Issue
Is the entity, a landowner, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it agrees to the amount of compensation to be paid as a result of land that it owns being compulsorily acquired under a statute?
Decision
No, the entity is not making a taxable supply under section 9-5 of the GST Act when it agrees to the amount of compensation to be paid as a result of land that it owns being compulsorily acquired under a statute as the entity is not making a supply.
Facts
The entity is a landowner that is registered for goods and services tax (GST). The entity is advised by an authority that, under statue, land that the entity owns is to be compulsorily acquired.
In accordance with the relevant statute, the entity's land is to be compulsorily acquired by way of gazettal of a resumption notice. The statute provides that the effect of the gazettal resumption notice is that the land taken shall be absolutely freed and discharged of all trusts, obligations, mortgages, charges, rates, contracts, claims, estates or interest of what kind soever and the land is vested in the acquiring authority on and from the date of the notice.
The entity is entitled to be paid compensation for injury caused to it by the loss of the land. Under the statue, the entity and the authority can reach an agreement in writing as to the amount of compensation to be paid and the authority will compulsorily acquire the entity's land after this agreement is reached.
The entity does not dispute the acquisition and reaches an agreement in writing with the authority on the amount of compensation to be paid. The authority compulsorily acquires the entity's land.
Reasons for Decision
Section 9-5 of the GST Act sets out the requirements that must be met for an entity to make a taxable supply. One of the requirements of a taxable supply is that an entity makes a supply for consideration (paragraph 9-5(a) of the GST Act).
The term 'supply' is a broad concept for GST purposes and is defined in subsection 9-10(1) of the GST Act to include 'any form of supply whatsoever'. The meaning of the term 'supply' is discussed in Goods and Services Tax Ruling GSTR 2001/4. Paragraph 22 of GSTR 2001/4 provides that a supply is essentially 'something which passes from one entity to another'.
Further, paragraph 25 of GSTR 2001/4 provides that: Subsection 9-10(2) refers to two aspects of a supply; the thing which passes, such as goods, services, a right or obligation; and the means by which it passes, such as its provision, creation, grant, assignment, surrender or release.
Therefore, in the GST Act, the term 'supply' covers not only the subject of the transaction - the thing that passes - but also includes the action by which the thing passes from one entity to another. In addition, by use of the word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) of the GST Act, there is a requirement for a supplier to take some action, whether voluntarily or involuntarily, to cause a supply to be made. This means that the entity must take some action or do something for a supply to occur.
In accordance with the relevant statute, the authority compulsorily acquires the entity's land by way of gazettal of a resumption notice, after the entity and the authority agree in writing to the amount of compensation to be paid. The statute provides that the effect of the gazettal notice is that the land becomes freed from any and all interests, and the legal ownership of the land described in the notice is vested in the acquiring authority.
A transfer of the legal interest in land, or the surrender of real property, is within the definition of supply in section 9-10 of the GST Act. However, rights are not transferred or surrendered. The statute has the effect of extinguishing the entity's interests in the land, creating new rights in the land and providing these to the acquiring entity.
Mere agreement by the entity to the amount of compensation payable on the compulsory acquisition does not provide a sufficient nexus between the land which passes and the means by which it passes. While the entity does not dispute the acquisition, this is not an activity which affects the supply of land.
That is, even where the entity agrees to the terms of the acquisition and the amount of compensation, the land is acquired by operation of the statute, upon publication of the acquisition notice in the gazette, not by an action of the landowner.
As the entity's legal interest was divested from the entity upon gazettal of the resumption notice, the entity has not taken any action to surrender real property or cause its legal interest in the land to be transferred. There is no supply.
Therefore, the entity is not making a taxable supply under section 9-5 of the GST Act when it agrees to the amount of compensation to be paid as a result of land that it owns being compulsorily acquired under a statute. Note. As part of reaching an agreement for the amount of compensation and to ensure finality to the process, the entity may enter into an obligation with the authority to refrain from challenging the amount of compensation agreed upon.
In these circumstances, although the entity's agreement may amount to a supply within the meaning of paragraph 9-10(2)(g) of the GST Act (entry into an obligation) or paragraph 9-10(2)(e) (surrender of a right), no part of the amount paid for compensation is consideration for that supply.
The compensation relates to damages suffered by the entity on the loss of its interest in the land and does not have a sufficient nexus with the entity's agreement to finalise the compulsory process without further legal action.