Edited version of private ruling

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Ruling

Subject: supply of water pursuant to Water Agreement

Question 1:

Is the supply of water by a State Water Corporation ('SWC') to the Operator of a hydro-electric power station ('Operator') pursuant to a Water Agreement a 'supply of water' which is GST-free under subsection 38-285(1) of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act')?

Answer:

Yes, the supply of water by a SWC to the Operator pursuant to a Water Agreement is a supply of water which is GST-free under subsection 38-285(1) of the GST Act.

Question 2:

Is the water usage charge payable to the SWC by the Operator pursuant to that Water Agreement consideration for a supply of water which is GST-free under subsection 38-285 of the GST Act?

Answer:

Yes, the water usage charge payable to the SWC by the Operator pursuant to that Water Agreement is consideration for a supply of water which is GST-free under subsection 38-285 of the GST Act.

Relevant facts and circumstances:

Applicant:

The SWC is a corporation established by State legislation.

Background:

SWC supplies bulk water to rural areas of the State by maintaining, managing and operating infrastructure which delivers bulk water to licensed water users along the State's regulated rivers.

SWC operates several major dams which have attached to them hydro-electric power stations which are owned by third parties. SWC has entered into agreements with those owners to supply water to those hydro-electric power stations. The water is supplied to the hydro-electric power stations and then released back to the regulated river system for delivery to end users.

Title to the water delivered to the hydro-electric power stations by SWC does not pass to the owners of the hydro-electric power stations. Instead those owners pay SWC water usage charges which are calculated according to a formula. SWC also charges the owners of the hydro-electric power stations lease fees for the use of the land on which the hydro electric power stations are located. Currently SWC does not charge GST on the water usage charges (on the basis that they are consideration for a supply which is GST-free) but does charge GST on the lease fees.

Sample Water Agreement:

SWC provided a copy of a Water Agreement entered into in 1993 by SWC's predecessor ('the Corporation') and an Operator. The Water Agreement recites that the Corporation is the owner and operator of a Dam, the Operator proposes to construct, own an operate a hydro-electric power station on the Dam and the Corporation's land pursuant to a Construction Licence and has the right (pursuant to the Lease) to occupy the land on which that hydro -electric power station will be situated, and that the Corporation has agreed to permit the Operator to use water from the Dam on the terms set out in the Agreement. Clause 3.7 of the Water Agreement states:

The arrangement herein for water usage shall confer on the Operator a right to the use of water as is evidenced by this Agreement but not otherwise, and shall not confer on the Operator any right to the use of water beyond the Term or after determination of this Agreement.

Part 5 of the Agreement provides that the Operator shall pay the Corporation a water usage charge calculated as a percentage of gross revenue earned by the Operator from 'run of dam' (i.e. a volume of water released at a uniform rate over a 24 hour period commencing midday each day) sales of electricity. The water usage charge is payable monthly in arrears.

Clause 6 of the Agreement provides that the water made available to the Operator under the Agreement shall be used by the Operator on a run of dam basis for generation of electricity by a hydro-electric power station and for no other purpose whatsoever.

Ruling request:

SWC referred to section 38-285 of the GST Act (which provides that a 'supply of water' is GST-free) and Goods and Services Tax Ruling GSTR 2000/25.

SWC noted that GSTR 2000/25 states that the words 'supply of water' in subsection 38-285(1) refer to 'the provision of tangible personal property' (Para 21). SWC advised that, although there was no change in ownership of the water supplied by SWC to the Operator, the Operator takes physical possession and control of the water from the time when the water arrives at the Operator's hydro-electric power station until the water is discharged from that hydro-electric power station. SWC submitted that that constituted a 'supply of water' which is GST-free under subsection 38-285(1).

In relation to Question 2, SWC submitted that the payments made by the Operator pursuant to the formula specified in the Water Agreement had a sufficient nexus with the supply of water.

Reasons for decision:

Question 1

Summary:

Although the Water Agreement merely allows the Operator to use the water for a specified purpose in return for payment of a charge by the Operator, there is a 'supply of water' within the meaning of subsection 38-285(1) of the GST Act by the SWC to the Operator.

Detailed reasoning:

Section 7-1 of the GST Act provides that GST is payable on taxable supplies. Section 9-5 of the GST Act provides that a supply is not taxable to the extent that it is GST-free or input taxed. Division 38 of the GST Act sets the supplies that are GST-free, which includes section 38-285. Subsection 38-285(1) provides:

A supply of water is GST-free.

The meaning of 'water' is discussed in GSTR 2000/25 which states that water includes untreated bulk water (Para 18) and that the source of water may lie in oceans, rivers, dams or streams (Para 19). The Water Agreement governs the use of water from the [ ] Dam and the term 'Dam' is defined in the Water Agreement to include 'all water impounded or stored'.

Recital E to the Water Agreement states that SWC has agreed to permit the Operator to 'use' the water from the Dam on the terms and conditions contained in the Water Agreement, clause 3.4 allows the Operator to 'use the water released from the Dam on a run of dam basis' (i.e. varies and different seasonal or operational patterns of water releases), clause 3.7 expressly states that the Agreement confers on the Operator 'a right to the use of water', clause 5 obliges the Operator to pay a 'water usage charge', and clause 6.1 refers to 'the water made available to the Operator under this Agreement' and obliges the Operator to use that water 'in the generation of electricity by a hydro-electric power station and no other purpose whatsoever'.

