a compulsory acquisition does not give rise to a supply, and 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.  What remains unclear is the nature and extent of the requisite positive action, particularly in the statutory context in which compulsory acquisitions can occur.

The cases

CSR Ltd v Hornsby Shire Council 

CSR was the owner of land which was compulsorily acquired by the Council.  The Valuer-General determined the amount of compensation for the land at $25,099,500.  The Council claimed that the value included GST and deducted $2,300,000 from the compensation payment on account of GST.  CSR sought an order requiring the payment of the outstanding amount.  The Council also 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 retain the GST component.  The Commissioner was not a party to the proceedings.

In respect of the Council seeking to withhold the GST component, the Court quite properly rejected this contention as there was no obligation on the Council to pay GST and any liability to pay GST fell on CSR.  In any event, the Court found that the market value of the land was $25,000,000 and not $22,700,000 plus GST.  This was because the market place had adjusted to the imposition of GST and had imbedded it in the market value of the land.

With respect to the tax invoice, CSR had obtained a private ruling from the Commissioner 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 competing submissions put to the Court were:

• a compulsory acquisition of property was a disposal for the purpose of the Income Tax Assessment Act; and
• based on the decision in Shaw v Director of Housing, the entry into an obligation did not constitute a supply because it did not depend on any action on the part of the supplier.  Reference was also made to stamp duty law whereby an application by a trustee in bankruptcy for registration as the proprietor of the land was not chargeable as a conveyance because it was the Statute which vested the property in the trustee.

Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd

This decision of the Full Federal Court is more commonly referred to in the context of s 13 of the GST Transition Act.  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 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 respective arguments before the Court were as follows (at [12]-[15):

• The appellants 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 kinds 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 which 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 para 9-10(2)(g) the ordinary meaning was extended to include the entry into an obligation to do something.  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.

The decision of the Court confirmed the submission made by the Commissioner that a supply for the purposes of s 9-10(2)(g) (i.e., 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 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.

Hornsby Shire Council and Commissioner of Taxation

This decision related to the compulsory acquisition considered by the NSW Supreme Court in 2004.  The issue before the 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 necessarily raised the threshold question of whether that compulsory acquisition constituted 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 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:

• 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
• The term “supply” is cast in very wide arms.  S 9-10(1) is expanded by s 9-10(2), in particular subparagraphs (d) and (g), on which the Council relied.  Further, CSR was not a passive or even resisting party, and CSR exercised a right which was analogous to a statutory put option.
• The deed of release executed by CSR was a supply within s 9-10.

Reglon Pty Ltd v Commissioner of Taxation

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 amount of the judgment was paid to the taxpayer and the money was used to pay off certain loans, leaving the taxpayer with assets of $499 and a loan of $189,588. 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 were 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 that there was no supply, the Court said as follows (at [26]):

The effect of the payment in full by Citidel 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 coverted 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 did file a notice of appeal in this case but the appeal was discontinued.

The current state of the law

The Commissioner’s view

In GSTR 2006/9 (at paragraphs 81-90) the Commissioner deals with the issue of compulsory acquisition.  The relevant points 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 – e.g., in Hornsby Shire Council where the owner 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 there 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.
• An example in the Ruling involves the acceptance by the owners of the compulsory acquisition and of the amount of compensation.  The acceptance of the compulsory acquisition does not cause the claimant’s rights to be extinguished – that is the effect of the operation of the statute.  There is no supply by the owners.

After the decision of the Tribunal in Hornsby Shire Council, the Commissioner issued a Decision Impact Statement which appeared to outline the views of the Commissioner as follows:

1. 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);
2. 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.

10 December 2011

Chris Sievers