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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012859927527

Date of advice: 26 August 2015

Ruling

Subject: Goods and services tax (GST) and compensation and easements

Question 1

Is GST payable on the compensation you receive under the Compensation Agreement?

Answer

No.

Question 2

Is GST payable on the price entity X must pay for the easement?

Answer

Yes.

Question 3

Is GST payable on the payments made pursuant to the Option Agreement?

Answer

Yes, except for a particular payment.

Question 4

Is GST payable on the B compensation for the grant of the additional easement?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You carry on a farming business on a particular property

Entity X will carry on certain activities on this land.

In accordance with certain legislation, entity X is required to pay you compensation for damage caused by activities carried on by entity X on the land and entity X's development of the land.

You own two parcels of land on which you carry on your farming business. One parcel of land will be the subject of a new easement which will benefit entity X. The other parcel of land is subject to an existing easement which benefits entity X. This is an easement appurtenant to the commercial facility (appurtenant easement), which was owned by another company at the time the easement was granted. Entity X acquired the commercial facility from that other company a number of years ago and consequently became the holder of the appurtenant easement on your land.

In order for entity X to obtain a licence under the legislation, it is necessary for entity X to acquire an interest from the relevant landowners. The Minister cannot issue entity X with a licence unless the Minister is satisfied that entity X has acquired the necessary interests over private land affected by the proposed development.

The acquisition of the interest may be done either by:

The legislation provides that an easement which is purchased or acquired under the relevant legislative division is an easement in gross. Easements in gross are only available where provided for by statute.

Generally speaking, companies in X's industry prefer to acquire easements (over other forms of land tenure) for a number of reasons, including that the easements confer durable rights to install and access the items which (particularly when registered) can be enforced despite changes of land ownership.

It is not mandatory to register an easement. However, in order to afford entity X with the best legal protection possible in relation to its rights under the easement, it is imperative that easements are registered. The legislation does not contain mechanisms for registration of the easement. Therefore, the processes and requirements of the relevant property transfer legislation must be followed in order to effect registration.

The property transfer legislation provides that a registered proprietor may transfer an interest in land by an instrument in an approved form. Under this legislation, upon registration of the transfer the interest as set out in the instrument will pass to the transferee.

The approved form for a creation of easement under the property transfer legislation is (form name A). The approved form is the only means available to register easements in these circumstances.

Under the legislation, a compulsory acquisition cannot proceed unless the Minister is satisfied that entity X has taken all reasonable steps to reach an agreement directly with the affected owners for acquisition of the necessary interests. Therefore, entity X is required by statute to attempt to reach an agreement with landowners to acquire an interest over their property. The proposed easements to be entered into with the landowners reflect the agreements entity X has reached with those landowners.

Under the legislation, there is a statutory requirement for entity X to provide compensation to land owners, including you, whether an easement is acquired by way of direct agreement with you or by compulsory acquisition from you under the legislation.

Consistent with the legislation, amounts of compensation are calculated with reference to certain damage caused by the existence of the easement.

Under the legislation, owners and occupiers of land, such as you, are each entitled to compensation from entity X in respect of activities entity X carries on on the land, which cause damage.

The legislation provides that the compensation may be determined by agreement directly between the parties. If the parties fail to reach an agreement, the amount can be determined by way of application to courts.

Under the Compensation Agreement, entity X agrees to pay you compensation for damage caused by its activities on your land.

You are currently in the process of negotiating some of the terms of the compensation agreements with entity X, but you and X have agreed in principle on the amounts of compensation under each of the Compensation Agreements.

Generally speaking, under the Compensation Agreement, when Origin has properly completed its activities, you are required to provide an acknowledgment and waiver which states you waive any right which you might otherwise have now or would have in the future to claim that X has not performed its obligations under the Compensation Agreement and that you shall not make any such claim.

Under the Option Agreement, you grant entity X an option to acquire an easement on one parcel of land, and the form of the easement is attached to the Option Agreement as Form A. Payments to you under the Option Agreement include an Option Fee and certain other payments, such as reimbursement of certain costs and a payment in respect of a damages claim.

