Edited version of private advice

Authorisation Number: 1051948461017

Date of advice: 22 March 2022

Ruling

Subject: Mining compensation

Question 1

Do the receipts under the Early Conduct and Compensation Agreement (ECCA) constitute assessable income in accordance with section 6-5 Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Do the receipts under the ECCA constitute capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening?

Answer

No.

Question 3

Do the receipts under the ECCA reduce the cost base of the property/land under section 110-45(3) of the ITAA 1997?

Answer

Yes.

Question 4

Will the sale of water be considered to be assessable income of the landholder?

Answer

Yes.

Question 5

Will the landholder incur a GST liability on the receipt of compensation amounts and receipts from the sale of water?

Answer

No.

This ruling applies for the following periods:

Income years ended 30 June 20XX to 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A and Person B (Landholder) have entered into an ECCA with ABC in regards to their Property.

Person A and Person B are the legal owners of the Property while the partnership of Person A and Person B (the Partnership) run a primary production business on the Property.

The ECCA compensates the Landholder for the impact of all coal seam gas (CSG) related activities on the Property which includes the proposed placement of gas production wells and non-production wells on the land.

A high-quality primary production business has been carried out on the land to date by the Partnership. The prospect of the proposed CSG activity and related infrastructure on the land is of significant concern to the Landholder because of:

•                    the permanent diminution in the productive capacity of the land from the CSG activities,

•                    the reduction in the amount of land available for primary production use, and

•                    land will be stranded and land rendered less productive due to the presence of CSG infrastructure.

Early Conduct and Compensation Agreement

The ECCA provides that ABC will carry out Authorised Activities under the Petroleum Authority on its behalf.

The General Conditions state that:

1)            This Agreement:

a)            is a conduct and compensation agreement under the Petroleum Legislation;

b)            includes an alternative arrangement for Noise Impacts under the Environmental Authority; and

c)            includes a Waiver of Entry.

2)            The Landholder has had the opportunity to seek advice before signing this Agreement and Xxxx will compensate the Landholder under the Petroleum Legislation for the Professional Costs.

The term Petroleum Legislation (in the above extract) means the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld) and, where the context requires, the Petroleum and Gas (Production and Safety) Act 2004 (Qld) and the Petroleum Act 1923 (Qld) (as amended and replaced).

Section 81 of the Mineral and Energy Resources (Common Provisions) Act 2014 defines the general liability of the resource authority holder (ABC) to compensate each owner/occupier of private and public land that is in an authorised area for any Compensatable effect the eligible claimant suffers as a result of authorised activities carried out by the holder or a person authorised by the holder.

Subsection 4 of section 81 goes on to define "Compensatable effect" as follows:

Compensatable effect means all or any of the following:

(a)          all or any of the following relating to the eligible claimant's land:

(i)            deprivation of possession of its surface;

(ii)           diminution of its value;

(iii)          diminution of the use made or that may be made of the land or any improvement on it;

(iv)          severance of any part of the land from other parts of the land or from other land that the eligible claimant owns;

(v)           any cost, damage or loss arising from the carrying out of activities under the resource authority on the land;

(b)          accounting, legal or valuation costs the claimant necessarily and reasonably incurs to negotiate or prepare a conduct and compensation agreement, other than the costs of a person facilitating an ADR;

Examples of negotiation- an ADR or conference

(c)          consequential damages the eligible claimant incurs because of a matter mentioned in paragraph (a) or (b).

Compensation under the Early Conduct and Compensation Agreement)

The ECCA outlines how the compensation will be paid and provides that ABC must pay compensation to the Landholder in the amount and time set out in Schedule 1 to the ECCA. The ECCA provides an explanation of what the compensation is designed to compensate the Landholder for and states:

10. The Compensation:

a.            compensates the Landholder for all:

i.              Compensatable Effects, Disturbance Impacts and Noise Impacts:

A.           of the Activities (including any maintenance reopening the Land's surface) and Modifications;

B.           resulting from any Livestock Management Notice or Livestock Direction; and

C.           from Authorised Activities off the Land; and

ii.            Professional Costs; and

iii.           other amounts payable by Xxxx to the Landholder under Relevant Laws for the Activities.

