Edited version of your written advice

Authorisation Number: 1013072338334

Date of advice: 29 August 2016

Ruling

Subject: CGT - compensation

Issue 1 - Income Tax

Question 1

Are accounting fees to the extent that they relate to your tax affairs deductible under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the legal and valuation fees incurred in relation to negotiating the agreements deductible under section 8-1 of the ITAA 1997?

Answer

No

Question 3

Will the reimbursement of deductible accounting fees incurred in relation to negotiating the agreements be assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes

Question 4

Should the amounts received under the Agreement to grant Easement represent capital proceeds of a capital gains tax (CGT) event A1 from a part disposal of your land?

Answer

Yes

Question 5

Will the capital gain made in respect of the Agreement to grant Easement be eligible for the CGT 50% general discount under Subdivision 115-A of the ITAA 1997?

Answer

Yes

Question 6

Where a capital gain arises on the part disposal of the land, are you able to access the small business capital gains tax (CGT) concessions where the other conditions for the concessions are satisfied?

Answer

Yes

Question 7

Do the payments under the Compensation Deed form part of your assessable income?

Answer

No

Question 8

Do the payments under the Compensation Deed reduce the cost base of the land for any future capital gain under section 110-40 or section 110-45 of the ITAA 1997?

Answer

Yes.

Issue 2 - Goods and Services Tax (GST)

Question 1

Is GST payable by you on the compensation you receive under the Agreement to grant Easements?

Answer

Yes.

Question 2

Is GST payable by you on the compensation you receive under the Compensation Deed?

Answer

Yes.

Question 3

Are you entitled to input tax credits for acquisitions you make that are associated with negotiating and obtaining the compensation and making alterations to your property necessitated by the granting of the easements or the impact of the activities, even if those acquisitions do not relate to making specific taxable supplies?

Advice

Yes, provided that the supplies made to you are subject to GST.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

You own property ('the Land'). You operate a business on this property as a partnership and are registered for GST.

You acquired the Land after 19 September 1985.

Entity X has carried out activities on the Land. Entity X is a constructing authority.

Agreement to grant Easements

The 'Agreement to grant Easements' contains the following terms:

• Entity X is a constructing authority for the purposes of the Acquisition of Land Act 1967 (ALA)

• Entity X is responsible for the delivery of the project

• The easements are required for the Project.

• The claimants are the registered owners of the land to be burdened by the easements.

• Entity X can legally compulsorily acquire the easements under the ALA. Entity X has issued a NIR (Notice of Intention to Resume) to the claimants. However, the Parties have negotiated this Agreement instead of Entity X exercising its compulsory acquisition powers.

• The claimants agree to grant, and Entity X agrees to accept, the easements subject to the terms of this Agreement.

• The parties have agreed on land access and on compensation payable to the claimants for impacts to the Claimants' land during construction of the project as recorded in this Agreement

ALA Act

Subsection 5(1) of the ALA states:

Land may be taken under and subject to this Act-

(a) where the constructing authority is the Crown, for any purpose set out in schedule 1; or

(b) where the constructing authority is a local government-

(i) for any purpose set out in schedule 1 which the local government

may lawfully carry out; or

(ii) for any purpose, including any function of local government, which

the local government is authorised or required by a provision of an Act other than this Act to carry out; or

(a) in the case of a constructing authority other than the Crown or a local

government-

(i) for any purpose set out in schedule 1 which that constructing authority may lawfully carry out; or

(ii) for any purpose which that constructing authority is authorised or required, by a provision of an Act other than this Act, to carry out.

Section 6 of the ALA states:

(1) When for any purpose it is not necessary that the constructing authority should take the whole estate in any land, but it is sufficient for such purpose to take an easement, the constructing authority may take such easement only and for that purpose the provisions of this Act shall apply as if the easement were land.

