Resumptions and GST by TurksLegal

Resumptions and GST A PAPER BY PAUL ANDERSON MAY 2009

Resumptions and GST Summary The compulsory acquisition of land by a Council from a landowner carrying on an enterprise will be a taxable supply, at least where the process involves some positive act by the landowner.

Who Does This Impact? Councils and landowners involved in the compulsory acquisition of land.

What Action Should Be Taken? The landowner should be aware of his potential liability for GST in these circumstances and the Council should be aware of its entitlement to an input tax credit.

CONTENTS:

TURKSLEGAL

Facts

Commissionerâ&#x20AC;&#x2122;s Case

Councilâ&#x20AC;&#x2122;s Arguments

AAT Decision

First and Third Arguments

Conclusion

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Resumptions and GST by Paul Anderson

The recent Administrative Appeals Tribunal (‘AAT’) decision of Hornsby Shire Council v Commissioner of Taxation raises the interesting question: to what extent is a resumption of land liable for GST?

Facts The case concerned the compulsory acquisition by Hornsby Shire Council of a quarry in Hornsby from CSR Limited (‘CSR’). The land on which the quarry was located was zoned ‘Open Space ‘A’ (Public Recreation Land)’ under the Hornsby Local and Environmental Plan 1994 (‘LEP’). Clause 17(5) of the LEP provided that the Council must acquire land so zoned if the owner of the land made a written request to this effect. CSR sent a letter to this effect to the Council on 21 March 2001 requesting compulsory acquisition. After a dispute in the New South Wales Land and Environment Court as to whether the Council was compelled to acquire the land, the Council in fact acquired the land on 25 October 2002 by way of publication of a notiﬁcation in the NSW Government Gazette. CSR was entitled to receive compensation from the Council under the Land Acquisition (Just Terms Compensation) Act 1991. The sum of $26,508,771.28 was ultimately paid comprising the following components: •

$25,000,000 market value of land as determined by the Valuer General;

•

$99,500 loss attributed to disturbance determined by the Valuer General; and

•

$1,409,271.28 in respect of statutory interest.

A Deed of Release was also executed between the parties. The Council claimed a GST input tax credit being one-eleventh of the amount paid, even though the Council had never received a tax invoice from CSR. The Commissioner: •

agreed to fund the case under his Test Case Funding Programme, given the signiﬁcance of the issue; and

•

did not take the point that no tax invoice had been received from CSR which was potentially fatal to the claim.

Commissioner’s Case The Commissioner argued that the compulsory acquisition of the land was not a supply for GST purposes as CSR did not take

any positive action to give effect to the supply. Some positive action was required by CSR. This argument was consistent with the Commissioner’s approach in his ruling GSTR 2006/9 on supplies.

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Resumptions and GST by Paul Anderson

Council’s Arguments The Council put forward three alternative arguments, namely: •

Firstly, under section 9-10 of the GST Act, there can still be a supply where the person from whom land is acquired does not perform any positive act in respect of the acquisition.

•

Secondly, even if such positive act was required, there was sufﬁcient action on the part of CSR in this case to constitute a supply; and

•

The entry by the Council and CSR into a Deed of Release was itself a ‘surrender of a right’ or ‘the release of an obligation’ for the purposes of section 9-10 of the GST Act.

AAT Decision The AAT found for the Council on the second argument. When CSR gave notice under clause 17(5) of the LEP, it entered into a legal obligation which was a supply of real property for the purposes of section 9-10 of the GST Act. The giving of the notice was ‘the driving force’ which resulted in the acquisition. CSR was the ‘very antithesis of an unwilling party’. The giving of the notice could aptly be described as equivalent to the exercise of a statutory put option. Having found for the Council on the second argument, it was strictly not necessary for the AAT to consider the ﬁrst and third arguments. However, since the case was a test case, it was appropriate for the Tribunal to consider the other two arguments as well.

First and Third Arguments The Tribunal dealt with the third argument in summary fashion. The compensation was paid to CSR in consideration of the supply of the quarry and nothing else. No additional right was supplied to the Council at the time the Deed of Release was executed. In relation to the ﬁrst argument, the AAT considered the degree of positive action required on the part of a landowner whose land is resumed before the acquisition is a supply for GST purposes. An example given was a passive landowner whose land is resumed for road widening purposes against his wishes and even with his opposition. The Commissioner conceded in his ruling that mere acceptance by an owner of an amount of compensation payable on the compulsory acquisition did not provide a sufﬁcient nexus to constitute a supply. The Tribunal viewed various authorities from New Zealand, the UK and South Africa on their equivalent GST legislation as well as Australian authorities dealing with resumptions in the context of liability for income tax. Although it was necessary to allow for differences in the wording of the legislation in each country and instance, the Tribunal came down on the side of the view that some positive action was required.

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Resumptions and GST by Paul Anderson

Conclusion The Council did not appeal against the decision. It leaves open the question of whether there will be a taxable supply in the case of a resumption which does not involve any positive action by the landowner i.e. where the landowner is at best a passive or at worst a resisting participant in the process. Both the Tribunal in dealing with the Council’s ﬁrst argument and the Commissioner in GST Ruling 2006/9, have expressed the view that some positive action is required. However, neither the Tribunal’s decision nor the Commissioner’s ruling on the point are binding on subsequent courts or Tribunals. Presumably following the decision the Commissioner lodged a claim with CSR for payment of the GST at issue. No doubt CSR had not provided the Council with a tax invoice because it did not wish to compromise its stance that the acquisition was not a taxable supply. It should also be borne in mind that a resumption will only be a taxable supply if the other elements of section 9 have been satisﬁed. In particular, the landowner must be carrying on an ‘enterprise’ at the time the land was compulsory acquired. If the landowner was a private individual and the acquisition related to his residence, there is no ‘enterprise’ and no supply for GST purposes.

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Resumptions and GST by Paul Anderson

For more information, please contact:

Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

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