Edited version of private ruling

Authorisation Number: 1011736542456

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Ruling

Subject: GST and surrender of rights

Question 1

Is the supply of surrendering the rights by Contracting Parties to Entity A a taxable supply?

Answer

No. The supply of surrendering the rights by Contracting Parties to Entity A is not a taxable supply.

Question 2

Is Entity A entitled to claim input tax credits on its acquisition of the rights?

Answer

No. Entity A is not entitled to claim input tax credits on its acquisition of the rights.

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.

Our decision is based on the following facts.

Entity A has negotiated:

§ an Agreement with the Contracting parties and

§ an Ancillary Agreement with the Contracting Parties.

Entity A wishes to obtain the grant of the Project Rights, including grant of the Freehold, to carry out the Project. This acquisition is not for a private or domestic use.

Entity A is registered for GST.

The Contracting Parties assert that they are the owners of the lands and waters to which the Agreement applies and that they hold the rights and interests to those lands and waters within the meaning of a Commonwealth Act.

The Contracting Parties seek to be paid appropriate compensation for the giving of their consent to the Project Rights and for the effect of exercise of the Project Rights.

Under the Agreement, the Contracting Parties have agreed to the carrying out of the Project (including works comprising or incidental to the Project), the grant and implementation of the Project Rights, the Surrender and any other act necessary or expedient to give effect to the Project and any act necessary to enable the Project to proceed in the Agreement Area. The Surrender is intended to extinguish any Title that may exist in relation to the Surrender Area, and takes effect immediately prior to the grant of the Freehold, provided that Registration of the Agreement and the successful completion of certain steps as defined in the Agreement have also occurred prior to the grant of the Freehold.

The Ancillary Agreements to the Agreement provide for the payment of compensation to the Contracting Parties in consideration of the Contracting Parties consenting to the Project and the grant of the Project Rights. The Compensation Payments are to be paid by payment to the Nominated Body, and the Contracting Parties agree that this payment will amount to full and final satisfaction of Entity A's obligations to the Contracting Parties to pay the Compensation Payments.

The following additional information has been provided by the contact officer for Entity A:

the surrender of rights and interests is done voluntarily by the Contracting Parties - it is not compelled;

Reasons for decision

These reasons for decision accompany the Notice of private ruling Entity A.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1 Taxable Supply

Summary

The supply of surrendering the rights by Contracting Parties to Entity A is not a taxable supply.

Detailed reasoning

GST is payable on a taxable supply. Section 9-5 of the GST Act states that:

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 defined term under section 195-1 of the GST Act)

Supply for consideration

Under paragraph 9-10(20(e) of the GST Act, supply includes a creation, grant, transfer, assignment or surrender of any right.

Under the heading Extinguishment of real property rights, paragraphs 81 to 82A of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies state:

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.

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 A has informed:

the surrender of rights and interests is done voluntarily by the Contracting Parties - it is not compelled;

The Nominated Body does not make a supply of surrendering the rights even though it receives the compensation payments. The Nominated Body is not a party to either of the Ancillary Agreement or the Agreement. The Nominated Body receives a payment by direction, pursuant to a certain clause of the Ancillary Agreement.

In this case, the Contracting Parties, pursuant to an Agreement, agree to surrender their rights and interests to Entity A and these rights are subsequently extinguished. This surrendering process is also undertaken by virtue of a Commonwealth Act.

The rights are surrendered pursuant to a contractual agreement. The rights subsequent to the initial surrender of the rights, are extinguished by operation of the statute.

Therefore, the surrender of the rights by this method will be a supply by the Contracting Parties.

The compensation payment relates directly to the Contracting Parties agreement to forgo their rights. Therefore, the compensation payment has a direct nexus with the Contracting Parties loss of rights. Therefore, the compensation paid by Entity A is consideration for the supply.

As such paragraph 9-5(a) of the GST Act will be satisfied.

We need to determine whether the Contracting Parties are making a taxable supply in the course or furtherance of an enterprise that they carry on.

Supply made in the course or furtherance of an enterprise that the Contracting Parties carry on

Section 9-20 of the GST Act provides that an enterprise is an activity, or a series of activities, done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

…………………………

In the form of a business

Paragraphs 176 to178 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number state:

176. As the definition of 'business' is identical in the GST Act and the ITAAs, it can be interpreted in a similar way. The meaning of 'business' is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

§ a significant commercial activity;

§ a purpose and intention of the taxpayer to engage in commercial activity;

§ an intention to make a profit from the activity;

§ the activity is or will be profitable;

§ the recurrent or regular nature of the activity;

§ the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

§ activity is systematic, organised and carried on in a businesslike manner and records are kept;

§ the activities are of a reasonable size and scale;

§ a business plan exists;

§ commercial sales of product; and

§ the entity has relevant knowledge or skill.

In this case, we do not consider that the supply (that is, the surrendering of the rights pursuant to the Agreement) by the Contracting Parties is in the form of a business. The indicators of a business outlined above (paragraph 178 of MT 2006/1) have not led us to the conclusion that in surrendering the rights pursuant to the Agreement the Native Title Parties are doing so in the form of a business.

In the form of an adventure or concern in the nature of trade

Paragraph 244 of MT 2006/1 states:

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

In this case, the rights are not an asset used in carrying on an enterprise. We do not consider that the Contracting Parties surrender their rights in a way that amounted to something in the form of an adventure or concern in the nature of trade.

On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property

In this case, the Contracting Parties are giving up a set of rights which they have. They are not leasing those rights, or conducting a business with the rights.

In conclusion, we do not consider that the Contracting Parties, by surrendering their rights pursuant to the Agreement, make any supply in the course or furtherance of an enterprise that they carry on. As paragraph 9-5(b) of the GST Act is not satisfied, there cannot be a taxable supply.

As such, the Contracting Parties are not making a taxable supply under section 9-5 of the GST Act of surrendering their rights.

Question 2 Input Tax Credits

Summary

Entity A is not entitled to claim input tax credits on its acquisition of rights.

Detailed reasoning

Section 11-20 of the GST Act provides that an entity is entitled to the input tax credit for any creditable acquisition that it makes.

Section 11-5 of the GST Act provides that Entity A makes a creditable acquisition if:

a) it acquires anything solely or partly for a creditable purpose; and

b) the supply of the thing to Entity A is a taxable supply; and

c) Entity A provides, or is liable to provide, consideration for the supply; and

d) Entity A is registered, or required to be registered.

As we have determined in Question 1, that the Contracting Parties are not making a taxable supply, paragraph 11-5(b) of the GST Act will not be satisfied. Therefore Entity A will not make a creditable acquisition and will not be entitled to input tax credits.