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Subject: GST and taxable supplies

Question

Are you making a taxable supply by entering into an agreement?

Answer

Yes, you are making a taxable supply by entering into an agreement.

Relevant facts and circumstances

You are registered for GST.

You entered into a tripartite agreement with two entities (Entity A and Entity B)

Under the terms of the agreement Entity A is required to complete a range of works as specified in the agreement in regard to assets of the Entity B (as listed in the agreement) situated on your property where such property is subject to an easement.

Entity A is also required to arrange and meet the costs of:

Entity B creating an easement as specified;

Entity B surrendering specified easements (or part thereof);

Transfer to you of specified property;

Transfer to you of other specified rights.

Entity A will pay a specified amount (GST exclusive) to you in full and final satisfaction of all claims in connection with the details of the agreement.

The payment has been apportioned with reference to the works being carried out together with possible potential future costs you may incur.

Under the terms of the agreement you agree to the manner in which the assets are to be dealt with.

You also agree for Entity A to carry out all works listed above.

Under the terms of the agreement Entity B:

· agree to the manner in which the assets are to be dealt with;

· shall forgo or waive all fees associated with licensing the assets as a private works structure if required;

· shall apportion any rights as required;

· shall forego or waive any fees in relation to any applications lodged by you in accordance with the agreement

You entered the agreement in the course or furtherance of carrying on your enterprise in Australia.

The agreement was entered into in Australia.

Contentions

You contend that the specified amount being paid to you is of the nature of compensation and as such is not consideration for a taxable supply.

Relevant legislative provisions

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

Section 9-5

Section 9-10

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you make a 'taxable supply' if:

· you make the supply for *consideration; and

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

· the supply is *connected with Australia; and

· 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.

[Please note asterisked terms are defined in the GST Act.]

In the first instance, we must determine whether you are making a supply in relation to the payment that you receive from Entity A.

The term 'supply' is defined in subsection 9-10(1) of the GST Act as any form of supply whatsoever.

Subsection 9-10(2) of the GST Act contains a list of things that are included as supplies which includes (amongst other things):

· a creation, grant, transfer, assignment or surrender of any right; and

· an entry into, or release from, an obligation to do anything or to refrain from an act or to tolerate an act or situation.

The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (EM) explains that the list contained in subsection 9-10(2) is not an exhaustive list and is not intended to limit the definition of supply contained in subsection 9-10(1).

Goods and Services Tax Ruling GSTR 2006/9 provides guidance on the meaning of 'supply' in the GST Act. Paragraph 71 of GSTR 2006/9 explains that the term 'supply' has been held to take its ordinary meaning which is to 'furnish or to serve' or to 'furnish or provide'. In adopting the ordinary meaning, it follows that the supplier must take some action or do something to make a supply.

Under the terms of the arrangement, you will receive a payment on entering into the agreement with Entity A. The payment is allocated with reference to the works being carried out together with possible potential future costs you may incur.

The agreement contains a number of terms and conditions, and specifies the things to be performed by the respective parties. You consent to the manner in which the assets of Entity B are to be dealt with. You will also surrender rights specified in the agreement. You also agree for Entity A to carry out all works as set out in the agreement. You also acknowledge that you may have certain obligations contingent on the final outcome of the works carried out.

While the terms of the agreement give rise to specific things being done and the creation of specific rights and obligations for each party, we consider that these are merely terms and conditions that go to the execution of the agreement as a whole.

Although the amounts may be allocated to certain things, of itself this is not determinative in characterising the relevant things supplied. For example, the payment being received has, in part, been allocated for works to be done at your discretion and that the allocated amounts do not need to be repaid to Entity A should those works not be carried out. This indicates that the works are not the relevant things 'supplied' or 'furnished' to Entity A in relation to the amount of payment allocated under the agreement.

In Saga Holdings Ltd v Commissioner of Taxation 2006 ATC 4001 the Court held:

' a technical analysis of one part of a transaction or of one set of obligations within a contract, even though accurate in legal principle, which is capable of explaining the service supplied, or the consideration given, in a restricted way, is not necessarily the right answer in law to the application of the provisions of this statute… this approach does indicate that taxable transactions should not be artificially dissected so as to demonstrate as being the service provided…

A similar point was made in RE AGR Joint Venture v Federal Commissioner of Taxation 2007 which involved the supply of coin blanks. The Tribunal recognised that the creation of a right can be a supply just as much as a supply of goods. However, they looked at the essence of the transaction and the real purpose for the dealing.

