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Ruling

Subject: GST and compensation payments

Question

Does a landholder make a taxable supply to you, under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when the landholder receives payments from you?

Decision

Yes, where all the requirements of section 9-5 of the GST Act are satisfied, a landholder will make a taxable supply to you, when the landholder receives payments from you.

Relevant facts and circumstances

You carry on an enterprise of exploration and related activities (exploration activities).

You have obtained a number Authorities to Prospect (ATP) issued under the relevant state government legislation (legislation) for exploration activities.

The ATPs have been signed between you and the state government for a period of X years. They approve drilling of exploration wells and pilot wells on land belonging to different 'landholders'. Each ATP has listed the particular blocks of land that are subject to its authority.

The legislation grants you, as the ATP holder, the right to conduct authorised activities such as drilling wells, building well lease sites etc on the land owned by 'landholders'.

Under the legislation, in order to carry out your enterprise, you have to enter into an agreement with each affected landholder in order to address a number of 'compensatable effects'.

Details of items relating to a landholder's land that is a compensatable effect was supplied.

The payments made by you to a landholder are for the compensatable effects.

The amount of compensation payment is determined by agreement between you and the relevant landholder. In determining the compensation payable, a number of matters including any damage caused to the land, loss of productivity or profits of the landholder etc have to be taken into account.

You, as an explorer, must serve on a landholder a notice of intention to enter the relevant land, describing the nature of operations to be carried out on the land. The notice sets out the landholder's rights of objection and compensation under the legislation. The landholder has a right to object to entry into the land by an explorer or use of the land for exploration activities. However, a notice is not required if the explorer is authorised to enter the land by an agreement with the landholder.

The amount payable under an agreement is linked to the level of exploration activities. The landholder is also entitled to compensation for damages to the crops on the land and further compensation, if the loss is greater than what was provided under the relevant clauses.

You intend to enter into agreements with the affected landholders. You intend to use the agreement form prepared by the state government. You have submitted a copy of a pro-forma agreement. This ruling request mainly refers to such agreements.

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 - section 9-10

A New Tax System (Goods and Services Tax) Act 1999 - section 9-15

A New Tax System (Goods and Services Tax) Act 1999 - section 9-20

Reasons for the decision

Section 9-5 of the GST Act refers to taxable supplies and states:

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 term defined in section 195-1 of the GST Act.

Section 9-10 of the GST Act refers to the meaning of supply and states:

(1) a supply is any form of supply whatsoever.

(2) Without limiting subsection (1), a supply includes any of these:

(a) a supply of goods;

(b) ….

(c) a supply of services;.

(d) a grant, assignment or surrender of *real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) ….

(g) an entry into or release from an obligation:

i. to do anything; or

ii. to refrain from an act; or

iii. to tolerate an act or situation.

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

When you serve a notice of intention to enter the land belonging to a landholder and carry out exploration activities in return for 'compensation payments', if the landholder is agreeable, you will negotiate the quantum of compensation payable and enter into the agreement.

In this case, the landholder makes a supply to you of the right to enter onto their land and carry out exploration activities. Under paragraph 9-10(2)(e) of the GST Act, the grant of this right by the landholder to you is a supply from the landholder allowing you to enter their property for exploration activities. The payments made by you to the landholder for the compensatable effects have a direct nexus with the grant of this right. Therefore, the 'compensation payments' made by you to a landholder constitute the consideration for their supply. Accordingly, paragraph 9-5(a) of the GST Act is satisfied.

Enterprise

It is necessary to consider whether the landholder makes this supply in the course or furtherance of an enterprise carried on by the landholder.

Paragraph 9-20(1)(b) of the GST Act provides that an enterprise is, an activity or series of activities done in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) refers to the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) refers to whether MT 2006/1 has an equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. Paragraph 1 of GSTD 2006/6 provides that the principles in that ruling apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

Paragraphs 234 and 238 of MT 2006/1 state:

234. Ordinarily, the term 'business' would encompass trade engaged in on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

238. A similar view was expressed by Foster J in AB v FC of T 97 ATC 4945 at 4961 where he said:

…..See also the discussion in RW Parsons, Income Taxation in Australia, The Law book Company Limited, Sydney 1985, p 159-63 in which the learned author expresses the view that 'an adventure in the nature of trade' is equivalent to an 'isolated business venture' as opposed to a continuing business. I respectfully agree. I also accept that such a transaction must 'exhibit features which give it the character of a business deal' (McClelland v FCT (1970) 120 CLR 487 at 495; ….)

As a result of entering into an agreement with you, the landholder receives a substantial 'compensation payment' from you. You have to rectify any damages done to the landholder's property. Therefore, the landholder does not have to incur any costs in rectifying the damages done to their property by your activities. Accordingly, we consider that this agreement bears the characteristics of a profitable business deal for the landholder. Consequently, we consider that the landholder makes the supply in the course or furtherance of an enterprise carried on by the landholder and paragraph 9-5(b) of the GST Act will be satisfied.

Other requirements

The supply from the landholder is connected with Australia as the land is located in Australia. The supply of the right to enter their land and carry out authorised activities is not a GST-free or an input taxed supply under any provision of the GST Act.

Therefore, if the landholder is registered or required to be registered for GST when the landholder enters into the agreement with you, the landholder makes a taxable supply to you. The 'compensation payments' made by you will be the consideration for this supply.