(2) Upon application in that behalf, payment of the prescribed fees, and the production to the land registry of the gazette copy of the gazette resumption notice, whereby an easement is taken affecting land under the Land Title Act 1994, the registrar of titles shall register such easement as prescribed by that Act, notwithstanding that such easement is not being annexed to or used and enjoyed together with any other land.

(3) The taking of an easement over land does not extinguish any interest in the land existing immediately before the easement is taken.

The Compensation Deed

The Compensation Deed contains the following terms:

• Clause 2(a) of the Compensation Deed states:

The claimants accept the compensation under all heads in full and final satisfaction of their entitlement to compensation for early access and off easement access and any impact to the land during construction of the project.

• Clause 4.1(a) of the Compensation Deed states:

The Claimants acknowledge that the Compensation includes an amount to enable Entity X to have off easement access to the Proposed Easement Areas, and once registered, the Easements, in accordance with this clause 4.1.

• Clause 4.1(b) of the Compensation deed states:

The Claimants grant to Entity X from the date of this Deed until the Construction Completion Date, an irrevocable licence, including a right to sub-licence to an Authorised Person, to enter on and use the Off Easement Area for works for the Project in accordance with this clause 4.1.

• The Compensation Deed does not specify any other supplies that you must make in return for the compensation paid under that Deed.

Accounting, legal and valuation fees

As part of the negotiation process with Entity X you sought advice from your accountant and lawyers and obtained an independent valuation for the compensatable effects of the electricity infrastructure activities on your Land. This allowed you to bargain with Entity X and obtain the best 'deal' in relation to your Land.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-5

Income Tax Assessment Act 1997 Paragraph 20-20(3)

Income Tax Assessment Act 1997 Section 20-30

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section110-40

Income Tax Assessment Act 1997 Section 110-45

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Division 152

Reasons for decision

Issue 1 - Income Tax

Questions 1 and 2 - Deductibility of accounting, legal and valuation expenses

Summary

The portion of the accounting fees which directly relate to managing your tax affairs are a deductible expense. The portion of accounting fees which are for services not directly related to managing your tax affairs, the valuation fees and the legal fees are not deductible expenses.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.

Section 25-5 of the ITAA 1997 allows a deduction for expenditure you incur to the extent that it is for:

• managing your tax affairs

• complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity

• the general interest charge or shortfall interest charge

• a penalty under Subdivision 162-D of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) which relates to situations where a taxpayer varies their instalment rate too low, or

• obtaining a valuation in accordance with section 30-212 (gifts of properties to deductible gift recipients) or 31-15 (entering into conservation covenants).

Accountancy fees which relate to your tax affairs are an allowable deduction. Where the services to which the fees relate go beyond managing your tax affairs, you must apportion the fees between the various purposes and only those services that directly relate to your tax affairs are deductible (Bartlett v FC of T; Falcetta v FC of T 2003 ATC 4962; [2003] FCA 1125)

Legal fees will be deductible where the nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v FC of T [1946] HCA 34; (1946) 72 CLR 634) (Hallstroms).

Hallstroms case involved a company incurring legal expenses in opposing the extension of a patent for a particular type of refrigerator which the taxpayer wished to manufacture and sell once the patent expired. The High Court found that the expenses met the positive limbs of section 8-1 of the ITAA 1997 and were not of a capital nature. The majority found that the advantage sought by the legal expenditure was a company that already manufactures refrigerators was able to manufacture a new model of refrigerator and did not result in any alteration of the structure of its business.

In your case, you have incurred legal and valuation expenses for the purpose of striking a bargain for the part disposal of your land and the disposal of a right to seek compensation. That is, the expenditure was incurred to ensure you got the best deal you could out of granting an easement to Entity X and for agreeing to forgo any future compensation claims. The deal was then formalised in the Agreement and Compensation Deed. The expenditure was not incurred for the purpose of ensuring that your current income structure of the business was not diminished. But for the easement being negotiated, none of the expenses would have been incurred.

The legal and valuation expenses are considered to be capital in nature and are not deductible expenses.

