Edited version of your private ruling

Authorisation Number: 1012525560323

Ruling

Subject: GST and payment of compensation/damages

Questions

1) Do the Landowners make a supply to you under the Agreement when you pay them compensation payment?

2) Is the payment you make to the Landowners under the Agreement are compensation for the effects caused or likely to be caused by your activities on the land under the Petroleum Legislation?

3) Do you make a creditable acquisition from the Landowners under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answers

1) No, the Landowners do not make a supply to you under the Agreement when you pay them compensation payment.

2) Yes, the payment you make to the Landowners under the Agreement are compensation for the effects caused or likely to be caused by your activities on the land under the Petroleum Legislation.

3) No, you do not make a creditable acquisition from the Landowners under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is the compensation payments made under a draft Agreement, pursuant to the Petroleum Legislation. All terms used are either defined under the Petroleum Legislation or in Schedule 4 of the Agreement

ABC Pty Ltd is the holder of petroleum leases and the registered holder of the Petroleum Authority. The leases cover all or part of private land (the land) owned or occupied by individuals or companies (the Landowners). ABC appoints you to carry out activities associated with exploring for petroleum, testing for petroleum, producing petroleum and storing petroleum on the land. These activities are authorised under the Petroleum Authority.

Both ABC and you are registered for ABN and GST in Australia. The ABN and GST status of the Landowners vary.

You propose to enter into a draft Agreement with the Landowners under the Petroleum Legislation. You submit that the Landowners do not make a supply to you in respect of your access to the land. Instead your access to the land happens by operation of the law under the Petroleum Legislation, that is, the Landowners' rights of exclusive access to the land are overridden by the Petroleum Legislation. Under the Petroleum Legislation, you do not acquire an "interest" in the land and therefore it is not compulsorily acquiring the rights to use the land. Instead, the Petroleum Legislation gives you the right to "access and use" land for petroleum activities provided that you follow the negotiation and dispute resolution process set out under the Petroleum Legislation.

The negotiation and dispute resolution process set out under the Petroleum Legislation requires you and the Landowners to negotiate and try to reach agreement on the quantum of compensation for the access and use of the land. If the parties cannot agree, either party can commence proceedings in the Court and the Court must then decide the quantum of compensation; and you can (as soon as the Court proceedings are commenced) enter and use the land for petroleum activities. Therefore, you submit you may still gain access to the land to carry out the authorised activities without the Landowner's consent.

The Petroleum Legislation

The Petroleum Legislation ensures that owners or occupiers of land, on which petroleum activities are to be carried out, are appropriately compensated.

The Petroleum Legislation defines "petroleum authority", and lists the "conditions" of a petroleum authority, and define an "authorised activity".

The Petroleum Legislation states that the authorised activities may be carried out despite the rights of an owner or occupier of land on which they are exercised. The Petroleum Legislation requires the Minister to grant the petroleum lease if the Minister is satisfied that the requirements for grant have been met. The Petroleum Legislation provides that the holder of an authority to prospect must be granted a petroleum lease if the applicant has met specific requirements in relation to the application and has substantially complied with the conditions of the authority to prospect.

The Petroleum Legislation requires you to compensate the Landowners or "eligible claimant" (referred to under the Petroleum Legislation as "relevant owner or occupier of private or public land") for any "compensatable effects" arising out of the Petroleum Activities on the land.

The draft Agreement

The draft Agreement is between you, acting as agent for and on behalf of ABC, and the Landowner. The Agreement provides that the Agreement is a conduct and compensation agreement negotiated for the purposes of the Petroleum Legislation.

Your activities on the land impact, or are likely to impact, the land and the Landowners' use of the land and will deprive the Landowners' possession of the land's surface.

The compensation you pay is set out in the Agreement and is in full and final satisfaction of all of your/ABC's compensation liability to the Landowner.

Upon receipt of the compensation paid by you, the Landowners acknowledge that ABC has discharged its Compensation Liability under the Petroleum Legislation in respect of the petroleum activities carried out on the Land as described in the Agreement. The compensation amounts do not include GST.

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 11-5

Reasons for decision

Summary

The payment from you to the Landowners is paid and received as compensation to the Landowners for losses relating to the Land including damage to the surface, deprivation of the possession of the surface or any part of the surface of the land resulting from your activities being carried on. Any loss suffered by the Landowners is not a supply that the Landowners make to you. Hence, you do not make a creditable acquisition from the Landowners.

Detailed reasoning

Question 1: Is there a supply from the Landowners to you in relation to payments of compensation?

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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.

A supply is broadly defined in section 9-10 of the GST Act to include the creation, grant, transfer, assignment or surrender of any right or an entry into, or release from an obligation to refrain from an act or to tolerate an act or situation.

Goods and Services Tax Ruling, GSTR 2006/9, (GSTR 2006/9), examines the meaning of "supply" in the GST Act. Proposition 5 in GSTR 2006/9 states that to "make a supply" an entity must do something. The relevant paragraphs are paragraphs 74 and 78 (as follows):

74. However, Underwood J was of the view, with which the Commissioner also agrees, that an entity can still make a supply even if the supply is made under the compulsion of statute if the entity takes some action to cause a supply to occur. His Honour went on to compare a supply resulting from a positive act against a situation where there is no supply because nothing is done.

