Edited version of private ruling

Authorisation Number: 1011760528088

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Ruling

Subject: GST and sale of water rights

Question 1

Is GST payable on the sale of water rights?

Answer

Subsection 38-285(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), provides that the supply of water (which includes the supply of water rights) is GST-free.

Question 2

Is GST payable on the assignment of the consideration paid by an entity from one entity (entity A) to another entity (entity B)?

Answer

GST may be payable on the assignment of the consideration depending on the status of the supplier (See question 4). However, the assignment of the consideration by entity A to entity B is considered to be a means to achieving the supply of the agreed projects.

Question 3

Is GST payable on the sale of the water rights where an entity is obliged to carry out works on its land?

Answer

GST may be payable in this instance as the sale of the water rights is an ancillary part of the supply of the agreed obligations by the landowner. This would depend on the GST status of the suppliers. (See Question 4)

Question 4

Is an entity (you) entitled to input tax credits in respect of the acquisition of water rights from the water share rights owners?

Answer

The water rights are not acquired by you but by other entities and as such you are not entitled to any input tax credits in respect of the acquisition of the water rights. However, you are making acquisitions from the landowner of the obligation attached to the sale of the water rights.

Relevant facts and circumstances

The entity (you) is registered for GST.

You have entered into an agreement to support activities associated with the acquisition of water rights.

You will enter into agreements with landowners and rights owners to undertake specific projects.

There are agreed projects that must be undertaken by the landowner and must enter into an Infrastructure Works Deeds with you to undertake specific projects.

As a result of these projects the landowners will be granted funds required to complete the specific projects.

You owners of the rights must first enter into an agreement to sell their rights to another entity.

Once this agreement is finalised you enter into an agreement with the landowners and the rights owners to assign the funding to the landowners to undertake the specific projects agreed to.

You have entered into a funding agreement with the other entity and are authorised to enter into infrastructure works deeds with eligible landowners.

Question 1

Summary

In this instance you are not the entity making the supply of the water rights so we are unable to provide you with a private binding ruling on this issue. However, we can advise you if you are making a creditable acquisition.

Detailed reasoning

See question 4 below.

Question 2

Summary

GST may be payable on the assignment of the consideration depending on the status of the supplier. However, the assignment of the consideration by the water share owner to the landowner is considered to be a means to achieving the supply of the projects.

Detailed reasoning

This is not considered to be a part of a separate supply. The funding is provided to the landowner and this issue is addressed in question 4 below.

Question 3

Summary

GST may be payable in this instance as the sale of the water rights is an ancillary part of the supply of the infrastructure obligations by the landowner. This would depend on the GST status of the suppliers. (See Question 4)

Detailed reasoning

As this is a supply by another entity we are unable to provide specific advice on this issue.

Question 4

Summary

The water rights are not acquired by you but by another entity you are not entitled to any input tax credits in respect of the acquisition of the water rights. However, you are making acquisitions from the landowner of the obligation attached to the sale of the water rights.

Detailed reasoning

All the requirements of section 11-5 of the GST Act must be satisfied before you are entitled to an input tax credit.

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides the meaning of creditable acquisition and states:

You make a creditable acquisition if:

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

(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 provides that an acquisition will be for a creditable purpose to the extent that it is acquired in carrying on the entity's enterprise.

However, subsection 11-15(2) provides that an entity will not acquire a thing for a creditable purpose to the extent that:

· the acquisition of the thing relates to making input taxed supplies; or

· the thing is acquired for a private or domestic purpose.

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

In this case you are not the entity acquiring the water shares. The water shares are acquired by another entity. You have entered into a funding agreement with the other entity and are authorised to enter into infrastructure works deeds with eligible landowners.

The water rights are not acquired by you but by the other entity and as such you are not entitled to any input tax credits in respect of the acquisition of the water rights.

However, you are making acquisitions from the landowner of the obligation attached to the sale of the water rights. Your payments to the landowners will be grants of financial assistance.

Goods and Services Tax Ruling 2000/11 (GSTR 2000/11) discusses grants of financial assistance.

Paragraph 26 of GSTR 2000/11 states:

26. The term supply includes the grant or assignment of a right, and the entry into, or release from an obligation. In some cases, the transaction between grantor and grantee will merely involve the granting of a right or entry into an obligation.

Paragraph 33 of GSTR 2000/11 provides that for there to be a supply of rights or obligations, such rights or obligations must be binding on the parties.

The Infrastructure Works Deeds you enter with the landowners have the aim of improving on-farm efficiency of irrigation systems and helping achieve permanent water savings.

The landowner will use the payments solely for the purposes of carrying out the works and may not use those payments for any other purpose unless the works have been completed to the reasonable satisfaction of you and you consent to the release of the funds.

There are agreed projects that must be undertaken by the landowner and by entering into the Infrastructure Works Deeds with you the landowners have entered into binding obligations to undertake agreed projects to a specific standard by a particular deadline. They have supplied these obligations to you. You have acquired these obligations.

