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Ruling

Subject: GST and mining tenements and compensation payments

Question

Are you liable for GST in relation to the compensation payment you receive from a mining company pursuant to a Compensation Agreement?

Answer

No.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· You, are a partnership registered for GST.

· You are the landholders of the Land (Land).

· You conduct a primary production business on the Land;

· Parts of the Land fall within an area covered by mining tenements held by a company granted under the relevant mining act (MRA);

· You have entered into a Compensation Agreement (the Agreement) with the company;

· An Item in the Agreement provides that the company shall pay Compensation to you;

· You provided a copy of the Agreement in support of this private ruling application.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section: 9-5

Section 9-10

Section 9-15

Reasons for decision

You have advised that under the terms of the Agreement you will receive an amount of money from the company as compensation under the terms of a Compensation Agreement. You are seeking advice in relation to whether you are liable for GST in relation to this payment.

Specifically, we need to consider whether the payment is consideration for a taxable supply that you make.

Section 9-5 of the GST Act provides that you make a taxable supply where all of the following conditions are met:

§ you make the supply for consideration

§ the supply is made in the course or furtherance of an enterprise that you carry on

§ the supply is connected with Australia; and

§ you are registered or required to be registered for GST.

However, a supply is not taxable to the extent that it is GST-free or input taxed.

The term 'supply' is broadly defined in section 9-10(1) of the GST Act to include (amongst other things):

§ a grant, assignment or surrender of real property (paragraph 9-10(1)(d))

§ a creation, grant, transfer, assignment or surrender of any right (paragraph 9-10(1)(e))

§ An entry into, or release from, an obligation (paragraph 9-10(1)(g)):

§ to do anything; or

§ to refrain from an act or

§ to tolerate an act or situation

§ Any combination of any 2 or more of the matters referred to in paragraphs (a) to (g) (paragraph 9-10(1)(h)).

Goods and Services Tax Ruling GSTR 2006/9 examines the meaning of 'supply' in the GST Act.

Paragraph 71 of GSTR 2006/9 explains that the term 'supply' has been held (in overseas jurisdictions) to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. The Commissioner applies this meaning in considering the meaning of 'supply' in the GST Act at paragraph 41 of GSTR 2004/9 a ruling which is about assumption of liabilities:

In adopting the ordinary and natural meaning of the term 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision', 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'.

Supply of land

A transfer or surrender of land is covered by the definition of 'supply' in section 9-10 of the GST Act.

The Agreement acknowledges that you agree not to obstruct, interfere with or hinder in any way access to the Land and the carrying out of activities on the Land authorised under the mining lease. and also that you agree that all access to the mining lease will be through the neighbouring property, and that no access will be provided through the Property unless agreed by the you and appropriate notice has been provided by the company to the you.

The relevant rights to conduct activities on the Land are created by virtue of the statutory rights under the Mining Leases, rather than as a consequence of anything (such as a licence granted by you for the company to use the land) that is 'furnished' or 'provided' by you. Similarly, the company's right to access and cross the Access land is created by the statutory rights under the MRA.

In these circumstances, you do not take any action to cause your interest in the Land or Access Land to be transferred or surrendered to the company. Further, it is our understanding (from the information extracted from the Government website) that it would be an offence, without a reasonable excuse, for anyone to obstruct a resource company from entering or crossing land to carry out authorised activities, or carrying out authorised activities subject to the Mining Lease. We understand that the only thing that you are free to do is to ask for reasonable and relevant conditions to be imposed.

As you do not transfer or surrender your rights to the land and do not take any form of positive action to cause anything else to be supplied to the company, it follows that you are not making a supply of land under section 9-10 of the GST Act.

Compensation payments and damages

To compensate the landholder, the holder of an Mining tenement is liable to pay compensation to each owner or occupier of land or access land that is within the Mining Lease, for any 'compensatable effect' suffered by the landholder due to the activities done under the authority of the Mining Lease.

Compensation is also payable for consequential damage the owner or occupier incurs because of 'compensatable effects' caused by authorised activities within the Mining Lease.

In this case, the payment of the money is provided by the company to you, to compensate you for any damages caused (or likely to be caused) to your land, and any inconvenience suffered (or likely to be suffered) by you as a consequence of the activities carried out by the company on your land.

Goods and Services Tax Ruling GSTR 2001/4 (which deals with the GST consequences of court orders and out-of-court settlements) states in relation to compensation and damages:

71. Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury…

…

73. The most common form of remedy is a claim for damages arising out of the termination or breach of a contract or for some wrong or injury suffered. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss or injury in itself does not constitute a supply under section 9-10 of the GST Act.

Although the explanation in paragraphs 71 and 73 of GSTR 2001/4 is made in respect of court orders and out-of-court settlements, the underlying principles are equally relevant in this case.

Paragraphs 110 and 111 of GSTR 2001/4 further explain:

110. With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the aggrieved party…

111. If a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement.

In applying the above principles to your circumstances, any claim for damages (or payment that you receive as a consequence of such claim) due to activities to be conducted by the company on your land, does not constitute a supply under section 9-10 of the GST Act.

Discontinuance supplies

A clause of the Agreement states that the payments that are or may be made under that clause are in full and final satisfaction of all Compensation Entitlements for the matters set out in the agreement.

This raises the issue of 'discontinuance supplies' as a 'supply' includes a surrender of any right (under paragraph 9-10(2)(e)) and an entry into, or release from, an obligation to do anything, or to refrain from an act (paragraph 9-10(2)(g) of the GST Act).

The Tax Office view in GSTR 2001/4 is that such conditions of settlement can create supplies for GST purposes. Such supplies are referred to as 'discontinuance supplies'. However, whether a discontinuance supply is a taxable supply would depend on the requirements of section 9-5 of the GST Act are met.

In this respect, paragraphs 106 to 107 and 109 of GSTR 2001/4 state:

106 Where the only supply in relation to an out-of-court settlement is a 'discontinuance' supply, it will typically be because the subject of the dispute is a damages claim. In such a case, the payment made under the settlement would be in respect of that claim and not have a sufficient nexus with the discontinuance supply.

107. In most instances, a 'discontinuance' supply will not have a separately ascribed value and will merely be an inherent part of the legal machinery to add finality to a dispute which does not give rise to additional payment in its own right. They are in the nature of a term or condition of the settlement, rather than being the subject of the settlement.

109. We consider that a payment made under a settlement deed may have a nexus with a discontinuance supply only if there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply.

As stated in paragraph 111 of GSTR 2001/4 where a payment is made to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement.

In this case, there is no 'earlier' or 'current' supply and we have determined that the compensation payment is made in relation to the settlement of any damages relating to activities conducted on the land pursuant to the Mining Leases. Consequently, the facts support that the substance of the payment is for 'damages' and does not have a nexus with any 'discontinuance' supply.

In summary:

The amount of money is not consideration for a supply of land as you are not granting, assigning or surrendering the land, nor is it for a supply of rights, or entry into any obligations with respect to the Land or Access land;

The amount of money is not consideration for any 'discontinuance' supply as any agreement to discontinue further action is merely a term of the Agreement and is not the subject of the claim. The payment of the money is paid as compensation for 'compensatable effects' as defined in the Agreement and the MRA. This is akin to a claim/payment for damages which is not a supply for GST purposes.

Consequently, you will not be liable for GST in relation to the compensation payment that you are entitled to receive from the company.

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