Question 3 - Assessability of reimbursed deductible accounting fees

Subsection 20-20(3) of the ITAA 1997 provides that an amount you have received as a recoupment of a loss of outgoing is an assessable recoupment if:

• you can deduct an amount for the loss or outgoing in the current year, or

• you have deducted or can deduct an amount for the loss or outgoing for an earlier income year

under a provision listed in section 20-30 of the ITAA 1997. Section 20-30 of the ITAA 1997 includes tax-related expenses deductible under section 25-5.

A reimbursement of accounting fees for which you deducted, or could claim a deduction for, in the current or earlier income year, will be an assessable recoupment and is required to be included in your assessable income in the year in which it is received.

Questions 5 to 7 - Grant of easement Agreement

Summary

The payment you received in relation to granting the easement is considered to be capital proceeds from the part disposal of the Land. If they result in a gain, it is assessable as a capital gain. A 50% discount may be applied to the gain under Division 115 of the ITAA 1997. You are able to apply the small business CGT concessions to the remaining capital gain provided you meet the basic conditions and any specific conditions relation to the small business CGT concession you wish to access.

Payments relating to the easements

An easement is a right over someone else's land or property. It is an asset which is created at the time it is granted.

The taxation treatment of a payment for the granting of an easement depends on whether the easement has been created by compulsory acquisition or as a voluntary action.

Taxation Ruling TR 93/7 at paragraph 4 states:

Compensation in respect of an easement created by statute in favour of a public authority cannot be said to have been received for the grant of the easement. The Land Acquisition (Just Terms Compensation) Act 1991 (NSW) and similar Acts in other jurisdictions enable public authorities to take land or an interest in land (including an easement) for specified purposes and confer on the affected landowner a right to compensation. In these circumstances, the landowner cannot be said to have created an asset as required for subsection 160M(6) of the Act to apply. The easement is created by operation of the relevant statute and is vested in the public authority. This constitutes a compulsory acquisition of the easement.

Note: subsection 160M(6) of the Income Tax Assessment Act 1936 referred to in the above paragraph has been replaced with section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997). The effect of both provisions is the same.

As stated above, TR 95/35 examines the treatment of any amount received in respect of a right to seek compensation in relation to an underlying asset. Where easements are acquired under statute, the underlying asset is the landowner's pre-existing land with its rights of ownership, including the right to exclude all others. This right to exclude all others is forfeited when the easement comes into existence.

Compensation received by a landowner for the loss of part of the rights of ownership is accepted as being consideration received in respect of the part disposal of the underlying asset (the land) (paragraph 8 of TR 93/7).

It is possible that a public authority that has the power to compulsorily acquire an easement by exercising a statutory power may enter into an agreement with the landowner to acquire the easement.

The Commissioner's view, in these situations, is the amount received takes on the same character as compensation for a compulsorily acquired easement. Thus, the consideration (compensation) for granting the easement is treated as being paid in respect of the part disposal of the land and not in respect of the grant of the easement (paragraphs 9 and 10 of TR 93/7).

It is accepted that Entity X has the legislative power to compulsorily acquire the easement. Thus, the payment you received from Entity X is considered to be capital proceeds for the part disposal of the Land. Any gain you made from the granting of the Easements is assessable as a capital gain.

Division 115 of ITAA 1997 - 50% discount

Under section 115-5 of the ITAA 1997 you make a discount capital gain if the following requirements are satisfied:

• you are an individual, a trust or a complying superannuation entity

• a capital gains tax (CGT) event happens to an asset you own

• the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

• you acquired the asset at least 12 months before the CGT event, and

• you did not choose to use the indexation method.

Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.

The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year unless reduced by other CGT concessions.

In your case, you are individuals who have owned the land on which the easement was registered for more than 12 months at the time of the CGT event. Thus, you are able to discount the resultant capital gain by 50%.

