Edited version of your private ruling

Authorisation Number: 1011955106909

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Ruling

Subject: GST and exploration tenement and compensation payments

Question 1

Are you liable for GST in relation to the compensation payment you receive from an exploration company pursuant to a conduct and compensation & access agreement (the Agreement)?

Answer

No. You are not liable for GST in relation to the compensation payment you receive from the exploration company pursuant to the Agreement.

Relevant facts and circumstances

You are registered for GST.

You are the landholders of specified lots of pastoral land (Land) situated in Australia.

You conduct a primary production business on the Land;

Parts of the Land fall within an area covered by a mining tenement held by an exploration company under the relevant exploration Act (the Relevant Act);

On a specified date you and the exploration company entered into a conduct and compensation & access agreement (Agreement);

A clause in the Agreement provides that the tenement holder shall pay compensation in a specified sum to you within an agreed timeframe from the date of the Agreement;

You provided a copy of the Agreement in support of this private ruling application. The relevant terms are summarised below:

The parties are named;

The registered holders of an interest in an Authority to Prospect (ATP) the Land are detailed;

The area of land covered by the Authority to Prospect is outlined;

The agreement states that under the Relevant Act, the exploration company is liable to pay compensation to you for any 'compensatable effect' caused by activities carried out on the Land permitted by ATP;

On a specified date you initiated proceedings in the Land Court seeking a determination of compensation payable under the Relevant Act;

The Parties agreed to resolve the exploration company's compensation liability under the Relevant Act in accordance with the terms of this agreement;

Further, you have agreed to enter into this agreement to permit the exploration company to cross, and build access tracks (and associated works) upon the Land to enable them to enter the area of the ATP.

The activities to be undertaken on the land are detailed;

The agreement includes a waiver of entry notice under the Relevant Act.

'Compensatable Effects' is defined with reference to the Land and Access Land, to be those those effects caused by the following activities:

· deprivation of possession of its surface

· diminution of its value

· diminution of the use made, or that may be made, of the Land or Access Land or any improvement on it

· severance of any part of the Land or Access Land from other parts of the Land or Access Land, or from other land that the Landholder owns

· any cost or loss arising from the carrying out of the Activities on the Land or Access Land; and

· any consequential damages the Landholder incurs because of a compensatable effect referred to in paragraphs (i) -(v) above.

'Compensation' is defined with reference to the compensation provided to the Landholder under this Agreement;

'Compensation Liability' means the Tenement Holder's liability to compensate you (the Landholder) for any Compensatable Effects cause by the Activities, or works on the Access Land;

The Tenement Holder and its Associates will be entitled to access to and from the Land and Access Land in accordance with this Agreement and in compliance with the Relevant Act.

With respect to the Access Land, you acknowledge that it is reasonably necessary for the Tenement Holder to enter and cross the Access Land to enter the area of the Tenement, and permit the Tenement Holder to do so;

You acknowledge that it is reasonably necessary for the Tenement Holder to undertake specified works on the Access Land, such as upgrading and constructing access tracks, and permit the Tenement Holder to do so.

For the avoidance of any doubt, the Agreement is said to also constitute an 'access agreement' in respect of the Access Land, for the purposes of the Relevant Act;

The Tenement Holder proposes to enter the Access Land for the purposes of undertaking the proposed works referred to, and at the locations stated.

The scope of the Agreement with respect to compensation is said to be in full and final satisfaction of the Tenement Holder's compensation liability to you under the Relevant Act for the Compensatable Effects of the Activities (as specified) during the term.

To avoid any doubt, the Agreement states that it is also in full and final satisfaction of the Tenement Holder's Compensation Liability to you under the Relevant Act for the Compensatable Effects of the proposed works on the Access Land

The Agreement constitutes the entire agreement between you and the Tenement Holder in relation to its subject matter.

The Tenement Holder shall pay to you the sums detailed in full and final satisfaction of all present and future Compensation Liability of the Tenement Holder to you for:

· the Compensatable Effects caused by the Activities (as detailed) to be carried out under the Tenement and Relevant Act;

· any works undertaken by the Tenement Holder in respect of the Access Land

The Compensation payable to you pursuant to this Agreement shall be in full and final satisfaction of all present and future claims you may have resulting from the Activities referred to and the works undertaken by the Tenement Holder in respect of the Access Land.

For the avoidance of doubt, this Agreement relates only to the Compensation Liability of the Tenement Holder for the Activities referred to, and the works undertaken by the Tenement Holder in respect of the Access Land

The amount of compensation payable by the Tenement Holder is specified.

