Edited version of your private ruling

Authorisation Number: 1012582011161

Ruling

Subject: GST and payment of compensation/damages

Issues

1. Do the Landholders make a supply to the recipient under the Compensation agreement (CA) when the recipient pays them compensation?

2. Is the payment the recipient makes to the Landholders under the CA compensation for the effects caused or likely to be caused by the recipient's activities on the land under the Energy resource Legislation?

Decisions

1. No, the Landholders do not make a supply to the recipient under the CA when the recipient pays them compensation.

2. Yes, the payment the recipient makes to the Landholders under the CA is compensation for the effects caused or likely to be caused by the recipient's activities on the land under the Energy resource Legislation.

Relevant facts

The Landholders of the Land are registered for GST.

The arrangement that is the subject of the private ruling is the compensation payments made under CA, pursuant to the Energy Resource Legislation.

The recipient is the holder of energy resource leases and the registered holder of the Energy Resource Authority. The leases cover all or part of the Land owned or occupied by the Landholders. The recipient is authorised to carry out activities associated with exploring for energy resource, testing for energy resource, producing energy resource and storing energy resource on the land. These activities (Energy Resource Activities) are authorised under the Energy Resource Authority.

The recipient is registered for ABN and GST in Australia. The recipient proposes to enter into a CA with the Landholders. The CA has been signed by the Landholders.

The Energy Resource Legislation ensures that owners or occupiers of land, on which energy resource activities are to be carried out, are appropriately compensated.

The Energy Resource Legislation provides that the authorised activities may be carried out despite the rights of an owner or occupier of land on which they are exercised.

"Activities" in the CA is defined as activities associated with the development and operation of energy resource on the Land. The CA provides that the agreement is an agreement negotiated for the purposes of the Energy Resource Legislation.

The CA provides that the Landholders acknowledge that the compensation compensates for all of the impacts of the authorised activities but not for any effects of the activities that arise from a breach of the Energy resource Authority, Environmental Authority or any relevant laws. The CA provides the amount which the recipient agrees to pay the Landholder compensation amounts.

Reasons for decisions

Summary

The payment from the recipient to the Landholders is paid and received as compensation to the Landholders to discharge the recipient's statutory Compensation Liability for losses relating to the Land resulting from the recipient's Energy Resource activities being carried on the Land. Any loss suffered by the Landholders is not a supply that the Landholders make to the recipient.

Detailed reasoning

Question 1: Do the Landholders make a supply to the recipient under the CA when the recipient pays them compensation payment?

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 2006/9 (GSTR 2006/9), examines the meaning of "supply" in the GST Act. Proposition 5 in GSTR 2006/9 provides 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.

The recipient is the holder of Energy Resource leases and the registered holder of the Energy Resource Authority. The Energy Resource Legislation provides that the authorised activities may be carried out despite the rights of an owner or occupier of land on which they are exercised.

The recipient has the rights to undertake Energy Resource activities on the land provided the recipient meets its Compensation Liability to the Landholders and enter into a CA with the Landholders.

You submit that the Landholders do not make a supply to the recipient in respect of the recipient's access to the land. Instead the recipient has the rights to carry out the Energy Resource Activities provided the recipient meets its Compensation Liability to the Landholders and enters into a CA with the Landholders.

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

In such circumstances, the right to access the Land and carry out the Energy Resource activities on the Landowner's land is vested in the recipient as a holder of the Energy Resource Authority under the Energy Resource Legislation. The right to access the Land and carry out the Energy Resource activities on the Landowner's land is not a supply by the Landholders to the recipient.

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

22. Essentially, a supply is something which passes from one entity to another. The supply may be one of particular 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. Hence there is no supply from the Landholders to the recipient.

Question 2: Is the payment the recipient makes to the Landholders under the CA compensation for the effects caused or likely to be caused by the recipient's activities on the land under the Energy Resource Legislation?

The Energy Resource Legislation requires the recipient to compensate the Landholders for any "compensatable effects" arising out of the Energy Resource Activities on the land.

The Energy Resource Legislation describes the above requirement to compensate in detail, and specify what needs to be in the CA.

"Activities" in the CA is defined as the activites associated with the development and operation of the energy resource on the Land.

The recipient's activities on the land impact, or are likely to impact, the land and the Landholders' use of the land.

The payment from the recipient to the Landholders is paid as compensation to the Landholders 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 the activities being carried on. The Landholders do not surrender any rights, release the recipient from any obligations, or refrain from any acts the recipient would have otherwise made. Consequently, the loss suffered by the Landholders is not a supply that the Landholders make to the recipient.

Accordingly, we confirm that:

1. The Landholders do not make a supply to the recipient under the Compensation Agreement when the recipient pays them compensation.

2. The payment the recipient makes to the Landholders under the CA is compensation for the effects caused or likely to be caused by he recipient's activities on the land under the Energy Resource Legislation.

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