Small business CGT concessions

Division 152 of the ITAA 1997 allows small businesses to apply certain concessions where a CGT event happens in relation to a CGT asset in an income year which results in an assessable capital gain.

To access the concessions, the entity must meet the basic conditions contained in Subdivision 152-A. There are four small business concessions available and some have additional, specific concessions which must also be satisfied.

The four available small business concessions are:

• the 15 year exemption contained in Subdivision 152-B of the ITAA 1997

• the 50% reduction contained in Subdivision 152-C of the ITAA 1997

• the retirement concession contained in Subdivision 152-D of the ITAA 1997, and

• the roll-over contained in Subdivision 152-E of the ITAA 1997.

If you meet the basic conditions contained in Subdivision 152-A of the ITAA 1997 and any additional specific conditions as required by the specific small business CGT concession you wish to access, you will be entitled to apply the concessions to the gain from the part disposal of the land made by granting the Easement to Entity X.

Please note: The Commissioner has not ruled that you meet the basic or specific conditions for the small business CGT concessions.

Questions 7 & 8 - Payments under the Compensation Deed

Summary

The payments received under the Powerlink Compensation Deed will not form part of your assessable income. They are considered to be compensation received for the permanent reduction in value of the Land and will be treated as a reduction to the Land's cost base.

Detailed reasoning

Compensation payment as ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Compensation paid due to loss and damage of a capital asset in the process of a petroleum authority undertaking petroleum activities on a taxpayer's land is an isolated transaction. Whether a profit from an isolated transaction is ordinary assessable income according to ordinary concepts depends on the circumstances of the case. Profit from an isolated transaction is generally ordinary income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and

(b) the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction (paragraph 6 of Taxation Ruling TR 92/3).

Neither of the above elements apply in your situation. The compensation payments were made in accordance to the legislative provisions of the petroleum legislation.

Accordingly, the compensation payments paid under the Compensation Deed do not give rise to income according to ordinary concepts or to a profit arising from an isolated transaction. They are not assessable under section 6-5 of the ITAA 1997.

Compensation payments and the capital gains tax (CGT) provisions

Under section 6-10 of the ITAA 1997 some amounts that are not 'ordinary income' are included in a taxpayer's assessable income due to another provision of the tax law. These amounts are 'statutory income'. Statutory income may arise from CGT events as consequence of the eligible claimant being entitled to receive compensation and the loss or destruction of a CGT asset.

Taxation Ruling TR 95/35 provides the Commissioner's view as to the CGT consequences of receiving a compensation payment. The ruling states that it is necessary to identify the underlying asset to which the payment relates and what has occurred to that asset.

The underlying asset is the asset that, using a 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity.

If there is more than one underlying asset, the relevant asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset.

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying post-CGT asset, or part of an underlying post-CGT asset, of the taxpayer, the compensation represents consideration on the disposal of that asset. In these circumstances, the Commissioner considers that the amount is not consideration for the disposal of any other asset, such as the right to seek compensation.

If an amount of compensation is received by a taxpayer wholly in respect of permanent damage suffered to a post-CGT underlying asset of the taxpayer or for a permanent reduction in the value of a post-CGT underlying asset of the taxpayer, and there is no disposal of that underlying asset at the time of the receipt, we consider that the amount represents a recoupment of all or part of the total acquisition costs of the asset.

Accordingly, the total acquisition costs of the post-CGT asset should be reduced by the amount of the compensation. No capital gain or loss arises in respect of that asset until the taxpayer actually disposes of the underlying asset. If the compensation amount exceeds the total unindexed acquisition costs (including a deemed cost base) of the underlying asset, there are no CGT consequences in respect of the excess compensation amount.

In your case, you have and will continue to receive payments for the compensatable effects of the activities undertaken on your Land. The activities have resulted in the permanent damage to, or permanent reduction in the value of, the Land. You have not received compensation for loss of income or other economic benefits.

