Edited version of private advice

Authorisation Number: 1051769081391

Date of advice: 20 October 2020

Ruling

Subject: GST and native title

Question 1

Do the Native Title Parties make a taxable supply to the relevant government entity pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) by entering into the Indigenous Land Use Agreement (ILUA)?

Answer

No.

Question 2

Does the relevant government entity make a taxable supply pursuant to section 9-5 of the GST Act when it provides compensation to Entity A under the ILUA?

Answer

No.

Relevant facts and circumstances

Entity A are the common law holders of native title within an area in Australia.

Entity B is a 'prescribed body corporate' (the PBC) which has been established to hold native title on behalf of Entity A.

Entity C (the Regional Entity) has been established to receive benefits and carry out a range of functions for Entity A.

On ddmmyyyy the relevant government entity and Entity D reached in-principle agreement to resolve native title claims within the 'Agreement Area'.

Entity D represented various native title claim groups, collectively, the Native Title Claim Groups.

The Native Title Claim Groups, the PBC and the Regional Entity are collectively, the Native Title Parties.

The relevant government entity and the Native Title Claim Groups agreed to seek a Determination of Native Title by consent of the Entity A claim (the Determination). The Determination includes:

1.    the determination that non-exclusive native title exists over certain parcels of land within the Agreement Area (Native Title Areas), and

2.    the surrender of any native title rights and interests over the rest of the Agreement Area (Surrender Area).

The Determination is conditional upon the registration of the Entity A Indigenous Land Use Agreement (ILUA) as defined in the ILUA.

A map of the agreement area has been provided.

On ddmmyyyy the relevant government entity and the Native Title Parties entered in to the ILUA. A copy was provided.

The ILUA provides for a package of benefits to compensate Entity A for:

·         the surrender of their native title rights and interests in the Surrender Area

·         the disapplication of the future act regime in the Native Title Areas

·         the validation of any invalid acts which may have been carried out by the relevant government entity

·         any other loss, surrender, diminution, impairment or other effects on native title rights and interests by acts that have been done in relation to the Agreement Area.

The package of benefits will constitute full and final compensation for the impact on native title rights and interests in the Agreement Area.

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 9-17

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

Reasons for decision

In this reasoning, please note:

·         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

·         all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

Question 1

An entity is liable for GST on any taxable supplies that it makes.

The ILUA provides a package of benefits to compensate Entity A, the common law holders of native title in the Agreement Area and will constitute full and final compensation for the impact on native title rights and interests in the Agreement Area.

The package of benefits from the relevant government entity to various entities as set out in the ILUA are received on behalf of Entity A. If there is a supply, Entity A will be the supplier.

For the package of benefits to give rise to a GST liability there has to be a taxable supply.

Section 9-5 provides that you make a taxable supply if:

(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 the indirect tax zone (Australia), and

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

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Supply

The term 'supply' is defined in subsection 9-10(1) as 'any form of supply whatsoever'. Essentially, a supply is something which passes from one entity to another, and may be one of particular goods, services or something else. Relevantly supply includes:

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

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

An entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient). While an entity may make a supply by observing an obligation, even if that involves no more than refraining from doing something or tolerating some act or situation, there will be no supply where something occurs by operation of law without an entity providing something or without any obligation being placed on the entity to provide something.

Consideration

Section 9-15 provides that a payment will be consideration for a supply if the payment is 'in connection with' a supply and 'in response to' or 'for the inducement' of a supply. Further, the requirement in paragraph 9-5(a) that the supply is 'for' consideration means that not every connection will be sufficient. There must be a sufficient nexus between a particular supply and a particular payment, which is provided for that supply, for there to be a supply for consideration.

Sufficient nexus

In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

The ILUA is an agreement involving native title rights and is entered into in the context of the requirements and obligations contained in the Native Title Act. This situation is unique in that native title arises as a result of the recognition, under Australian common law, of pre-existing Indigenous rights and interests according to traditional laws and customs.

