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Edited version of private advice
Authorisation Number: 1012638466130
Ruling
Subject: GST and compensation payments
Question
Are payments received for compensation subject to goods and services tax (GST)?
Answer
No, the payments received are not subject to GST.
Relevant facts and circumstances
The payee received payments for compensation.
The payments were not for services provided by the payee.
The payee is registered for GST.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 9-40
A New Tax System (Goods and Services Tax) Act 1999 section 9-10
A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(1)
A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(2)
A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1)
Reasons for decision
Unless otherwise stated, all legislative references in this Ruling are to the A New Tax System (Goods and Services Tax) Act 1999.
Under section 9-40, an entity must pay GST on any taxable supply it makes.
A supply is a taxable supply if, pursuant to section 9-5:
• an entity makes a supply for consideration
• the supply is made in the course or furtherance of an enterprise that the entity carries on
• the supply is connected with Australia, and
• the entity is registered or required to be registered for GST.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
The first criterion that needs to be determined is whether there is a supply for consideration.
The meaning of 'supply' is given in section 9-10. Subsection 9-10(1) states that a supply 'is any form of supply whatsoever'. Without limiting subsection 9-10(1), subsection 9-10(2) provides that a supply includes:
• a supply of goods
• a supply of services
• a provision of advice or information
• a creation, grant, transfer, assignment or surrender of any right, and
• an entry into, or release from, an obligation:
• to do anything, or
• to refrain from an act, or
• to tolerate an act or situation, or
• any combination of any 2 or more of the matters referred to in subsection 9-10(2).
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 server' 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 the 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'.
The term 'consideration' is defined in subsection 9-15(1) so as to include:
• any payment, or any act or forbearance, in connection with a supply of anything' (paragraph 9-15(1)(a), and
• any payment, or any act or forbearance, in response to or for the inducement of a supply of anything (paragraph 9-15(1)(b)).
The payments are payments for compensation and not payments for services provided by the payee. Therefore the compensation payments received are not consideration for supplies made by the payee.
The question that now arises is whether the payments are consideration for any other supply made by the payee.
Of relevance to this case is paragraph 80 of GSTR 2006/9 which discusses the 'extinguishment of real property rights' and states that 'various government authorities are empowered by legislation to acquire an interest in real property'.
In relation to the vesting of an interest in land in a government authority, paragraphs 81 and 82 of GSTR 2006/9 state:
81. …
The entity whose interest in the land is extinguished is compensated for the loss of that interest. That entity may agree to the compensation determined by the Valuer-General and execute a form of release. …
82. The effect of the gazettal notice is that the legal ownership of the land, described in the notice, is vested in the authority acquiring the land, and that the land becomes freed from any other interests. The entity's interest in the land, whether legal or equitable, is extinguished. … In cases where land vests in the authority as a result of the authority seeking to acquire the land, and initiating the compulsory acquisition process pursuant to its statutory right, then the owner does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.
Paragraphs 85 to 90 of GSTR 2006/9 sets out an example of an acquisition of an interest in land by compulsory acquisition and relevantly states:
85. A government authority is compulsorily acquiring land and interests relating to that land, including the native title rights under a particular statute. The effect of compulsory acquisition is that every registered and unregistered interest in the land is extinguished, and each person who formerly held such an interest has that holding converted into a claim for compensation.
86. As required by the statute, the authority has made a public announcement that it is acquiring the land, and as a result, a number of groups of claimants have registered their respective native title over the land.
87. The authority has negotiated with each of the claimant groups as required by the statute, as to just compensation for the extinguishment of their rights over the land, and has entered into a deed with them. …
88. Although the claimants have agreed to accept the compulsory acquisition and the amount of the compensation, the agreement does not cause the claimant's rights to be extinguished. These rights over the land are extinguished when all the limitations, reservations and restrictions over the land are revoked by the operation of the statute. The claimants are not making a supply of surrendering their rights.
89. It may be argued that the native title claimants are making a supply of entering into an obligation to withdraw any objections made under the relevant native title statute. However, no part of the compensation is consideration for a supply of withdrawing objections to the compulsory acquisition. The compensation relates to the loss suffered by the claimants on the extinguishment of their interest in the land.
The compensation payments received by the payee are not a supply as discussed above.
Consequently, the payee will not be liable for GST in relation to the compensation payments.
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