As you did not dispose of all or part of the affected Land there are no CGT consequences at the time of entering the Compensation Deed or receiving the compensation payments.

However, the cost base of the Land will be reduced by the value of the payments received and any gain or loss will crystallise at a later time when the Land is sold.

Issue 2 - Goods and Services Tax

Question 1

Summary

The compensation paid under the Agreement to grant Easements is consideration for a supply you make, that is, granting the easements. This supply is subject to GST.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) You make the supply for consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or required to be registered.

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

(*Denotes a term that is defined in section 195-1 of the GST Act)

Goods and Services Tax Ruling GSTR 2001/4 discuss the GST implications of court and out-of-court settlements.

Paragraph 21 of GSTR 2001/4 provides guidance on the meaning of 'supply for consideration'. It states:

21. A 'supply for consideration' is the first step towards there being a taxable supply. However, for there to be a supply for consideration, three fundamental criteria must be met:

(i) there must be a supply (see paragraph 22 onwards);

(ii) there must be a payment (see paragraph 74 onwards); and

(iii) there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration (see paragraph 100 onwards).

Paragraphs 71 to 73 and 111 of GSTR 2001/4 discuss damages payments. They state:

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.

72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the matter is resolved by a court or through negotiation.^F37

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.^F38

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.

Paragraph 48 of GSTR 2001/4 discusses current supplies. It states:

48. A new supply may be created by the terms of the settlement. In this Ruling, such a supply is referred to as a 'current supply'.

Paragraphs 71 to 91 of Goods and Services Tax Ruling GSTR 2006/9 reflect the principle that in order for an entity to be considered to be making a supply, it must take some action. Paragraphs 71 to 91 of GSTR 2006/9 state:

Proposition 5: to 'make a supply' an entity must do something

71. In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'.²⁷ The Commissioner picks up 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'.

72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw') in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.

73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.

74. However, Underwood J was of the view, with which the Commissioner also agrees, that an entity can still make a supply even if the supply is made under the compulsion of statute if the entity takes some action to cause a supply to occur. His Honour went on to compare a supply resulting from a positive act against a situation where there is no supply because nothing is done:

It seems to me that different considerations arise when considering the meaning of 'supply' in the Act. Notwithstanding the statutory compulsion, the liquidator's disposition in St Hubert's Island Pty Ltd (in liq) was something that was 'made' by him and for that reason would be likely to be considered a supply within the meaning of the Act. This is quite a different situation from the matter at hand, for the release of the obligation to pay a judgment sum by the payment of that sum will occur regardless of whether the judgment creditor makes or does any act at all. It was held in Databank Systems Ltd v. Commissioner of Inland Revenue (NZ) (1987) 9 NZTC 6213 that 'supply' means 'to furnish or provide'. Application of that proposition to the word 'supply' as enacted in the Act, s9-10 reinforces the concept that there is a legislative intention not to include in the word 'supply' the release of an obligation that occurs independently of the act of the releasor.

75. Underwood J considered the disposition by the liquidator would have been a supply under the GST Act because it was something 'made' by the liquidator. His Honour did not find a supply in relation to the release of the obligation to pay a judgment sum because the release occurred upon payment and not as a result of the judgment creditor doing something. However, an entity may do something and make a supply by agreeing to refrain from an act or to tolerate an act or situation.

76. In Westley the Full Federal Court considered two questions: whether the acquisition of real property in the form of commercial premises subject to an existing lease constituted a 'supply' for the purposes of section 9-10; and whether, for purposes of section 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 , a review opportunity arose when the lease provided for a rent review. The Court noted that the ordinary meaning of 'supply' required a positive act^31A and continued on to suggest paragraphs 9-10(2)(f) and (g), 'arguably', extend the ordinary meaning of supply. At paragraph 16 the Court said.