Section 11-20 of the GST Act provides that you are entitled to input tax credits for any creditable acquisitions that you make.

You have acquired the obligations in carrying on your enterprise.

Your acquisitions of the obligations are not of a private or domestic nature.

You have acquired the obligations for a creditable purpose, and therefore the requirement of paragraph 11-5(a) of the GST Act is satisfied.

Taxable Supply

Section 9-5 of the GST Act provides 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.

Paragraph 44 of GSTR 2000/11 provides guidance in relation to a taxable supply made for consideration and states:

44. A supply is a taxable supply, if among other things, the supply is made for consideration. Thus, there must be some nexus or connection between a particular supply and particular consideration which is provided for that supply.

Further, paragraph 88 of GSTR 2000/11 provides that a supply of an obligation has a substantial nexus with a grant if the supply of the obligation goes to the purpose for which the grant is paid.

The landowner's supplies of the obligations to you will have a substantial nexus with the grant you will pay them, as the supplies of the obligations go to the purpose for which the grant is made. The grant is consideration for the supplies of those obligations.

The requirement of paragraph 9-5(a) of the GST Act is therefore satisfied.

When the landowners who hold their land for the purpose of carrying on an enterprise make supplies of their obligations to you they do so in the course or furtherance of an enterprise that they carry on. Under these circumstances the requirement of paragraph 9-5(b) is satisfied.

When the landowners who do not hold their land for the purpose of carrying on an enterprise make supplies of their obligations to you they do not do so in the course or furtherance of an enterprise that they carry on. Under these circumstances the requirement of paragraph 9-5(b) is not satisfied.

The supplies of the obligations are connected with Australia. The requirement of paragraph 9-5(c) of the GST Act is satisfied.

Where the landowner is registered or required to be registered for GST, the requirement of paragraph 9-5(d) of the GST Act is satisfied.

Where the landowner is not registered or required to be registered for GST, the requirement of paragraph 9-5(d) of the GST Act is not satisfied.

There are no provisions in the GST Act under which the supplies of the obligations are GST-free or input taxed.

All of the requirements of section 9-5 of the GST Act are satisfied where the landowner holds their land for the purpose of an enterprise that they carry on; and, the landowner is registered or required to be registered. Therefore the landowner makes a taxable supply to you and as such the requirement of paragraph 11-5(b) of the GST Act is satisfied.

If the landowner does not hold their land for the purpose of an enterprise that they carry on; and/or, the landowner is not registered or required to be registered for GST the requirement of paragraph 11-5(b) of the GST Act is not satisfied.

In these circumstances the landowner is not making a taxable supply to you.

Consideration

You will provide consideration for the taxable supplies to you. Therefore, the requirement of paragraph 11-5(c) of the GST Act is satisfied.

GST Registration

You are registered for GST. Therefore, paragraph 11-5(d) of the GST Act is satisfied.

Conclusion

All of the requirements of section 11-5 of the GST Act are satisfied where:

· The landowner holds their land for the purpose of an enterprise that they carry on; and

· The landowner is registered or required to be registered for GST.

In those circumstances you will be entitled to an input tax credit.

However, where

· The landowner does not hold their land for the purpose of an enterprise that they carry on; and

· The landowner is not registered or required to be registered for GST.

You do not satisfy all of the requirements of section 11-5 of the GST Act and will not be entitled to an input tax credit.

Water Rights.

A supply of water rights may satisfy the conditions at paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act.

The water share owner is making the supply of the water share to the other entity. The water share owner also has an obligation to assign the funding to the landowner. The landowner must agree to spend that funding on specific works that will ultimately achieve water savings.

As stated above GST is payable on taxable supplies that are made. However, a supply is not taxable to the extent that it is GST-free or input taxed.

Subsection 38-I of the GST Act provides that a supply of water is GST-free. In relation to a supply of a right to receive a GST-free supply of water, paragraph 9-30(1)(b) applies to make the supply of the right to receive a supply of water GST-free.

A supply of a right to receive water includes:

(a) a right to receive a supply of a quantity of water; or

(b) a right to receive a supply of water for a specified period; or

(c) a tradeable right to receive a supply of water.

The other entity enters into an arrangement with the water share owner to acquire specific water shares that the water share owner has offered for sale. The acquirer is the other entity.

In order that you have an entitlement to an input tax credit you must be the entity making a creditable acquisition.

Further, it is considered that the supply that is made in this instance is the supply of the obligation to you. The sale of the water shares to the other entity is considered to be a device that allows the supply of the obligation to be made.

The water savings are achieved as a result of the projects that will ultimately be undertaken. These water savings are transferred to the other entity as a result of those projects. It is the undertaking of the projects and associated obligations that is the supply made under the funding arrangement rather than a supply of water or water rights. The transfer of water rights is considered to be ancillary to the main taxable supply.