The ILUA is an alternative to continuing to pursue a decision in the relevant court for determination of native title. Under the ILUA the collection of rights is considered holistically rather than having to look at each and every action and consider whether and to what extent rights were extinguished and what rights might remain. For example, acts such as freehold title and roads will extinguish native title in its entirety, whereas pastoral leases may only partially extinguish native title.

Further, the Native Title Act provides it will continue to apply to future acts unless it is specifically stated in the ILUA that native title has either been extinguished or that the Act does not apply to the future act.

Is there a supply for consideration under the ILUA?

The parties ILUA will settle all claims for native title over the Agreement Area and compensate Entity A for the loss, surrender, diminution, impairment and other effects on their native title rights and interests, arising from all acts that have been done and may be done in relation to the Agreement Area (the Settlement).

Relevantly, pursuant to the ILUA, the Native Title Parties fulfil various obligations to the relevant government entity. It is necessary to consider if the following are supplies by Native Title Parties:

·         validating all invalid acts in the Agreement Area

·         surrendering the native title rights and interests in the Surrender Area

·         consenting to the disapplication of the future act regime in the Native Title Areas.

The map of the Agreement Area outlines, amongst other things, that the majority of the area is covered by freehold and pastoral leases. This illustrates that native title rights have already been extinguished in whole or in part prior to the entry into the ILUA. The ILUA does not quantify or ascribe monetary or non-monetary compensation to these or to particular supplies of other rights and interests that may remain in the Agreement Area.

As stated above, there will be no supply where something occurs by operation of law without an entity providing something or without any obligation being placed on the entity to provide something. Paragraphs 80 to 90 of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies illustrate this principle in the context of compulsory acquisition or vesting of real property rights. In the circumstances described, claimants for compensation do not make a supply of surrendering their rights as those rights are being extinguished through the actions of a third party or other party. While there are clauses in the ILUA that the parties are agreeing to validation of acts or surrendering of rights, the majority of these rights will already have been extinguished under the Native Title Act due to the past acts that have occurred. Therefore, the Native Title Parties will not be making a supply where the rights have been extinguished.

Further, Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements explains when payment represents consideration for a supply because there is a link or nexus between a payment (or act or forbearance) and a supply. The principles are relevant in this situation.

Paragraph 51 of GSTR 2001/4 provides:

Generally (it is suggested in most if not all cases), the terms of a settlement, in finalising a dispute, will ensure no further legal action in relation to that dispute, provided that the terms of the settlement are complied with. This often takes the form of a plaintiff releasing a defendant from some (or all) of the existing claims and from further claims and obligations in relation to that dispute.

The conditions of the Settlement may also create the following discontinuance supplies:

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

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

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

However, paragraph 107 GSTR 2001/4 relevantly provides:

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.

Similarly, the obligations under the ILUA of agreeing that native title rights, if there are any, are extinguished and that there are no further obligations to pay compensation under the Native Title Act or otherwise, are necessary to bring finality to the native title matter and give effect to the ILUA as full and final compensation for the impacts on native title rights and interests in the Agreement Area.

Paragraphs 110 and 111 of GSTR 2001/4 relevantly provides:

110. With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the aggrieved party. If a payment made under a court order is wholly in respect of such a claim, the payment will not be consideration for a supply. ...

111. If a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement.

Applying the above principles, there is not a sufficient nexus between the package of benefits and any supply within the meaning of section 9-10. Therefore, the requirement of paragraph 9-5(a) for there to be a supply for consideration is not satisfied.

Therefore, the Native Title Parties have not made any taxable supplies to the relevant government entity under section 9-5.

Question 2

As considered under question 1 of this private ruling, the Native Title Parties will not make any supplies to the relevant government entity for compensation to be provided by the relevant government entity. Accordingly, the Native Title Parties will not provide any consideration for supplies made by the relevant government entity which comprise the compensation to be provided. As the supplies made by the relevant government entity are not made for consideration, the relevant government entity will not make any taxable supplies to the Native Title Parties under section 9-5 when it provides the compensation pursuant to the ILUA.