Edited version of private advice

Authorisation Number: 1051647529954

Date of advice: 19 March 2020

Ruling

Subject: Income - compensation and GST - taxable supply

Issue 1: Income Tax

Question 1

Are the ex-gratia payments received assessable under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the ex-gratia payments received exempt income?

Answer

No

Issue 2: GST

Question 1

Have you made a taxable supply in connection with the ex-gratia payments and therefore liable to pay GST?

Answer:

No. You made no supply for the ex-gratia payments and therefore not liable to any GST in relation to the payments.

This ruling applies for the following periods:

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You conduct a business.

In October 20XX, commenced construction on a project (the project).

The project involved construction near your business premises.

You were advised businesses that the project would last X months that there may be disruptive effects during construction.

Due to various hold ups, the project exceeded the initial period and continued for X years.

During the entire project period your business experienced a severe decline in revenue as a direct result of the disruption from the project construction.

In August 20XX, an assistance program (assistance program) commenced.

The assistance program was targeted at small businesses who have experienced a greater length of disruption than they may have originally planned and that may be experiencing financial hardship.

To apply, the businesses needed to meet the following criteria:

·   Small businesses employing fewer than XX full-time equivalent employees;

·   The place of business is situated along the alignment or in close proximity to and impacted by the construction activity;

·   The place of business is located in a zone where construction is taking longer than initially advised.

To be eligible, businesses must meet all criteria and must demonstrate a financial downturn.

Businesses that met the criteria were required to provide:

·   Signed financial statements prior to the beginning of construction, and for the period since construction began; and

·   Any additional information requested that shows how the construction has impacted the business.

You applied for the assistance program by supplying details demonstrating the economic loss suffered by the business caused by the ongoing construction.

A fact sheet on the ex-gratia payments entitled "Small Business Assistance Program" stated

"any payment under this program is not designed to compensate businesses, but to provide targeted assistance during major civil construction. This assistance is provided on an ex-gratia basis."

On XX 2017, you received notice that the Assistance Program has decided to make the ex-gratia payments to you. The notice stated:

As a gesture of goodwill and with no admission of liability, and subject to your agreement to the terms below, I wish to notify you that the X has decided to make a payment of ex-gratia financial assistance of $X (inclusive of any GST, if applicable) to you to help with your rent and bills in a time of disruption. The payment of this financial assistance is made on the basis that your business has been affected by the overstay of the Project in the zone near your business.

Payment of the amount specified above will be made on the following basis:

(a)  you agree that the amount of the payment made in accordance with this letter will be set off against any claim or claims which you had, have or may have against X, and its contractors arising from or in connection with any disturbance or impact as a result of the Project;

(b)  you confirm the information you have provided for the purposes of assessment of our circumstances is true, accurate and complete;

(c)  you have had the opportunity to carefully consider this matter and obtained all necessary advice; and

(d)  you agree to keep confidential the matters disclosed in this letter.

If you agree to these terms, please sign and execute this letter...

A copy of the letter and the Deed Poll for execution was provided as part of the private ruling application and forms part of the basis of the decision.

Between December 20XX and May 20XX, you received the X payments, each accompanied by letters identical to the notice provided as part of the private ruling:

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 6-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

Reasons for decision

Income Tax

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year.

An amount is ordinary income if it meets the ordinary meaning of income while an amount is statutory income if it is not ordinary income but is specifically included in assessable income by a provision of the taxation legislation.

An ex gratia payment is one that is given as a favour or gift.

The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning. Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:

·   There is a transfer of the beneficial interest in property

·   The transfer is made voluntarily

·   The transfer arises by way of benefaction, and

·   No material benefit or advantage is received by the giver by way of return.

After considering the full circumstances of your ex gratia payment it is considered that the payment is not a true 'gift', but rather paid to you to compensate you for the economic loss suffered by the business caused by the ongoing construction.

When you signed the Deed Poll you agreed that

"the amount of the payment ... would be set off against any claim or claims which you had, have or may have against the Crown in right of the State of New South Wales and all its NSW Government agencies, including Transport for NSW, and its contractors arising from or in connection with any disturbance or impact as a result of the Project".

In any case, ATO Interpretative Decision ATO ID 2003/263 demonstrates that an 'ex gratia' payment can be considered income. In ATO ID 2003/263 the payer had no obligation to make the payment that they did but it was considered to be income of the recipient as the payment was meant to substitute for part of the recipient's salary.

Taxation Determination TD 93/58 states that a lump sum compensation or settlement payment is considered to be ordinary income if the payment is in relation to claims for loss of income.

Section 6-20 of the ITAA 1997 provides that ordinary income is exempt income if it is made exempt by a provision of either the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997, or if it is excluded by either Act from being assessable income either expressly or by implication; statutory income is exempt only if it is made exempt by a provision of either Act outside of Division 6 of the ITAA 1997.

In your case, you were required to demonstrate a financial downturn (economic loss) suffered by your business caused by the ongoing construction in order to be eligible for any assistance payments. As such, it is considered the ex-gratia payments you received were made to you in relation to your loss of business income, hence considered to be ordinary income. There is no specific provision in ITAA 1936 or ITAA 1997 that excludes the ex-gratia payments you received from being assessable income, therefore the ex-gratia payments are not considered exempt income.

Therefore, the 'ex-gratia' payments will be included in your assessable income in the years the payments were received.

GST

GST is payable on any taxable supplies that you make. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) outlines the requirements of a taxable supply and the first requirement is that you make "the supply for consideration".

To satisfy this requirement, the ex-gratia payments must have been made for an identifiable supply. For GST purposes, a supply is defined very widely as "any form of supply whatsoever" and includes an entry (or release from) an obligation to do anything (section 9-10 of the GST Act).

The notices provided by X in relation to the ex-gratia payments provided that the payments were to be made on a number of bases including that you agree

·         the ex-gratia payments must be used to set off against any past and future claim or claims against X; and

·         to keep the information of the notice confidential.

We do not consider that any of the bases (either by themselves, in combination with one or more bases or altogether) are a supply or supplies for GST purposes. Our view on what constitutes a supply is set out in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies. In the ruling, we stated that an entity will make a supply when it provides "something of value to another entity" (paragraph 71 of GSTR 2006/9). The bases for payment are not supplies of something of "value" from you to the Transport for NSW. They are conditions or terms for the receipt of the ex-gratia payments.

Further, an ex-gratia payment is commonly understood as a payment "that is given as a favour or giftand not because it is legally necessary". The factsheet outlining the scheme for payment of the ex-gratia payments confirms this by stating that the payments are to provide" targeted assistance" to affected businesses and not for any supply. In addition, the notices advising entitlement to the ex-gratia payments also clearly show that the payments were not made in connection with the surrender of any of your rights to make claims against X or its agencies by providing that the payments must be set off for any payments made as a result of any successful claim(s).

In these circumstances, we do not consider that the ex-gratia payments were made by X for an identifiable supply. Therefore, you have not made a taxable supply and there is no liability to GST in relation to the payments. You should not issue any tax invoices for the payments stating it is a taxable supply or that it includes GST. You should also not enter into a recipient created tax invoice (RCTI) agreement for X to issue you with RCTIs.