These provisions indicate that SWC does not transfer ownership of the water to the Operator but merely allows the Operator to 'use' the water for a specified purpose in return for payment of a charge by the operator.

The meaning of 'a supply of water' in subsection 38-285(1) is discussed in GSTR 2000/25 (Paras 20-23):

20. 'A supply of water,' in section 38-285, refers to the delivery or the making available of water, as goods, to a recipient's premises. In State Electricity Commission of Victoria & Anor v. FC of T, (the SECV case) Heerey and Merkel JJ found that electricity and electrical power were 'goods' for the purposes of the Sales Tax Assessment Act 1992 , being tangible personal property capable of being bought and sold in quantifiable amounts. Evidence given equated voltage with the pressure under which water flows through a pipe and current with the rate of flow of water in a pipe.

21. Appropriate analogies can be drawn between the system for the distribution of electricity discussed in the SECV case and the 'supply of water' referred to in section 38-285. A 'supply of water' is the provision of tangible personal property - that is, goods. In other words, the supply of water means the change in ownership or control and transfer of physical possession of water from a supplier to a recipient. In this Ruling, we refer to this as a delivery of water.

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

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

GSTR 2000/25 refers (Para 20) to the Full Federal Court's decision in State Electricity Commission of Victoria v FCT 99 ATC 5007 in which the Commissioner conceded that electricity was 'goods' as defined in section 5 of the Sales Tax Assessment Act 1992 (repealed), i.e. 'any form of tangible personal property' and Heery and Merkel JJ stated that that concession was correct (Para 23):

In our view that concession was correct. The qualifier 'tangible' primarily has the effect of excluding choses in action. Clearly electric power is something subject to the dominion of United [Energy Limited - an electricity distribution company]. It can be transported from place to place. It can be bought and sold.

In our view the Full Federal Court merely confirmed that electricity was 'goods' for the purposes of sales tax by referring to two characteristics of tangible personal property which were shared by electricity, i.e. electricity can be transported and can be bought and sold.

GSTR 2000/25 then states (Para 21) that appropriate analogies can be drawn between the distribution of electricity and the 'supply of water' in subsection 38-285(1) and that a 'supply of water' is 'the provision of tangible personal property'. GSTR 2000/25 further states (Para 21):

In other words, the supply of water means the change in ownership or control and transfer of physical possession of water from a supplier to a recipient.

In our view these words mean that a 'supply of water' means either a 'change in ownership' of water or a 'change in…control' of water and, in either case, the transfer of physical possession of the water. To read a 'supply of water' as always requiring a transfer of ownership of water would amount to taking a characteristic which the Full Federal Court found to be shared by electricity and goods (i.e. both can be bought and sold) and making that characteristic a necessary condition for a 'supply of water'.

We consider that there is a change in control of the water under the Water Agreement as SWC confers a right to use the water on the Operator (clauses 3.4 and 3.7). There is also a transfer of physical possession of the water as SWC advised in the ruling request that the Operator takes physical possession of the water from the time the water is discharged from the Dam into the Operator's hydro-electricity station until it is discharged from that hydro-electricity station. We therefore consider that there is a 'supply of water' within the meaning of subsection 38-285(1) by SWC to the Operator under the Water Agreement.

Question 2

Summary:

Clauses 5 and 6 of the Water Agreement establish the necessary nexus between the water usage charge payable by the Operator under the Water Agreement and the GST-free 'supply of water' within the meaning of subsection 38-285(1) of the GST Act.

Detailed reasoning:

Paragraph 9-5(a) of the GST Act provides that an entity makes a taxable supply if, inter alia, that entity makes the supply for consideration. Section 195-1 of the GST Act defines 'consideration' for a supply to mean any consideration, within the meaning of subsection 9-15(1), in connection with the supply and subsection 9-15(1) of the GST Act provides that consideration includes any payment, act or forbearance in connection with, in response to, or for the inducement of a supply of anything.

Goods and Services Tax Ruling GSTR 2006/9 states (Para 180) that the test whether there is a sufficient nexus between a supply and consideration is objective, regard needs to be had to the true character of the transaction, and that the arrangement between the parties is characterised by examining all of the transactions entered into and the circumstances in which the transactions are made.

Clause 5.1 of the Water Agreement states that the Operator shall pay to the SWC a water usage charge at the rate set out in Appendix A (e.g. a percentage of gross revenue earned from run of dam sales of electricity for the first 10 years) which shall accrue from the commencement of the sale of electricity by the Operator and be paid monthly in arrears at the end of the month following the month in which production of electricity occurred. As noted above, clause 6.1 of the Water Agreement states that the water made available to the Operator under the Water Agreement shall be used for the Operator on a run of dam basis for use in the generation of electricity by a hydro-electric power station and no other purpose whatsoever.

In our view these provisions of the Water Agreement establish the necessary nexus between the water usage charge and a 'supply of water' within the meaning of subsection 38-285(1) of the GST Act.