GST and compulsory acquisitions – can you have an “involuntary supply”?

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:

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.
The Court refused to make a final decision on the issue in the absence of the Commissioner.

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.
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 which had the relevant nexus with the acquisition of the land.  The Tribunal rejected this contention and agreed with the Council that the making of the request was the “driving force” which resulting in the acquisition of the land by the Council.  The Tribunal found particular assistance in the decision of Westley Nominees and noted that when CSR made the request it incurred legal obligations (i.e., to hand over the land to the Council) and made a supply within s 9-10(2)(g).
Having made these findings, the Tribunal did not need to consider the first and third arguments, but nevertheless made the following comments:
  • Re the third argument, the compensation was paid to CSR in consideration for the land and for nothing else (i.e., no part of the consideration was for the deed of release).
  • Re the first argument, the Tribunal accepted that the overseas case law 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 judgement 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.
This decision is consistent with that in Westley Nominees, in that s 9-10(1) would appear to require some positive action by the supplier.  However, the scope of s 9-10(2)(g) remained unclear, save that the decision confirmed that there would be a supply where the owner of the land exercised a statutory right to require the Council to acquire the land.

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 statutory process of compulsory acquisition in each State is different, but as a general rule the following process is followed:
  • To begin the process, the authority must serve on the owner a notice stating its intention to acquire the land [Land Acquisition (Just Terms Compensation Act) 1991 (NSW) s 11; Land Acquisition and Compensation Act 1986 (Vic) s 6Acquisition of Land Act 1967 (Qld) s 7Land Administration Act 1997 (WA) s 170; Land Acquisition Act 1969 (SA) s 10Land Acquisition Act 1993 (Tas) s 11 (although referred to as a “notice to treat”) ]
  • 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 [Vic s 12; WA s 172; SA s 13 and s 14]
  • In some jurisdictions the owner can object to the notice of intention [Qld s 8; WA s 175; SA s 12]
  • The authority publishes a notice of acquisition (generally published in the Government Gazette) [NSW s 19Vic s 19Qld s 9; WA s 177; SA s 16; Tas s 18
  • The effect of the notice of acquisition is that the land is vested in the authority [NSW s 20Vic s 24Qld s 12; SA s 16; Tas s 19]
  • 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.

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.

Involuntary acquisitions

The Court and Tribunal decisions 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.  In this regard, it is likely that 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 confirms that s 9-10(2)(g) is broader than s 9-10(1) and that the provision can be engaged by the operation of law.  It also remains unclear whether positive acts of the supplier are required – indeed, 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 for Hornsby Shire Council, the Commissioner appears to regard the central point of distinction as whether the acquisition was “initiated” by the acquirer or the owner.  In a case such as Hornsby Shire Council that 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.

It gets more difficult is where the compulsory acquisition process is used to acquire the land, but the owner is a consenting or active party in the process.  Some of the potential issues can be illustrated by the following statutory provisions:
  • Under s 23 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) 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 Land Acquisition (Just Terms Compensation) Act 1991 (NSW) provides for compulsory acquisition ‘by consent’. 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 gave consent to the acquisition and agreed on compensation) and an agreement pursuant to section 30.  However, it would 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, section 18 of Land Acquisition and Compensation Act 1986 (Vic) 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 have been compulsorily acquired. The authority has initiated the process by issuing the notice and the land is compulsorily acquired, but the parties have also come to an agreement to sell the land.  See also Section 15 of the Land Acquisition Act 1969 (SA).
  • Section 168 of the Land Administration Act 1997 (WA) 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 (i.e., acquiring the land for public purposes) – yet, under this process the GST treatment would arguably to be different because the parties choose to resolve the issue by way of agreement rather than by allowing the land to be compulsorily acquired.
  • Section 11 of the Land Acquisition Act 1993 (Tas) 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“.  The authority has initiated the process, but the GST treatment may depend upon whether the owner agrees to negotiate with the authority.
  • Section 16 of the Land Acquisition Act 1993 (Tas) allows owners to consent to the taking of land by notice of acquisition.  Given the example in GSTR 2006/9, it is likely that the Commissioner would not view the giving of consent as sufficient positive action to give rise to a supply.

When one has regard to the above examples, there may be a tension between the act which has the legal effect of vesting the land (i.e., the notice of acquisition) and certain acts of the owner which may also be seen as a “driving force” behind the vesting of the land.  In Hornsby Shire Council that “driving force” was the statutory right of the owner 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 (by issuing a notice of intent to acquire), the active participation of the owner in that process leading up to the publication of the notice of acquisition (for example the entry into an agreement to divest the land to the authority) can give rise to a supply within the meaning of s 9-10(2)(g).

Conclusion

The central conclusion in Peter 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 existence of s 9-10(2)(g) does potentially complicate matters.  In this regard I recall the views of Justice Edmonds of the Federal Court when speaking at the TIA GST Conference earlier this year. His Honour felt that the inclusion of the matters in s 9(10)(2) had caused more problems than they had solved and it would be better if they were simply removed and we were left to rely on s 9-10(1).  His comments were made in the context of the decision of the Full Federal Court in Qantas Airways Limited v Commissioner of Taxation, but those comments are arguably relevant to this issue as well.

At this time, I consider that it is not possible to make any definitive statements of principle, other than:
  • purely involuntary supplies will likely have no GST consequences; and
  • those supplies which are not purely involuntary, as they involve some positive action by the supplier, “may” have GST consequences.
Applying these principles to compulsory acquisitions, regard must be had to the varied circumstances in which a compulsory acquisition can take place.  Some acquisitions may attract GST and some may not.  Advisors for both owners and acquiring authorities therefore need to consider GST in light of the particular circumstances of each case.  Also, given the large sums of money involved, it is likely that further disputes will arise which will give the Courts an opportunity to further clarify this difficult issue.

10 December 2011

Chris Sievers

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