After entity X exercises the option under the Option Agreement, you are required to execute a Form A. Entity X is then required to make a payment to you under Form A being the consideration for the grant of the easement. The Option Agreement describes the timing of this payment under Form A and refers to the payment as name A. The Option Agreement states that the name A payment is a certain amount (which may be subject to specified changes including, for example, if the option is exercised more than X years after the date of the Option Agreement or if the actual location of the easement strip materially differs from the original location).

Under Form A, you agree to grant entity X an easement in return for consideration set out in that contract.

Name A is a separate amount to the amounts to be specified in the Compensation Agreement.

The new easement is actively sought by entity X. It is not 'volunteered' by you - instead you were approached by entity X in the first instance. This is distinguishable from a 'commercial scenario' where a land owner actively seeks to make supplies or to participate in the arrangements (cf Hornsby Shire Council v Commissioner of Taxation [2008] AATA 1060). The negotiations for your grant of the new easement are part of a statutory framework in which entity X could have compulsorily acquired the easement if it could not reach a direct agreement with you.

It is intended that:

In addition to the Compensation Agreements, X also seeks to acquire an additional easement for a strip of land that adjoins the existing appurtenant easement. X will pay you amount B as compensation for the acquisition of this easement. This B payment is a separate amount to the name A payment, as it is compensation for the grant of an additional easement.

Relevant legislative provisions

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.

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 Paragraph 9-10(2)(d).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-10(2)(e).

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decisions

Question 1

Summary

GST is not payable on the compensation paid under the Compensation Agreement because it is a payment in respect of a compensation claim for damages and is not consideration for any supply.

Detailed reasoning

GST is payable on taxable supplies.

In accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act (GST Act), a supplier makes a taxable supply if:

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

The term 'supply' is defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'.

'Supply' includes:

Goods and Services Tax Ruling GSTR 2001/4 deals with the GST consequences of court orders and out of court settlements and discusses the meaning of 'supply for consideration'.

Paragraph 7 of GSTR 2001/4 states:

Paragraph 22 of GSTR 2001/4 provides that a supply is essentially 'something which passes from one entity to another'.

Further, paragraph 25 of GSTR 2001/4 states:

Therefore, the term 'supply' covers not only the subject of the transaction - the thing that passes - but also includes the action by which the thing passes from one entity to another. In addition, by use of the word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) of the GST Act, there is a requirement for a supplier to take some action to cause a supply to be made. As such the landowners must take some positive action or do something for a supply to occur.

Paragraphs 89 to 91 of GSTR 2001/4 discuss the concept of 'consideration' and the nexus test. They state:

Paragraphs 44 to 55 and 106, 107 and 109 of GSTR 2001/4 discuss the three categories of supply that may be made in relation to a court or out-of-court settlements. They state:

Paragraph 73 of GSTR 2001/4 discusses damages. It states:

Paragraphs 110 and 111 of GSTR 2001/4 further discuss damages. They state:

You and entity X will be parties to what is considered an out-of-court settlement under GST law.

The damage suffered by you as a result of entity X's activities on your land is not a supply.

The compensation under the Compensation Agreement is not consideration for an earlier or current supply.

Additionally, the payment to the landowners under the Compensation Agreement is in respect of a compensation claim for any damages caused by the activities of entity X on the land. Hence, although you make a discontinuance supply to entity X, the compensation under the Compensation Agreement is not consideration for this supply.

Therefore, the compensation under the Compensation Agreement is not consideration for a supply. Hence, the requirement of paragraph 9-5(a) of the GST Act is not met. As the requirements of section 9-5 of the GST Act are not met, you do not make a taxable supply in return for the compensation paid under the Compensation Agreement. Therefore, GST is not payable on the compensation payments made under the Compensation Agreement.

Question 2

Summary

GST is payable on the name A payment because it is consideration for a taxable supply of real property. The requirements of section 9-5 of the GST Act are met.

Detailed reasoning

Paragraphs 81 to 91 of GSTR 2006/9 discuss compulsory acquisitions of real property. They state:

In accordance with paragraph 95 of Goods and Services Tax Ruling GSTR 2001/6, one needs to examine the character of the transaction that occurs and not what might have happened if it had been arranged differently (for example, entity X could have acquired an easement through compulsory acquisition if you did not enter into an agreement to grant an easement) for the purposes of identifying whether a payment is consideration for a supply.

