Edited version of your private ruling

Authorisation Number: 1012611212394

Ruling

Subject: Goods and services tax and compensation payments

Question 1

Do the compensation amounts received by the landholders in accordance with the relevant conduct and compensation agreements give rise to a GST liability for the landholders?

Answer

No. The compensation amounts received by the landholders in accordance with the relevant conduct and compensation agreements do not give rise to a GST liability for the landholders.

Question 2

Is the amount received by Company A in relation to its provision of XYZ service to Entity B subject to GST?

Answer

Yes. The amount received by Company A in relation to its provision of XYZ service to Entity B is subject to GST.

Question 3

Is the amount received Company A in relation to the dead animal subject to GST?

Answer

No. The amount received by Company A in relation to the dead animal is not subject to GST.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The landholders have individually and jointly entered into a number of conduct and compensation agreements ("CCAs") with the Authority Holder (Entity B) for the purpose of compensating the landholders for a certain ("CSG") activity undertaken by the Authority Holder on the land owned by the landholders.

Company A leases the land from the landholders and carries on an enterprise on the land. Company A is the owner of all the livestock grazed on the land.

The landholders have received upfront and annual compensation amounts in accordance with the relevant CCAs.

The landholders will continue to receive annual compensation amounts for the term of the CCAs whilst Entity B carry out the activities on their properties.

Entity B paid Company A for the supply of service XYZ which were performed by Company A using equipment it owned and by staff it employed.

Entity B paid Company A an amount as compensation for a dead animal that became trapped in a certain pit that is associated with the activities conducted by Entity B.

Assumption

For the purposes of this ruling, the Commissioner accepts the landholders' assertion that the removal of gravel and use of the property's water reserves by Entity B and the installation of the powerlines diminished the value of the land. This ruling is given on this basis.

Reasons for decision

Question 1

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

Section 9-5 of the GST Act provides that you make a taxable supply where all of the following conditions are met:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with Australia; and

(d) 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 first requirement of section 9-5 of the GST Act is that the supply is made for consideration. For there to be a supply for consideration, three fundamental criteria must be met:

• there must be a supply

• there must be a payment, and

• there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration .

There are payments being made to the landholders in the form of compensation amounts. Accordingly, we need to determine if the landholders are making supplies for which the compensation amounts received is consideration. In other words, what needs to be determined in this case is whether there is a nexus between any supply made by the landholders and the compensation amounts received.

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), sets out the Commissioners view relating to the meaning of supply. In particular 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 goods, services or something else.

The compensation amounts received by the landholders are in respect of any compensatable effect suffered by the landholders due to the activities undertaken by Entity B on their properties. The definition of compensatable effect as set out in the CCAs is consistent with that contained in the specific legislation.

The compensatable effect includes any damages caused or likely to be caused to the landholders' properties and any inconvenience suffered by the landholders as a consequence of their activities to be carried out on their properties.

GSTR 2001/4 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.

72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the matter is resolved by a court or through negotiation.

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 to 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. In paragraph 71 of GSTR 2001/4, the Commissioner identifies situations where the subject matter of a claim for damages or compensation cannot be regarded as a 'supply'. Examples of such situations include property damage.

In applying the above principles to the landholders' circumstances, the damage caused to the land as a result of the activities conducted by Entity B and consequently the loss in the value of the land borne by the landholders cannot in itself be characterised as a supply by the landholders under section 9-10 of the GST Act.

As stated above, in order for the first requirement of section 9-5 of the GST Act to be satisfied, the compensation amounts received by the landholders must be for supplies made by the landholders. As there are no supplies made by the landholders for which the compensation amounts are received as consideration, the requirements of section 9-5 of the GST Act cannot be met.

Discontinuance supplies

In relation to the scope of compensation, the CCAs provides that the compensation amounts paid to the landholders are in full and final satisfaction of the Authority Holder's compensation liability under the specific legislation.

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

The ATO 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 being met.

In this respect, paragraphs 106 to109 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.

108. We do not consider that the inclusion of a 'no liability' clause in a settlement deed alters this position. 'No liability' clauses are commonly included in settlement agreements and we do not consider their inclusion to alter the substance of the original dispute, or the reason payment is made.

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.

The undertaking made by the landholders not to seek further compensation does not have a separately ascribed value. It is merely part of the mechanism to finalise the compensation claim. Therefore, the compensation amounts received by the landholders will have no nexus with any discontinuance supply made by the landholders.

In conclusion, as the landholders are not making a supply for which the compensation amounts is consideration, the first requirement of section 9-5 of the GST Act is not met. It follows that no GST is payable in relation to the compensation amounts received by the landholders.

Question 2

Company A carries on enterprise on the land leased from the landholders. Company A owns all the animals in relation to that enterprise that is carried on the land.

Entity B paid Company A for the supply of service XYZ associated with the property. XYZ service were performed by Company A using equipment it owned and by staff it employed.

Company A made the supply of the XYZ service to Entity B for consideration, the supply was made in the course of furtherance of its enterprise, the supply was connected with Australia and Company A is registered for GST.

The XYZ service provided by Company A are not input taxed or GST-free.

Therefore the supply of the XYZ service by Company A to Entity B meets all the requirements of a taxable supply as set out in section 9-5 of the GST Act and will therefore be subject to GST.

Question 3

Entity B paid Company A an amount as compensation for the animal that became trapped in a pit associated with the enterprise being carried on by Entity B and consequently died.

In line with the Reasons for Decision in Question 1 and pursuant to paragraphs 71 to 73 of GSTR 2001/4 as listed above, the loss of the animal cannot be characterised as a supply made by Company A for purposes of the GST Act. This is because the loss in itself does not constitute a supply under section 9-10 of the GST Act.

Therefore the requirements of section 9-5 of the GST Act are not met and consequently the compensation amount received by Company A for the death of the animal will not be subject to GST.