(collectively, the Compensation Matters);

b.            is in full and final satisfaction of all of Xxxx's and its Associates' Compensation Liability to the Landholder.

Clause 11 (under Part 2 - Compensation) of the ECCA provides that the Landholder releases ABC and its Associates from any Liability to the Landholder regarding the Compensation matters subject to the terms of the Agreement.

Activities proposed to be carried out

The ECCA identifies all of the construction activities and petroleum production activities to be carried out on the land under the ECCA. Petroleum production will include all activities reasonably associated with or incidental to the construction, testing, development, operation, maintenance, decommissioning and rehabilitation of the production wells and non-production wells on the land.

The Landholder will need to continually monitor and engage with ABC in relation to the activities that are being carried on by ABC or their agents, contractors or employees during the construction phase to ensure that the activities minimise the impact on the land and the commercial enterprises that can be carried out on the land.

Given that the Landholder will continue to live on the Property during the construction period and thereafter, there is significant concern in relation to the impact that noise and dust may have on their quiet enjoyment of the property both during the construction and operational phase.

Other Factors Recognised in Determining the Compensation Amount

The ECCA negotiations took into account the negative stigma of having CSG activity on the land which include the concept of blight on the land where the land has an unwelcome attribute and depresses the overall value of the property. The impact of the blight on the land will include the diminution in the long-term market value of the land as a result of having industrial CSG activities on the land. This negative stigma is particularly concerning in the context of potential consumers of the output produced by the farm.

It is expected that greater difficulty in travelling within the property and to visit neighbouring properties will exist due to the interruptions caused by the CSG activity. Due to the general inconvenience from the presence of structures on the land it will generally take longer to undertake common pastoral and farming activities. In addition, due to the short timeframes presented by the weather, these additional time-consuming inconveniences may result in certain activities not being completed on time or at all.

A further restriction that the CSG activity has on the land includes the potential limitations on the nature and range of agricultural enterprises that may be carried out on the land. The reduction in the number of enterprises that may be carried out on the land is very likely to result in a reduction in the number of potential buyers interested in the Property with the consequence that the market value of all of the land is reduced.

The presence of the CSG mining activity has impacted and will continue to impact the existing quality of life, lifestyle, quiet enjoyment or amenity for the human inhabitants on the property.

The visual impact of viewing the wells and other infrastructure will be ever-present; additional people in the district during the construction period (and ongoing) and so potentially a sense of diminished personal safety in a formerly remote area. Residents can expect to feel that they live in an industrial zone where they are constantly reminded of the fact that they are in the centre of extensive CSG infrastructure with noise and visual disturbance ever-present. The value of non-business assets such as the homestead will significantly reduce in value due to the perceived and actual lesser quality of life.

There is potential reduction to the value of farm output due to the risk of contamination to farm output (soil and other chemical contamination impacting on livestock or crops produced); risk to or reduction in the value of market status.

Due to the demand from the mining industry for goods and services in the district the cost of undertaking normal grazing and farming activities has increased substantially and such increased costs include the costs of maintaining/repairing equipment, the cost of engaging contractors to undertake tasks such as earthmoving and the cost of purchasing farm equipment. Prices for these goods and services were formerly set at a figure that accommodated what grazing and farming activities in the district could sustain but due to the fact that the mining industry can pay substantially more, the prices for these goods and services have increased to a level that makes it extremely difficult for the agricultural industry to pay and remain viable.

In relation to the bio-security control for the livestock run on the Property, the former natural barriers of remoteness and limited entry by parties outside the normal farm traffic are permanently damaged due to the high volume of traffic that on an on-going basis will come and go through the property as a result of the CSG mining activity.