It seems to me that different considerations arise when considering the meaning of 'supply' in the Act. Notwithstanding the statutory compulsion, the liquidator's disposition in St Hubert's Island Pty Ltd (in liq) was something that was 'made' by him and for that reason would be likely to be considered a supply within the meaning of the Act. This is quite a different situation from the matter at hand, for the release of the obligation to pay a judgment sum by the payment of that sum will occur regardless of whether the judgment creditor makes or does any act at all. It was held in Databank Systems Ltd v. Commissioner of Inland Revenue (NZ) (1987) 9 NZTC 6213 that 'supply' means 'to furnish or provide'. Application of that proposition to the word 'supply' as enacted in the Act, s9-10 reinforces the concept that there is a legislative intention not to include in the word 'supply' the release of an obligation that occurs independently of the act of the releasor.

78. The Court's wider comments about 'supply' and 'obligation' in paragraphs 16, 22 and 23 of its decision were expressed with some caution. With respect, the Commissioner does not consider the Court has stated a general principle, contrary to our proposition, that a supply can be brought about by operation of law in the absence of an entity taking any positive action. The Commissioner distinguishes something brought about solely by operation of law where there is no supply, from something done by an entity as a consequence of a legal requirement where there may be a supply, as was the situation noted by Underwood J in Shaw citing the example of the liquidator's actions in St Hubert's Island. The Commissioner also distinguishes an action that results in obligations arising by operation of law, as the Full Court found in Westley , where there may be a supply by the entity taking the action.

ABC is the holder of petroleum leases and the registered holder of the Petroleum Authority. The Petroleum Legislation defines an authority to prospect as a petroleum authority for the purposes of the Petroleum Legislation. The Petroleum Legislation states that the authorised activities may be carried out despite the rights of an owner or occupier of land on which they are exercised. The Petroleum Legislation requires the Minister to grant the petroleum lease if the Minister is satisfied that the requirements for grant have been met. The Petroleum Legislation provides that the holder of an authority to prospect must be granted a petroleum lease if the applicant has met specific requirements in relation to the application and has substantially complied with the conditions of the authority to prospect.

As ABC's agent, you have the rights to undertake petroleum activities on the land provided you meets your Compensation Liability (referred to under the Petroleum Legislation) to the Landowners and enter into a Conduct and Compensation Agreement with the Landowners as stated under the Petroleum Legislation.

You submit that the Landowners do not make a supply to you in respect of your access to the land. Instead your access to the land happens by operation of the law under the Petroleum Legislation, that is, the Landowners' rights of exclusive access to the land are overridden by the Petroleum Legislation. Under the Petroleum Legislation, you do not acquire an "interest" in the land and therefore you are not compulsorily acquiring the rights to use the land. Instead, the Petroleum Legislation gives you the right to "access and use" land for petroleum activities provided that you follow the negotiation and dispute resolution process set out under the Petroleum Legislation. Therefore, you may still gain access to the land to carry out the authorised activities without the Landowner's consent.

We agree with your submissions because the negotiation and dispute resolution process set out under the Petroleum Legislation requires you and the Landowners to negotiate and try to reach agreement on the quantum of compensation for the access and use of the land. The Petroleum Legislation provides that if the parties cannot agree, either party can commence proceedings in Court; upon which the Court must then decide the quantum of compensation. There is no clause in the Petroleum Legislation which provides for a dispute resolution process in case the Landowners do not agree to give you access to the Land for approved activities.

In such circumstances, the right to access the Land and carry out the petroleum activities on the Landowner's land is vested in ABC as a holder of the Petroleum Authority under the Petroleum Legislation and is not a supply of a right to access the land by the Landowners to you acting as agent for ABC.

Goods and Services Tax Ruling, GSTR 2001/4, sets out the Commissioners view relating to GST consequences of court orders and out-of-court settlements and in relation to the meaning of supply, paragraph 22 states:

22. Essentially, a supply is something which passes from one entity to another. The supply may be one of goods, services or something else.

In paragraph 71 of GSTR 2001/4, the Commissioner also identifies situations where the subject matter of a claim for damages or compensation cannot be regarded as a 'supply'. Examples of such claims include property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury. 

Question 2: Payment to the Landowners from you

The Agreement entered into between you and the Landowners is made pursuant to the Petroleum Legislation.

The Petroleum Legislation requires you to compensate the Landowners for any "compensatable effects" arising out of the Petroleum Activities on the land. It follows that where a landowner is an eligible claimant under the Petroleum Legislation, this gives rise to a right to compensation.

The Petroleum Legislation describe the above requirement to compensate in detail, and specify what needs to be in the Agreement.

Your activities on the land impact, or are likely to impact, the land and the Landowners' use of the land and will deprive the Landowners' possession of the land's surface.

You will pay the Landowners compensation. This compensation is in full and final satisfaction of all of ABC's compensation liability to the Landowners. The loss suffered by the Landowners is not a supply that the Landowners make to you.

We confirm the following issues:

1) the Landowners do not make a supply to you under the Conduct and Compensation Agreement (CCA) when you pay them compensation payment on behalf of ABC.

2) the payment you make to the Landowners are compensation for the effects caused or likely to be caused by your activities on the land under the Petroleum Legislation.

Question 3: Do you make a creditable acquisition from the Landowners under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

For a supply to be taxable under paragraph 11-5(b) of the GST Act, all the requirements of section 9-5 of the GST Act must be satisfied.

Since there is no supply from the Landowners to you in relation to the compensation payments, the requirement of subsection 11-5(b) of the GST Act is not satisfied. We confirm the third issue that you do not make a creditable acquisition from the Landowners under section 11-5 of the GST Act.