Edited version of private advice

Authorisation Number: 1052026970603

Date of advice: 8 September 2022

Ruling

Subject: Compensation payment for impact of development

Income Tax

Question 1

Will the contribution you receive be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. The contribution is not assessable income under section 6-5 of the ITAA 1997. The amount is statutory income under section 6-10 of the ITAA 1997.

Question 2

Will the contribution you receive be a CGT Event H2 under section 104-155 of the ITAA 1997?

Answer

Yes. The contribution is compensation for the potential impacts of the proposed renewal energy development. The receipt is considered to be a CGT Event H2. The CGT event will happen to each proprietor based on their proportion of the lot entitlements.

Question 3

Will the contribution you receive be assessable under section 102-5 of the ITAA 1997

Answer

Yes. Each proprietor will include their share of the capital gain in their own tax return based on their proportion of the lot entitlements. For more information, see Taxation Ruling TR 2015/3 Income tax: matters relating to strata title bodies constituted under strata title legislation.

GST

Question 1

Is GST payable on the contribution made by the developer to you?

Answer

No, GST is not payable on the contribution made by the developer to you?

This private ruling applies for the following periods:

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commences on:

20 June 2022

Relevant facts and circumstances

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

Facts

You are the registered proprietor of land.

A development is proposed in proximity to the land.

A developer proposes to enter into an agreement with you in respect of the land.

The agreement proposes a contribution.

The agreement imposes no obligations or limitations on you.

The contribution will be made according to the impact of the development.

The developer has identified potential impacts to you.

The developer has lodged the Development Application for determination and will commence development when approved.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-155

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 Division 81

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that an entity makes a taxable supply where the supply:

•                     is made for consideration;

•                     is made in the furtherance of an enterprise being carried on;

•                     is connected with the indirect tax zone; and

•                     is made by a supplier who is registered, or required to be registered, for GST.

Section 9-10(1) of the GST Act states that a supply is any form of supply whatsoever. Section 9-10(2) states without limiting subsection (1), supply includes any of these:

•                     supplying goods (this means any form of tangible personal property)

•                     supplying services

•                     providing advice or information

•                     granting, assigning or surrendering real property

•                     creating, granting, transferring, assigning or surrendering any right

•                     making financial supplies

•                     entering into an obligation to do anything, refrain from doing something, or tolerate an act or situation (or releasing someone from such an obligation)

•                     any combination of the above.

Whether something constitutes a supply is important for the purposes of determining whether there is a GST liability. This is because there must be a supply in order for there to be a taxable supply on which GST can be charged.

The Full Federal Court noted the importance of supply in Sterling Guardian Pty Ltd v. Commissioner of Taxation (2005) 220 ALR 550 (Sterling Guardian) at paragraph 15:

In economic terms it may be correct to call the GST a consumption tax, because the effective burden falls on the ultimate consumer. But as a matter of legal analysis what is taxed, that is to say what generates the tax liability (and the obligations of recording and reporting), is not consumption but a particular form of transaction, namely supply; refer to generally HP Mercantile Pty Ltd v Commissioner of Taxation (2005 143 FCR 553)

Further,Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) uses ten propositions to assist in analysing a transaction to identify the supply or supplies made in that transaction. The propositions are not universal as they may have exceptions or be qualified either by the operation of particular provisions of the GST Act, or by the facts and circumstances of a transaction.

The propositions are:

Transactions also require consideration of the total fact situation.

For Proposition 9 in GSTR 2006/9, the Commissioner considers that an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other. This requirement was emphasised by the New Zealand Court of Appeal in C of IR v. New Zealand Refining Co. Ltd (1997) 18 NZTC 13,187 (New Zealand Refining). The case concerned payments made by the New Zealand Government to the New Zealand Refining Company, which were only to be made on condition that the refinery remained operational.

The New Zealand Court of Appeal noted there was an expectation among the parties that the refinery would continue to operate, but that there was no contractual obligation to that effect. The Government's only recourse in the event that the refinery ceased to be operational was to stop making payments. Although the payments were intended as an inducement to keep the refinery open, they were not linked to any identifiable supply:

In our view the payments related to the structure or framework within which supplies of services were expected to be made. They were to compensate NZRC for the removal of the protections given by the Support Letters and its exposure to the hot winds of competition. It was compensation directed to the same purpose as the grants which repaid the loans. The payments were received in course of the taxable activity of NZRC, but they were not in consideration for any supply made by it. Accordingly, they are not subject to GST

You are not currently registered for GST and represent owners who own the land adjacent to the land owned by the developer.

The developer has offered to enter into an agreement to make a contribution to improve the amenity of the landowners. Further, the landowners has no obligations or limitations arising from the agreement. This is consistent with Proposition 9 in GSTR 2006/9.

It is accepted that the contribution is provided for no supply by the developer. Therefore, the contribution is not a taxable supply as it is not part of any enterprise that you carry on. Consequently, the transaction is not subject to GST.

Division 81 of the GST Act, together with the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) made for the purposes of Division 81, provides that certain payments of Australian taxes, fees and charges are not the provision of consideration.

Division 81 is not applicable in your case nor is Division 82.

GST registration

Section 23-5 of the GST Act provides that you are not required to be registered for GST unless you carry on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000).

As the ex-gratia payment is not in the furtherance of an enterprise that you carry on, the payment/s are not taken into account in calculating your GST turnover and determining if you are required to be registered for GST.

As a result, you are not required to be registered for GST.