The continued viability of the enterprises on the properties is dependent on the presence of a reliable supply of good quality water. Where the construction activities impact on the natural water flows on the Property then the ability to keep the dams used to water the cattle filled may be compromised. Additionally, it is expected that water extracted as part of the gas extraction process will reduce the overall level of water in the aquifer which services the bore on the farm.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 110-40

Income Tax Assessment Act 1997 Division 116

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 subsection 9-10(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

Reasons for decision

Compensation payment as ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Compensation paid due to loss and damage of a capital asset in the process of a petroleum authority undertaking petroleum activities on a taxpayer's land is an isolated transaction. Whether a profit from an isolated transaction is income according to ordinary concepts depends on the circumstances of the case. Profits from an isolated transaction are generally ordinary income when both of the following elements are present:

a)            the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and

b)            the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction (paragraph 6 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income).

Neither of the above elements apply in your situation. The compensation payments were made in accordance to the legislative provisions of the petroleum legislation.

Accordingly, the compensation payments paid under the ECCA does not give rise to income according to ordinary concepts or to a profit arising from a profit-making undertaking or plan pursuant to section 6-5 of the ITAA 1997. You did not enter into the arrangement to make a profit. Rather, you as a landowner, entered into the arrangement in order to receive compensation for damage that will be caused by the mining activities.

The compensation amounts are not included in your assessable income under section 6-5 of the ITAA 1997.

Compensation payments and the capital gains tax (CGT) provisions

Under section 6-10 of the ITAA 1997 some amounts that are not ordinary income are included in your assessable income due to another provision of the tax law. These amounts are statutory income. Statutory income may arise from CGT events as consequence of an eligible claimant being entitled to receive compensation for the loss and destruction of a CGT asset.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts provides the Commissioner's view as to the CGT consequences of receiving a compensation payment. The ruling provides that it is necessary to identify the underlying asset to which the payment relates and what has occurred to that asset.

The underlying asset is the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity.

If there is more than one underlying asset, the relevant asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset.

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying CGT asset, or part of an underlying CGT asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, the Commissioner considers that the amount is not consideration for the disposal of any other asset, such as the right to seek compensation.

If an amount of compensation is received by a taxpayer wholly in respect of permanent damage suffered to an underlying asset of the taxpayer or for a permanent reduction in the value of an underlying asset of the taxpayer, and there is no disposal of that underlying asset at the time of the receipt, then the amount represents a recoupment of all or part of the total acquisition costs of the asset.

Accordingly, the total acquisition costs of the CGT asset should be reduced by the amount of the compensation. No capital gain or loss arises in respect of that asset until the taxpayer actually disposes of the underlying asset. If the compensation amount exceeds the total unindexed acquisition costs (including a deemed cost base) of the underlying asset, there are no CGT consequences in respect of the excess compensation amount.

The coal seam gas activities will result in permanent damage to, or a permanent reduction in the value of the land.

As you did not dispose of all or part of the affected land there are no CGT consequences at the time of entering into the ECCA or receiving the compensation payments. The land's acquisition cost will be reduced by the compensation payments received in relation to that land. That is, the cost base of the land will be reduced by the compensation payments and any gain or loss will crystallise at a later time when the land is disposed of.

Water sales

Currently, and under another proposed agreement with ABC you receive payments for the volume of water taken from your property. The amount of water taken is dependent on the available level of water in the dams and tanks, the levels of which are governed by seasonal conditions. It is considered that any proceeds you receive from the sale of the water is ordinary income. Even if the proceeds were not ordinary income, they would be assessable as a royalty given that the water is a natural resource that was removed from your land.

Question 5

Summary

For the receipt of compensation amounts to give rise to a GST liability there has to be a taxable supply made. You are not making a taxable supply by entering into the ECCA. GST is not payable on the compensation amounts received under the ECCA.

Detailed reasoning

GST is payable on taxable supplies and the supplier must pay the GST payable on any taxable supplies that it makes. For the receipt of compensation amounts to give rise to a GST liability there must be a taxable supply.

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides GST is payable on taxable supplies.

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)

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.

To determine whether you are making any supplies when entering into the ECCA within the meaning of the GST Act we need to examine whether any activities of yours or obligations you enter into can be characterised as a supply.

The existence of a 'supply' itself is an essential element in determining whether there is a taxable supply under section 9-5 of the GST Act.

Supply

The term 'supply' is defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. Paragraph 9-10(2)(g) of the GST Act provides that a supply includes:

an entry into, or a release from, an obligation:

i.              to do anything; or

ii.             to refrain from an act; or

iii.            to tolerate an act or situation.

