GST and sale of real property before compulsory acquisition

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 sells land to a government authority before the compulsory acquisition of the land is formally initiated?

Yes, the entity is making a taxable supply under section 9-5 of the GST Act when it sells land to a government authority before the compulsory acquisition of the land is formally initiated.

The entity is a landowner that is registered for goods and services tax (GST).

A government authority proposes to compulsorily acquire the entity's land. Before the compulsory acquisition process under statute is formally initiated, the entity and the government authority enter into negotiations and the entity sells the land to the government authority under a standard sale of land contract. The land is transferred to the government authority pursuant to the terms of the agreement with the entity.

The government authority provides consideration for the sale of land, the land is located in Australia and was used by the entity in its enterprise. The sale of the land does not meet the requirements to be GST-free under Division 38 of the GST Act or input taxed under Division 40 of the GST Act.

Under section 9-5 of the GST Act, an entity makes a taxable supply if: • it makes a supply for consideration • the supply is made in the course or furtherance of an enterprise that it carries on • the supply is connected with Australia, and • the entity is registered or required to be registered for GST.

'Supply' is defined in subsection 9-10(1) of the GST Act as any form of supply whatsoever and subsection 9-10(2) of the GST Act provides that a supply includes a grant, assignment or surrender of real property.

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: 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.

The term 'supply' covers not only the thing 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 the use of the phrase 'you make the supply' in section 9-5 of the GST Act, there is a requirement for a supplier to take some action to cause a supply to be made.

A government authority proposes to compulsorily acquire the entity's land. The compulsory acquisition of land under statute is not a 'supply' by a landowner for GST purposes, as the land is vested in the acquirer by the operation of the words of a statute, that is, the owner does not grant, assign or surrender the real property or undertake any activity to transfer or supply the property (see ATO ID 2003/1173).

However, before the compulsory acquisition under statute was initiated, the entity and the government authority entered into negotiations and the entity sold its land under a standard land contract. Therefore, although the land in question is targeted for a potential compulsory acquisition and the government authority could acquire the land by this method, the land is not vested in the government authority through the compulsory acquisition process. The land transfers as a result of settlement of the contract and execution of a transfer instrument. As such, the entity is making a supply of the land to the government authority.

The entity is registered for GST, is selling the land for consideration in the course of its enterprise and the land is located in Australia. The supply of the land is neither GST-free under Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Therefore, the entity is making a taxable supply under section 9-5 of the GST Act when it sells its land to a government authority.