The concept of 'supply' in its ordinary meaning in subs 9-10(1) of the GST Act does seem to require some act of provision, furnishment, conferral or giving of some thing. The inclusions in subs 9-10(2) specifically identify some of these things, without limitation to subs (1), as goods, services, advice or information, real property and any right, (pars (a) - (e) inclusive). On the other hand, the concept of 'financial supply' in par (f) is defined in the GST Regulations 1999 (40-5.09) to include, amongst other things, the acquisition of an interest in or under specified financial instruments and par (g) extends the concept of 'supply' to include the entry into an obligation to do something, to refrain from doing something or to tolerate an act or situation. For these reasons, the ordinary meaning of 'supply' is arguably extended by pars (f) and (g), if not by pars (a) - (e) inclusive.

77. The Court concluded, at paragraphs 22 and 23:

While the matter is not free from doubt, we have concluded that when the appellants purchased the reversion they assumed the obligation of Lake Eerie to honour the lease according to its terms and in that sense entered into an obligation to tolerate an act or situation and in consequence, made a 'supply' by virtue of s 9-10(2)(g). The fact that the obligation arises by operation of law does not, in our view, impede this conclusion; after all, the reference to 'obligation' in s 9-10(2)(g) must be a legal obligation, although not necessarily one sourced in contract.

In the circumstances, it is unnecessary for us to determine whether there is a '... "supply" by way of lease of the exclusive possession of the demised property in accordance with the lease' as her Honour below concluded in reliance of the ordinary meaning of the word 'supply' in s 9-10(1). However, the indications discussed at [16] above tend to point away from that construction.

78. The Court's wider comments about 'supply' and 'obligation' in paragraphs 16, 22 and 23 of its decision were expressed with some caution. With respect, the Commissioner does not consider the Court has stated a general principle, contrary to our proposition, that a supply can be brought about by operation of law in the absence of an entity taking any positive action. The Commissioner distinguishes something brought about solely by operation of law where there is no supply, from something done by an entity as a consequence of a legal requirement where there may be a supply, as was the situation noted by Underwood J in Shaw citing the example of the liquidator's actions in St Hubert's Island. The Commissioner also distinguishes an action that results in obligations arising by operation of law, as the Full Court found in Westley , where there may be a supply by the entity taking the action.

79. Also, the Court did not discuss whether Westley made an ongoing supply in relation to honouring the existing lease, as this question was not central to its conclusion that Westley assumed the obligation to honour the lease. The Commissioner's view is that a purchaser who has acquired a reversionary interest in commercial premises subject to a lease is making a positive act by continuing to tolerate the lessee's occupation subject to the terms of the existing lease. The Commissioner is also of the view that, following the sale of the reversion, there is a continuing supply by the purchaser to the lessee.

Extinguishment of real property rights

80. Various government authorities are empowered by legislation to acquire an interest in real property. Two common mechanisms employed by legislation are:

• the vesting of the interest in the relevant government authority and extinguishing any previous interests in the real property; and

• the particular statute may allow the government authority to acquire the real property by agreement.

Vesting in the government authority

81. An example of vesting is provided by section 20 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW), where the required acquisition notices are gazetted, the relevant land is:

• vested in the authority of the State acquiring the land'; and

• 'freed and discharged from all estates, interests, trust, restrictions, dedications, reservations, easements, rights, charges, rates and contracts in, over or in connection with the land'.

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. If the entity disputes the compensation amount, there is provision for payment of 90% of the initial valuation until the matter is resolved.

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. When land vests in an authority in consequence of a gazettal notice, it is necessary to examine the relevant facts and circumstances to determine whether or not the owner makes a supply of the land to the authority. 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.

82A. However, in other cases the owner may do something or undertake some action such that it does make a supply of the land that vests in the authority. For example, see the decision in Re Hornsby Shire Council v. Commissioner of Taxation in which the Administrative Appeals Tribunal found that, in the circumstances the owner, CSR Limited, made a supply of its land by way of entry into an obligation and the surrender of its land when it issued a notice, pursuant to statute, compelling the Hornsby Shire Council to acquire its land.