The Tribunal concluded that while the transaction may have involved a number of steps, there was only one supply, being the supply of the coin blanks.

Applying these principles to your circumstances, we consider that the allocation of amounts to certain things, are merely the method by which the payments are determined. Although Entity A has split the total payment and allocated amounts to a number of components of the agreement, this is the method used by Entity A to calculate the total payment amount having reference to the costs that may be incurred to give effect to the change in infrastructure. Accordingly, we consider that in this case, it is not appropriate to dissect the arrangement according to the itemised amounts to try to determine a supply. Rather, in the context of section 9-5 of the GST Act, it is appropriate to consider whether you make a supply 'for consideration'.

Goods and Services Tax Ruling GSTR 2001/4 Goods and services tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) states in part at paragraph 81 that:

'It will not be sufficient for there to be a supply and a payment. GST is not payable on supplies unless they are made for consideration, and the other tests in section 9-5 are satisfied. There must be a sufficient nexus between the supply and the payment.'

The requirement of a sufficient nexus between a supply and the payment is illustrated by the language contained in subsection 9-15(1) of the GST Act including the terms 'in connection with', in response to' and 'for the inducement of' a supply.

We consider that the essence of the transaction is your entry into the arrangement for the works to be done on your property. In other words, we consider that there is a single supply, being your agreement to allow or tolerate the specified works to be carried out on your property. This is the relevant supply that is made for GST purposes that has the necessary nexus with the payment being received under the agreement.

With reference to your contention that the amount being received is of the nature of compensation and as such is not consideration for a taxable supply we advise the following.

The term 'compensation' is not defined in the GST Act. Therefore the term will take its ordinary or common meaning. The Macquarie Dictionary (Online version 2012) defines compensation as:

· the act of compensating.

· something given or received as an equivalent for services, debt, loss, suffering, etc.; indemnity.

The concept of 'compensation' in this context is in relation to the model of indemnity. That is, something received to make a party to a contract "whole" again should a contractually-specified event occur.

In this case, the payment received is not an attempt to return you to your original position prior to the completion of the works specified under the agreement. In some cases, the payment may in fact result in you being in a better position than prior to the agreement being completed.

As such, we do not consider the amount to be in the nature of compensation. We consider that the nature of the payment is akin to an incentive or inducement. The term 'incentive' is defined in The Macquarie Dictionary (Online version 2012) as that which incites or stimulates action. In this case, the attraction of the payment could be said to have incited or stimulated the action of entering into the agreement.

The payment is considered not to be made to compensate the land owners for damages to their property but as a financial incentive for the land owner to voluntarily participate in the project.

In this case, the agreement provides that the owners accept payment in full and final satisfaction of all claims in connection with the matters contemplated by the agreement and to assist with any works and loss of benefit as a consequence of work carried out.

GSTR 2001/4 discusses supplies related to the discontinuance of action. Paragraph 54 of GSTR 2001/4 states in part that a discontinuance supply may be a supply characterised as:

· surrendering a right to pursue further legal action [paragraph 9-10(2)(e)]; or

· entering into an obligation to refrain from further legal action [paragraph 9-10(2)(g)]; or

· releasing another party from further obligations in relation to the dispute [paragraph 9-10(2)(g)].

Paragraph 107 of GSTR 2001/4 describes that in most instances a discontinuance supply will 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. A discontinuance supply is in the nature of a term or condition of the settlement, rather than being the subject of the settlement.

This principle is relevant to the current situation in that the land owners are not being paid an amount to compensate them for damages or relinquish their rights to further claims. In this case, although the calculation has been made with reference to potential costs the land owners may incur, no actual damages have been identified or predetermined.

In this case, as discussed previously, we consider the payment is made for you, the land owner, agreeing to enter into the agreement and not a payment in the nature of compensation.

Conclusion

You have made a taxable supply as your supply satisfies the requirements of section 9-5 of the GST Act and the supply is neither GST-free nor input taxed.