In accordance with paragraph 64 of Goods and Services Tax Ruling GSTR 2009/3, an amount can have both the character of damages, a penalty or compensation and also be consideration in connection with a supply.

Although entity X would have compulsorily acquired an interest in your case if you did not enter into a contract to grant an easement, you will still make a supply to entity X in return for the price payable by entity X for the easement if entity X exercises its right to acquire the easement.

In the Re Hornsby Shire Council v. Commissioner of Taxation case, the landowner took positive action to cause an interest to be acquired by another entity. Similarly, you will have taken some positive action to cause an easement to be created in favour of entity X by entering into the Option Agreement and the contract to grant the easement. You will have made a supply of real property. We do not consider the fact that entity X approached you to grant an easement to it means that you will not make a supply of a real property in relation to the easement

The agreed consideration for your supply of the real property would include the name A payment. The consideration for this supply would also include any reimbursement you receive in respect of certain costs (as set out in the Option Agreement). There is a close coupling between the supply of the real property and these payments.

Support for the view that you will supply the real property for consideration can be found in the court case, SXGX v. Commissioner of Taxation [2011] AATA 110. In that court case, a car dealer held land for use in his car dealing enterprise. He agreed to sell the land to the government. The land was expected to be compulsorily acquired if the car dealer did not sell it to the government. The judge held that the sale of the land to the government was a supply made for consideration, even though the land was expected to be compulsorily acquired had the car dealer not agreed to sell the land to the government.

Therefore, if entity X exercises its option to acquire the easement, you will meet the requirement of paragraph 9-5(a) of the GST Act.

In accordance with paragraph 64 of GSTR 2009/3, the fact that the price for the easement would have the character of compensation (as it would compensate for loss you suffer as a result of the easement) does not mean that it cannot be consideration for a supply.

In accordance with issue 15.1.18 of the Property & Construction Industry Partnership - issues register:

Your supply of the real property is connected with your farming business and is incidental to your farming business because:

Therefore, you will supply real property to entity X in the course or furtherance of your farming enterprise.

SXGX v. Commissioner of Taxation also supports the view that you will supply the real property in the course or furtherance of the enterprise you carry on. The judge in that case held that the sale of the land to the government was a supply made in the course or furtherance of the car dealer's car dealing enterprise.

As you will supply real property in the course or furtherance of your farming enterprise, you meet the requirement of paragraph 9-5(b) of the GST Act.

You would also meet the requirements of paragraphs 9-5(c) and 9-5(d) of the GST Act. This is because:

There are no provisions of the GST Act under which your supply of the real property would be GST-free or input taxed.

Therefore, if entity X exercises the option to acquire the easement, you will make a taxable supply to entity X in return for the name A payment because all of the requirements of section 9-5 of the GST Act would be met. Hence, you would have a GST liability on this payment. You would also have a GST liability on the reimbursement you receive in respect of certain costs (as set out in the Option Agreement).

Question 3

Summary

GST is payable on the Option Fee because it is consideration for a taxable supply of an option. The requirements of section 9-5 of the GST Act are met.

Detailed reasoning

You have granted an option to acquire an easement. Therefore, you have supplied a real property right.

The consideration for this supply includes the Option Fee.

The consideration for the supply of the option also includes certain other payments set out in the Option Agreement, such as reimbursement of certain costs.

A number of items are further consideration for the supply of the real property in return for the name A payment.

You meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act in respect of your supply of the option. This is because:

There are no provisions of the GST Act under which your supply of the option is GST-free or input taxed.

Therefore, your supply of the option is a taxable supply as all of the requirements of section 9-5 of the GST Act are met.

As explained above, your supply of the real property in return for the name A payment is also a taxable supply.

Therefore, you have made taxable supplies to entity X in return for the Option Fee etc because all of the requirements of section 9-5 of the GST Act are met. Hence, you have a GST liability on the following payments made under the Option Agreement which are consideration for the supply of the option or the supply of the real property:

(Deleted the list)

You do not have a GST liability on the certain payment (if any) paid under the Option Agreement because this payment would be in respect of a damages claim and would not have a sufficient nexus with the supply of the option, real property or any other supply.

Question 4

GST is payable on the B compensation for the same reasons as why GST is payable on the name A payment.

Summary relating to entire arrangement

GST is payable on all of the payments except for:


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