83. Some statutes provide that land remaining, where only part of the land (the 'target land') is to be compulsorily acquired, will also be compulsorily acquired if the owner and the acquiring authority agree that the remaining land will be of no practical use or value to the owner. In cases where, prior to the vesting of the target land, the owner and authority agree that the remaining land will also be acquired, and the remaining land is acquired contemporaneously with the target land, it is the Commissioner's view that the owner does not make a supply of the remaining land to the acquiring authority. Although the owner may have requested that the remaining land be acquired, the agreement reached between the parties, and the resulting acquisition of the remaining land is integral, ancillary or incidental to the compulsory acquisition of the target land.

83A. In contrast to the circumstances described in paragraph 83 of this Ruling, the land owner may, at a time subsequent to the authority's acquisition of the target land, request that the authority acquire the remaining land on the basis that it is of no practical use or value to the owner. Consistent with the decision in Re Hornsby Shire Council v. Commissioner of Taxation, in these circumstances it is the Commissioner's view that the owner has taken some action by requesting that the remaining land be acquired and makes a supply of the remaining land by way of surrender to the authority. In such cases, the acquisition of the remaining land is not integral, ancillary or incidental to the authority's compulsory acquisition of the target land.

84. Mere acceptance by an owner of an amount of compensation payable on the compulsory acquisition does not provide a sufficient nexus between the land which passes and the means by which it passes. The fact that the owner does not dispute the acquisition is not an activity that effects the supply of the land. Even if the owner agrees to the terms of the acquisition and the amount of compensation, the land is acquired by operation of the statute, upon publication of the acquisition notice, not by an action taken by the landowner.

Example 1: compulsory acquisition

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. The deed sets out, among other things, that:

• the claimants accept the compulsory acquisition and extinguishment of any and all native title rights and interests in the land and agree to withdraw a related objection made under the statute to compulsory acquisition; and

• the authority undertakes to provide compensation to the native title claimants in the form of funding, land and certain services.

88. Although the claimants have agreed to accept the compulsory acquisition and the amount of the compensation, the agreement does not cause claimants' 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.

90. In contrast, the extinguishment of an owner's interest by statute needs to be distinguished from the doing of a thing that is compelled by statute.

Acquisition by agreement under a standard land contract

91. It may transpire that, before a compulsory acquisition under a statute is made, an owner and an authority enter into negotiations that result in the owner selling land under a standard land contract. The land in this case is not vested in the authority through the compulsory acquisition process. Instead, the interest in the land transfers as a result of settlement of the contract and execution of a transfer instrument. As such, the owner makes a supply of land to the authority.

Entity X could have legally compulsorily acquired the easements in your case. In accordance with the principles in paragraphs 71 to 91 of GSTR 2006/9, if it had done so, you would not have been considered to have taken any action to supply easements to Entity X. Therefore, under such circumstances, you would not have made a supply of easements.

However, the Agreement to grant Easements states 'the parties negotiated this agreement instead of Entity X exercising their compulsory acquisition powers.'

Under the 'Agreement to grant Easements', you agreed to grant to Entity X the easements subject to the terms of that agreement.

In accordance with paragraph 73 of GSTR 2001/4, the loss that you suffer as a result of the easements does not constitute a supply. However, paragraph 111 of GSTR 2001/4 states that a payment to resolve a damages claim is not consideration for a supply if there is no earlier or current supply.

In your case, there is a current supply, being the granting of the easements. There is a sufficient nexus between the supply of the easements and the compensation because the compensation is paid to compensate you for the loss you suffer as a result of granting the easements and clause 2 of the Agreement to grant Easements indicates that the compensation under that agreement is consideration for the Claimants' granting of the easements.

Therefore, the compensation is consideration for a supply. Hence, the requirement of paragraph 9-5(a) of the GST Act is met.

