Edited version of your written advice

Authorisation Number: 1012813210832

Ruling

Subject: GST and supply of water

Question

Is the Charge received by Entity A, consideration for a GST-free supply of water under subdivision 38-I of the GST Act?

Answer

Yes

Relevant facts and circumstances

Entity A is a government entity.

The primary function of Entity A is to provide services for the:

• supply of water by means of reticulated systems;

• storage, treatment and supply of bulk water;

• removal and treatment of wastewater by means of sewerage systems.

Entity A is registered for GST.

Area B Water Supply Scheme

Area B is a suburb located in Australia.

Area B has always received its water supply from private water suppliers. In 20XX, the current private water supplier ceased trading. As a result, Entity A negotiated with the supplier to operate and maintain its water network for a period of 12 months (on a cost recovery basis) in order to ensure residents in Area B continued to be supplied with water.

Given the short-term nature of the arrangement, Entity A investigated solutions to provide the residents of Area B with the opportunity to connect to the mains water system, that is, the provision of sustainable long term water supply.

The solution to deliver a sustainable, secure and safe drinking water supply to the residents of the Area B for the longer term, has been designed to largely use the existing water infrastructure with additional new components (upgrade existing water assets, install pump stations and construct new water mains). This water will meet or exceed all relevant public health, environmental and other regulatory requirements.

Specifically, apart from upgrading certain parts of existing water pipelines and infrastructure, the following new components will be integrated:

• Two booster pump stations - required to pressurise the water network so that there is sufficient pressure to enable the flow of water when the tap is turned on.

• New isolating valves - required to be installed to create new pressure zones.

• New mains pipeline - required to be installed to either upgrade existing pipelines or to connect new areas of Area B to the network.

• Individual Water meters - required to be installed on properties, these meters will remain the property of Entity A.

• New water tank - required for storage.

The Charge

For this scheme to be implemented, Entity A requires individual Area B property owners (Area B residents) to make a capital contribution towards the infrastructure. This contribution is known as the Charge.

This fee is not a regulated fee and is not imposed under an Australian law (that is, Division 8l of the GST Act does not apply).

There are two options in relation to payment of the Charge Area B residents. Area B residents may:

• make a one off upfront payment (discounted amount to encourage Area B residents to participate in the scheme);

• make an annual payment for a period of X years.

If certain Area B residents decide not to participate in the scheme now, but wish to do so in the future, the Charge would be higher plus the consumer price index (CPI) (that is, the Charge will increase annually based on CPI).  

If Area B residents do not take up the offer, they can continue to receive bore/rain water supplies through a private supplier. However, the agreement between Entity A and the current supplier to supply water to Area B residents will expire/cease in 12 months.

The Charge has been calculated with reference to the cost of infrastructure that must be provided to enable Area B residents to physically connect to the water main. The Charge is payable by the end user who, in this case, is not a developer but rather the residents of Area B.

There is no cash contribution or transfer of capital works for permits to develop land or granting of approval for building or development or to obtain various rights. There is no developer arrangement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Division 38-I

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 38-285

Reasons for decision

Under section 38-285 of the GST Act, a supply of water is GST-free. However, a supply of water is not GST-free under Subdivision 38-I of the GST Act if it is supplied in a container, or transferred into a container, that has a capacity of less than 100 litres. A supply of a right to receive a GST-free supply, such as a GST-free supply of water, is also GST-free. 

Goods and Services Tax Ruling GSTR 2000/25 Goods and service tax: GST-free supplies of water, sewerage and sewerage-like services, storm water draining services and emptying of a septic tank (GSTR 2000/25) explains the Commissioner's view of what activities are covered by Subdivision 38-I of the GST Act.

According to paragraph 20 of GSTR 2000/25, 'a supply of water' in section 38-285, refers to the delivery or the making available of water, as goods, to a recipient's premises. It means the change in ownership or control and transfer of physical possession of water from a supplier to a recipient. 

Paragraph 21 of GSTR 2000/25 provides that a 'supply of water' is the provision of tangible personal property - goods. In other words, the supply of water means the change in ownership or control and transfer of physical possession of water from a supplier to a recipient.

Paragraphs 22 and 23 of GSTR 200/25 states:

22. In an urban environment, the delivery of water may occur through reticulated pipes that provide a continuously available supply of water at adequate pressure. It may also occur through other means, such as by access to natural watercourses and aquifers, access to canal and channel systems, or by delivery by road vehicle to the storage facility of recipients not serviced by reticulated pipes. Access to water systems can be provided by the opening of an outlet to obtain irrigation water or by pumping water from a dam directly into a recipient's premises.

23. A supply of water to an end recipient through reticulated pipes is made at that part of the recipient's premises where the supplier's responsibility for the supply ceases. This is the point of supply to end recipients. In an urban environment, a supplier's responsibility for the supply of water usually ceases at the water meter, a property boundary or a point close to a property boundary. For end recipients receiving water through a canal and channel system, a supplier's responsibility usually ceases at that part of the system where the flow of water is physically regulated or timed by the supplier, for example, at an irrigation outlet. Appendix 1 shows a schematic view of how water may be delivered.

Paragraph 24 of GSTR 2000/25 provides that activities performed by the supplier of water, up to and including the point of supply to the recipient of water, are GST-free if they are integral to the physical delivery of water to the recipient. Paragraph 24 of GSTR 200/25 provides the following to be GST-free:

• initial connection, re-connection, disconnection, water meter installation, and tapping and tee insertion;

• irrigation channel water scheduling and channel attendance (including channelling from natural water courses);

• irrigation channel maintenance up to and including the point of supply (where it is charged to the water supply recipient); and

• water meter reading and testing.

Paragraphs 66 to 70 of GSTR 2000/25 states the following in relation to charges for GST-free supplies:

GST-free charges made by suppliers of water, sewerage or drainage services

Standard ongoing fees

67. Volumetric charges and use fees for the supply of water, sewerage or drainage services (fees charged to water, sewerage or drainage service recipients on a use basis) and fixed periodic charges (often termed access charges , or fees), are GST-free.

Valuation based charges

68. Charges or fees for the making of Subdivision 38-I supplies that are calculated by reference to land values, meter size or a level of capital improvement to land, either in their own right or in combination with variable use, fixed fee or other fees, are GST-free.

Facilities charges

69. A fee for the supply of sewerage services based on the number of flushing devices is a fee for a GST-free supply of sewerage services.

Irregular fees

70. A fee charged by a supplier of water to cover a connection from the border of the recipient's property to an adjacent existing water, sewer or storm water main or pipe controlled by the supplier is consideration for a GST-free supply. This fee may include the installation of a meter on the supplier's property, and tapping and tee insertion into the main pipe.

Your activity of upgrading the existing water pipelines and installing new components like booster pump stations, isolating valves, mains pipeline, water meters and water tank is integral to your physical delivery of water up to and including the point of supply to Area B residents. Therefore you are making a supply of GST-free water to the residents of Area B. As the Charge is consideration for this supply, it will not be subject to GST.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).