The statutory definition of 'supply' is very broad. Essentially, a supply is something which passes from one entity to another, and may be one of goods, services or something else.

Consideration

Section 9-15 of the GST Act 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. Thus, 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

A sufficient nexus between the compensation amounts and a supply must exist to create the 'supply for consideration' relationship.

The issue is whether the landholders have provided something to Xxxx, in return for the compensation amounts that are paid to them

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) examine the meaning of supply under section 9-10.

Paragraph 22 of GSTR 2006/9 outlines the ten propositions which may be relevant to characterising and analysing supplies. The relevant propositions include:

Proposition 5: To 'make a supply' an entity must do something

Proposition 6: ''Supply' usually, but not necessarily, requires something to be passed from one entity to another'.

Proposition 5 provides that an entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient). This is consistent with the ordinary meaning of 'supply', being to furnish or provide.

When analysing an arrangement to determine the GST consequences, it is necessary to examine the terms of the transaction documents between the parties and the facts and circumstances in which the arrangement is carried out to identify what is being supplied.

While there is provision in the ECCA for access to land arrangements and consent to the activities, withholding consent or agreement to land access and the activities does not prevent ABC from exercising and enforcing its statutory rights to conduct the activities on your property authorised under the Petroleum Legislation. An early conduct and compensation agreement sets the parameters for access to land and conducting authorised activities; it is not the source of the authority to access land and conduct authorised activities. That authority comes from the resource authority, issued under statute.

The provision of access to the land is not within your control and not something you are able to supply. Therefore, when you entered into the ECCA you did not supply anything to ABC, nor did you enter into an obligation to tolerate an act or situation that was not already authorised by statute. Rather, you agreed to the compensation that is to be paid for the damage that will be done to your property and interference to your quiet enjoyment and use of those properties by the authorised activities.

Paragraph 84 of GSTR 2006/9 provides a useful analogy to your circumstances with respect to compensation received from a compulsory acquisition of land:

84. Mere acceptance by an owner of an amount of compensation payable on the compulsory acquisition does not provide a sufficient nexus between the land which passes and the means by which it passes. The fact that the owner does not dispute the acquisition is not an activity that effects the supply of the land. Even if the owner agrees to the terms of the acquisition and the amount of compensation, the land is acquired by operation of the statute, upon publication of the acquisition notice, not by an action taken by the landowner.

Regarding the landholders giving up their rights for further compensation upon commencement of the agreement, this raises the issue of whether giving up of a landholder's rights would be a separate supply or as termed in Goods and Services Tax Ruling 2001/4: Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) a 'discontinuance supply'.

Paragraphs 106 to 109 in GSTR 2001/4 discuss discontinuance supplies as follows:

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 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.

Paragraphs 71 to 73 in GSTR 2001/4 states the following in relation to 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.

Paragraphs 110 and 111 of GSTR 2001/4 further explain:

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.

In this case, the issue is whether the Landholder have provided something to Xxxx in return for the compensation amounts paid to them.

The ECCA is a conduct and compensation agreement under the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld) [Petroleum Legislation]. Under the ECCA the Landholder receive the compensation amounts for the Compensation Matters outlined in clause 13.

Clause 13 of the ECCA states:

13. The Compensation:

a. compensates the Landholder for all:

i. Compensatable Effects, Disturbance Impacts and Noise Impacts:

A. of the Activities (including any maintenance reopening the Land's surface) and Modifications;

B. resulting from any Livestock Management Notice or Livestock Direction; and

C. from Authorised Activities off the Land; and

ii. Professional Costs; and

iii. other amounts payable by Xxxx to the Landholder under Relevant Laws for the Activities.