You make this supply in the course or furtherance of your farming enterprise as the supply is incidental to your enterprise given that you are granting an easement over your farmland. Hence, the requirement of paragraph 9-5(b) of the GST Act is met.

The supply is connected with Australia. Therefore, the requirement of paragraph 9-5(c) of the GST Act is met.

You are registered for GST. Therefore, the requirement of paragraph 9-5(d) of the GST Act is met.

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

Therefore, as all of the requirements of section 9-5 of the GST Act are met, you made a taxable supply in return for the compensation payment. Hence, GST is payable on the compensation payment.

Question 2

Summary

All or part of the compensation under the Compensation Deed is consideration for your supply of access licences. This supply is subject to GST.

Detailed reasoning

Clause 2(a) of the Compensation Deed states:

The claimants accept the compensation under all heads in full and final satisfaction of their entitlement to compensation for early access and off easement access and any impact to the land during construction of the project.

Clause 4.1(a) of the Compensation Deed states:

The Claimants acknowledge that the Compensation includes an amount to enable Entity X to have off easement access to the Proposed Easement Areas, and once registered, the Easements, in accordance with this clause 4.1.

Clause 4.1(b) of the Compensation deed states:

The Claimants grant to Entity X from the date of this Deed until the Construction Completion Date, an irrevocable licence, including a right to sub-licence to an Authorised Person, to enter on and use the Off Easement Area for works for the Project in accordance with this clause 4.1.

Therefore, you make a supply of an early access licence and an off-easement access licence in return for compensation. The Compensation Deed does not specify any other supplies that you must make in return for the compensation paid under that Deed.

Hence, all or part of the compensation under the Compensation Deed has a sufficient nexus with your supply of an early access licence and an off-easement access licence.

Therefore, all or part of the compensation under the Compensation Deed is consideration for your supply of an early access licence and an off-easement access licence.

The supply of the early access and off-easement access licences meets the requirements of section 9-5 of the GST Act because:

• the supply is made for consideration

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

• the supply is connected with Australia

• you are registered for GST, and

• the supply is not GST-free or input taxed.

It is not clear from the Compensation Deed what part of the total compensation under that Deed is consideration for this supply.

GST will be payable on the part of the compensation under that Compensation Deed that is consideration for this supply.

Question 3

Summary

The expenses in question are business expenses and these expenses do not relate to making input taxed supplies. Therefore, you acquire the associated goods and services for a creditable purpose.

Your acquisitions of these items are creditable acquisitions under section 11-5 of the GST Act where the supplies made to you are subject to GST.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Creditable purpose

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states;

However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

Section 11-5 of the GST Act does not require that an acquisition made by a taxpayer relates to particular taxable supplies that the taxpayer makes in order for the taxpayer to be entitled to an input tax credit on its acquisition.

The acquisitions you make that are associated with negotiating and obtaining compensation and making alterations to your property necessitated by the granting of the easements or the impact of Entity X activities are acquisitions made in carrying on your enterprise as these are made in connection with obtaining compensation for detriment caused to your business and making alterations to an asset of your business necessitated by the detriment to that asset.

The acquisitions do not relate to making input taxed supplies.

The acquisitions are not of a private or domestic nature.

Therefore, you make the acquisitions for a creditable purpose. Hence, you meet the requirement of paragraph 11-5(a) of the GST Act.

Where the supplies made to you of the goods and services you acquire are subject to GST, you will meet the requirement of paragraph 11-5(b) of the GST Act.

Where you pay for the acquisitions in question, you meet the requirement of paragraph 11-5(c) of the GST Act.

You are registered for GST. Therefore, you meet the requirement of paragraph 11-5(d) of the GST Act.

Hence, you are entitled to input tax credits for purchases you make in connection with negotiating and obtaining compensation and making alterations to your property that are necessitated by the granting of the easements or the impact of Entity X's activities, provided that the supplies of the goods and services to you are subject to GST. This is the case even for an acquisition that does not relate to making specific taxable supplies.

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