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If they take it, have you “supplied” it?

The Inland Revenue Department has published a draft view on whether a GST “supply” occurs when land is compulsorily taken by a Public Authority under the Public Works Act.

At issue is whether a compulsory acquisition of land results in a “supply” being made by the person whose land is taken and whether that “supply” is a “sale”.

If it’s a “supply” and the land owner is GST registered then GST is likely to apply. In most cases this won’t matter because the GST rate will be 0%.

However, if the land owner is not GST registered the acquiring authority (usually a Government entity) may be entitled to claim a GST “credit” if the acquisition is considered to be a “supply by way of sale”.

Practically speaking this is mainly just one Government entity (IRD) paying another Government entity so you have to wonder why it is important. However, that won’t always be the case. The principles could apply to some local authority bodies for example and some statutory bodies.

The IRD is looking for views on this. See here
According to the IRD a compulsory acquisition of land is a “supply by way of sale” for GST purposes.

This view isn’t unchallengable. The Australian Tax Office has previously taken the view a compulsory acquisition is not a “supply” because the transferor takes no action to transfer their interest to the acquiring authority [see ATO GSTR2006/9]. However they have more recently backed away from this view in light of an Australian case, Hornsby Shire Council v FC of T 2008 ATC 10-061 which came to a different conclusion.

I think the IRD have got it right. Compulsory acquisition is simply a mechanism by which title to a property passes and it is a “sale” because consideration is provided for the transfer of the property, albeit under some duress in many cases.

Iain

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