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Ruling

Subject: GST and mining compensation

Question

Are the compensation proceeds received by you subject to goods and services tax (GST)?

Answer

No, the compensation proceeds are not subject to GST.

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.

You are not registered for GST.

You own grazing land.

You are also a partner in a partnership. This partnership has operated a grazing business on the land. You do not charge the partnership for the use of your land in its business.

The partnership is registered for GST. You carry on an enterprise being the provision of the land to the partnership, but as no consideration is charged for the supply and it is to an associate that is registered for GST, you have not registered for GST.

The company has underground mining rights granted on the majority of the land and is now in the process of negotiating compensation under the Mineral Resources Act 1989 to enable it to apply for the granting of surface rights, prior to the commencement of underground mining.

The compensation sum is exclusive of GST.

The main detriment that will result from the mining operation is from the damage to the underlying land asset. It is expected that as a result of the mining operation, the land will suffer significant subsiding, cracking and sink holes across the affected area. The general natural water courses will also be affected.

History has shown that soil fertility is also affected, erosion can be expected and also water courses, both above and below ground can often be contaminated, making the water unusable for livestock. The underlying land asset will therefore suffer significant loss of value due to the impact of the mining operation. The company has conceded this and agreed to the compensation.

In response to a request for further information you have advised that under your agreement with the company you are only granting the company those rights which it is entitled to under the Mineral Resources Act 1989. That is, no additional rights have been granted to the company.

Section 85 of the Mineral Resources Act 1989 is titled 'Compensation to be settled before grant or renewal of mining claim'.

Subsection 85(1) of the Mineral Resources Act 1989 states, in part:

(1) A mining claim shall not be granted or renewed unless-

(a) compensation has been determined (whether by agreement or by determination of the Land Court) between the applicant and each person who is the owner of land the subject of the application and of any surface access to that land; or …

Subsection 85(7) of Mineral Resources Act 1989 states:

(7) Upon an application made under subsection (5), or the referral of a matter under section 85A(2), the Land Court shall settle the amount of compensation an owner of land is entitled to as compensation for-

(a) deprivation of possession of the surface of land of the owner;

(b) diminution of the value of the land of the owner or any improvements thereon;

(c) diminution of the use made or which may be made of the land of the owner or any improvements thereon;

(d) severance of any part of the land from other parts thereof or from other land of the owner;

(e) any surface rights of access;

(f) all loss or expense that arises;

as a consequence of the grant or renewal of the mining claim.

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 Paragraph 9-5(a).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-10(1).

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

Reasons for decision

Summary

The compensation proceeds are not subject to GST because the payment is not consideration for a supply which you make to the company.

Detailed reasoning

A supply is taxable, and thus subject to GST, where all of the conditions of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Section 9-5 of the GST Act provides that you make a taxable supply if:

(a) you make a 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.

(*as defined in section 195-1 of the GST Act)

The first condition of section 9-5 of the GST Act is that the supply is made for consideration. For there to be a supply for consideration, three fundamental criteria must be met:

· there must be a supply

· there must be a payment, and

· there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration .

The term 'supply' is defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever' and includes a grant, assignment or surrender of real property (paragraph 9-10(2)(d) of the GST Act).

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.

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:

Subsection 9-10(2) refers to two aspects of a supply; the thing which passes, such as goods, services, a right or obligation; and the means by which it passes, such as its provision, creation, grant, assignment, surrender or release.

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, a landowner must take some positive action or do something for a supply to occur.

Generally, a transfer or surrender of the legal interest in land is covered by the definition of supply in section 9-10 of the GST Act.

However, in this case, you do not transfer or surrender your legal ownership to the land. Instead, the company as the holder of underground mining rights can apply under the Mineral Resources Act 1989 for the grant of surface rights so that it can commence underground mining as long as compensation has been agreed between the company and you.

In this case, the payment to you is in respect of compensation for any damages caused or likely to be caused to your land and any inconvenience suffered by you as a consequence of the activities to be carried out by the company.

Of relevance to this case is paragraph 71 of GSTR 2001/4 which states:

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.

Following on from this, paragraph 73 of GSTR 2001/4 states, in relation to compensation and damages:

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.

Based on the information provided, the loss of use of your land (and diminution in its value) and any other loss resulting from the granting of the mining lease does not constitute a supply under section 9-10 of the GST Act. This means that your compensation payment for the damage to be caused or likely to be caused to your land by the activities of the company is not consideration for a supply.

Therefore, the first requirement of section 9-5 of the GST Act cannot be met. As a result, there is no taxable supply by you to the company and as such, GST will not apply to the compensation payment.