For convenience, specific sections of the Relevant Act relating to access rights and liability to compensate landholders were cited.

We also obtained some background from the relevant State Department in relation to exploration laws and an authority to prospect:

· An entity acting under an ATP, is required to comply with statutory obligations in relation to activities that they conduct on tenement land and access land.

· An entity acting under an ATP has access rights to cross land if it is reasonably necessary and to carry out activities on that land that are reasonably necessary to allow the crossing of that land. This may include constructing a road or track on the access land.

To compensate the landholder, the holder of an ATP is liable to pay compensation to each owner or occupier of land or access land that is within the ATP, for any 'compensatable effect' suffered by the landholder due to the activities done under the authority of the ATP. Compensation is also payable for consequential damage the owner or occupier incurs because of compensatable effects cause by authorised activities for the ATP.

'Compensatable Effect' is defined. [We note that the definition included in your Agreement is consistent with the statutory definition contained in the Relevant Act. ]

Each owner or occupier of land that is within the ATP, or is access land for the ATP, may enter into a compensation agreement with the ATP holder.

Generally, unless a compensation agreement is in place, an ATP holder cannot enter land to conduct activities authorised under the ATP.

An owner or occupier cannot refuse to make an access agreement but can ask for reasonable and relevant conditions to be imposed.

If a resource company has met all of its legal obligations under the Relevant Act, it is an offence for anyone, without a reasonable excuse, to obstruct the resource company from entering or crossing land to carry out authorised activities, or carrying out authorised activities.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Petroleum and Gas (Production and Safety) Act 2004

Reasons for decision

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

You have received an amount of $X from an exploration company as compensation under the terms of a conduct and compensation & access agreement. You are seeking advice in relation to whether you are liable for GST in relation to this payment.

Specifically, we need to consider whether the payment is consideration for a taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply where all of the following conditions are met:

· you make the supply for consideration

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

· the supply is connected with Australia; and

· you are registered or required to be registered for GST.

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

The term 'supply' is broadly defined in section 9-10(1) of the GST Act to include (amongst other things):

· a grant, assignment or surrender of real property (paragraph 9-10(1)(d))

· a creation, grant, transfer, assignment or surrender of any right (paragraph 9-10(1)(e))

An entry into, or release from, an obligation (paragraph 9-10(1)(g)):

· to do anything; or

· to refrain from an act or

· to tolerate an act or situation

Any combination of any 2 or more of the matters referred to in paragraphs (a) to (g) (paragraph 9-10(1)(h)).

Goods and Services Tax Ruling GSTR 2006/9 examines the meaning of 'supply' in the GST Act.

Paragraph 71 of GSTR 2006/9 explains that the term 'supply' has been held (in overseas jurisdictions) to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. The Commissioner applies this meaning in considering the meaning of 'supply' in the GST Act at paragraph 41 of GSTR 2004/9 a ruling which is about 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'.

Supply of land

A transfer, or surrender of land is covered by the definition of 'supply' in section 9-10 of the GST Act.

The Agreement acknowledges that the tenement holder and its associates will be entitled to access to and from the 'Land' (as defined) and 'Access Land' in accordance with the Agreement and in compliance with the Relevant Act.

An entity acting under an ATP also has access rights to cross land if it is reasonably necessary and to carry out activities on that land that are reasonably necessary to allow the crossing of that land. This may include constructing a road or track on the access land.

In a specified clause in the Agreement you acknowledge that it is reasonably necessary for the tenement holder to enter and cross the Access Land to enter the area of the Tenement and agree to permit them to do so. You also acknowledge and permit them to undertake certain activities (such as upgrading and constructing access tracks and rehabilitation of affected parts) on the Access land.

The relevant rights to conduct activities on the Land are created by virtue of the statutory ATP, rather than as a consequence of anything (such as a licence granted by you for the exploration company to use the land) that is 'furnished' or 'provided' by you. Similarly, the exploration company's right to access and cross the Access land is created by the statutory rights that allow an exploration company to cross and undertake specified activities on Access land, where it is reasonably necessary for them to do so. We understand from the terms of your Agreement that you are not granting or assigning any additional rights in relation to the Access land, other than what is reasonably necessary for the exploration company to undertake the authorised activities subject to the ATP.