(collectively, the Compensation Matters)[1];

The relevant definitions are outlined in Schedule 6 (Interpretation rules and definitions) to the ECCA and provide as follows:

Compensatable Effect has the meaning given in subsection 81(4) of the Petroleum Legislation:

(4) In this section-

compensatable effect means all or any of the following:

(a) all or any of the following relating to the eligible claimant's land:

(i) deprivation of possession of it's surface;

(ii) diminution of the it's value;

(iii) diminution of the use made or that may be mad, of the land or any improvement on it;

(iv) severance of any part of the land from other parts of the land or from other land that the eligible claimant owns;

(v) any cost, damage or loss arising from the carrying out of activities under the resource authority on the land; and

(b) accounting, legal or valuation costs...

(c) consequential damages the eligible claimant incurs because of a matter mentioned in paragraph (a) or (b).

Disturbance Impact means all impacts of light, dust, odour, vibration, vehicular movements and loss of amenity caused by the Activities.

Noise Impactsmeans the Internal Noise Impacts and External Noise Impacts and includes the types of noises described in Schedule 5

Schedule 1 to the ECCA provides details of the Compensation Amounts and the Trigger Events which determine when the agreed amounts will be paid.

XYZ Pty Limited holds a Petroleum Authority, Petroleum Lease 216, which allows their appointed agent, ABC to enter the Property and carry out the Authorised Activities[2] under the Petroleum Authority on its behalf.

However, under section 81 of the Petroleum Legislation, a resource authority holder is liable to compensate Land Owners and occupiers for any Compensatable effect caused by the authorised activities carried out on the land.

The compensation amounts received by Landholder from Xxxx under the ECCA are to compensate the parties for the Compensatable Effects, Disturbance Impacts and Noise Impacts arising from the Authorised Activities undertaken on the Property. These are not payments for any supply made by Landholder to Xxxx.

As the compensation payments are not consideration for a supply, there is no taxable supply under section 9-5 by Landholder.

Therefore, the receipt of the compensation amounts by Landholder from Xxxx will not give rise to a GST liability pursuant to section 9-40 of the GST Act.

Supply of water

Subsection 9-30(1) of the GST Act states that a supply is GST-free if:

a)            it is GST-free under Division 38 or under a provision of another Act, or

b)            it is a supply of a right to receive a supply that would be GST-free under paragraph (a).

A supply of water in section 38-285 of the GST Act refers to the delivery or the making available of water, as goods. A supply of water is GST-free under subsection 38-285(1) of the GST Act.

However, a supply of water is not GST-free under subsection 38-285(2) of the GST Act where it is 'supplied in a container', or 'transferred into a container, that has a capacity of less than 100 litres'.

Goods and Services Tax Ruling GSTR 2000/25 Goods and service tax: GST-free supplies of water, sewerage and sewerage-like services, storm water draining services and emptying of a septic tank explains the Commissioner's view of what activities are covered by Subdivision 38-I of the GST Act.

Paragraphs 25 and 26 of GSTR 2000/25 deal with the application of paragraph 9-30(1)(b) of the GST Act to the supply of water rights and discuss trading 'water rights'.

25. Paragraph 9-30(1)(b) applies to make the supply of a right to receive a supply of water GST-free. A supply of a right to receive a supply of water includes:

•                    a right to receive a supply of a quantity of water; or

•                    a right to receive a supply of water for a specified period; or

•                    a tradeable right to receive a supply of water.

26. Where a recipient of a right to receive a GST-free supply of water trades that right, for example, by making a supply of the right to a third party, that supply is also GST-free. Water rights may be capable of being exercised for a specified period or for a specified quantity of water from a designated source of supply. A water quota may have been acquired by a water authority from a dam holder and be sold on to an irrigator without any delivery of the water while the water authority held the right.

As stated above the supply of water is GST-free under subsection 38-285(1) and section 9-30 of the GST Act.

Accordingly, the supply of water is GST-free and the consideration for this supply will not be subject to GST.

[1] Section 81 of the Petroleum Legislation discusses the General Liability to compensate. Subsection 81(1) states:

        i.          A resource authority holder is liable to compensate each owner and occupier of private land or public land that is in the authorised area of, or is access for land for, the resource authority (each an eligible claimant) for any compensatable effect the eligible claimant suffers caused by authorised activities carried out by the holder or a person authorised by the holder.

[2] As defined in Schedule 2 of the Mineral and Energy Resources (Common Provisions) Act 2014