In these circumstances, you do not take any action to cause your interest in the Land or Access Land to be transferred or surrendered to the exploration company. Further, it is our understanding (from the information extracted from the relevant government authority's website) that it would be an offence, without a reasonable excuse, for anyone to obstruct a resource company from entering or crossing land to carry out authorised activities, or carrying out authorised activities subject to the ATP. We understand that the only thing that you are free to do is to ask for reasonable and relevant conditions to be imposed, which are outlined in the Agreement.

As you do not transfer or surrender your rights to the land and do not take any form of positive action to cause anything else to be supplied to the exploration company, it follows that you are not making a supply of land under section 9-10 of the GST Act.

Compensation payments and damages

To compensate the landholder, the holder of an ATP is liable to pay compensation to each owner or occupier of land or access land that is within the ATP, for any 'compensatable effect' suffered by the landholder due to the activities done under the authority of the ATP.

Compensation is also payable for consequential damage the owner or occupier incurs because of 'compensatable effects' cause by authorised activities for the ATP. The definition of 'compensatable effects' contained in your Agreement is consistent with that in the Relevant Act.

In this case, the payment of $X is provided by the exploration company to you, to compensate you for any damages caused (or likely to be caused) to your land, and any inconvenience suffered (or likely to be suffered) by you as a consequence of the activities carried out by the exploration company on your land.

Goods and Services Tax Ruling GSTR 2001/4 (which deals with the GST consequences of court orders and out-of-court settlements) states in relation to compensation and damages:

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…

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.

Although the explanation in paragraphs 71 and 73 of GSTR 2001/4 is made in respect of court orders and out-of-court settlements, the underlying principles are equally relevant in this case.

Paragraphs 110 and 111 of GSTR 2001/4 further explain:

110. With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the aggrieved party…

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.

In applying the above principles to your circumstances, any claim for damages (or payment that you receive as a consequence of such claim) due to activities to be conducted by the exploration company on your land, does not constitute a supply under section 9-10 of the GST Act.

Discontinuance supplies

A specified clause in the Agreement provides that with respect to compensation, this Agreement is in full and final satisfaction of the tenement holder's compensation liability under the Relevant Act for 'compensatable effects' of the relevant activities (as defined).

Similarly, another part of the Agreement states that the compensation payable to you under this Agreement shall be in full and final satisfaction of all present and future claims you may have resulting from the activities (as defined) undertaken by the tenement holder in respect of the Access land.

This raises the issue of 'discontinuance supplies' as a 'supply' includes a surrender of any right (under paragraph 9-10(2)(e)) and an entry into, or release from, an obligation to do anything, or to refrain from an act (paragraph 9-10(2)(g) of the GST Act).

The Tax Office view in GSTR 2001/4 is that such conditions of settlement can create supplies for GST purposes. Such supplies are referred to as 'discontinuance supplies'. However, whether a discontinuance supply is a taxable supply would depend on the requirements of section 9-5 of the GST Act are met.

In this respect, paragraphs 106 to 107 and 109 of GSTR 2001/4 state:

106 Where the only supply in relation to an out-of-court settlement is a 'discontinuance' supply, it will typically be because the subject of the dispute is a damages claim. In such a case, the payment made under the settlement would be in respect of that claim and not have a sufficient nexus with the discontinuance supply.

107. In most instances, a 'discontinuance' supply will not have a separately ascribed value and will merely be an inherent part of the legal machinery to add finality to a dispute which does not give rise to additional payment in its own right. They are in the nature of a term or condition of the settlement, rather than being the subject of the settlement.

109. We consider that a payment made under a settlement deed may have a nexus with a discontinuance supply only if there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply.

As stated in paragraph 111 of GSTR 2001/4 where a payment is made 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.

In this case, there is no 'earlier' or 'current' supply and we have determined that the compensation payment is made in relation to the settlement of any damages relating to activities conducted on the land pursuant to the ATP. Consequently, the facts support that the substance of the payment is for 'damages' and does not have a nexus with any 'discontinuance' supply.

In summary:

1) the amount of $X is not consideration for a supply of land as you are not granting, assigning or surrendering the land, nor is it for a supply of rights, or entry into any obligations with respect to the Land or Access land;

2) the amount of $X is not consideration for any 'discontinuance' supply as any agreement to discontinue further action is merely a term of the Agreement and is not the subject of the claim;

3) the payment of $X is paid as compensation for 'compensatable effects' as defined in the Agreement and the Relevant Act. This is akin to a claim/payment for damages which is not a supply for GST purposes.

Consequently, you will not be liable for GST in relation to the amount of $X compensation payment that you are entitled to receive from the exploration company.