1 Will the compensation to be received by the Entity under the Conduct and Compensation Agreements (CCAs) for disruption of the business operations carried on by the Entity be treated as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 Will the compensation payments received by the Entity under the CCAs for permanent damage to the land be treated as assessable income under section 6-5 of the ITAA 1997? Answer No. Question 3 Will the compensation payments received by the Entity under the CCAs for permanent damage to the land be treated as capital proceeds under Division 116 of the ITAA 1997? Answer No. Question 4 Will the compensation payments received by the Entity under the CCAs for permanent damage or permanent reduction in the value of the land reduce the cost base of the property under sub-division 110-A of the ITAA 1997? Answer Yes. Question 5 Will the amounts received for the grant of easement in accordance with the Deed of Option for Easement be assessable as a capital gain in accordance with Chapter 3 of the ITAA 1997? Answer Yes. Question 6 Will the Entity incur a GST liability on the receipt of compensation amounts? Answer No. Question 7 Will the Entity incur a GST liability on the receipt of the amounts received for the grant of easement in accordance with the Deed of Option for Easement? Answer Yes. This ruling applies for the following periods : Year ended 30 June 20XX
Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX The scheme commences on: 1 July 20XX
Person A and Person B are landholders that carry on primary production business as an entity, with some of the cropping activity undertaken on their own farming land and some on farming land that they lease from different entities. The Entity is registered for GST. Infrastructure means all temporary and permanent equipment, machinery, infrastructure, plant and other coal seam gas (CSG) works that are brought on to or are constructed or installed on or under, the land. The presence of CSG infrastructure on the land will have an impact on the farming operations carried out on the land giving rise to a potential reduction in the land available for primary production and a reduction in yield on the land. The loss of access to any land because of mining activity or the permanent reduction in the yields due to permanent damage to the land would result in the value of the land being reduced substantially. A significant amount of land will be taken out of production due to the mining infrastructure. There are three petroleum leases covered by the CCAs. In addition to the three conduct and compensation agreements there is an associated Deed of Option for Easement
The purpose of the Deed of Option for Easement ("Deed") is to provide an option to acquire and register an easement over the area of a Pipeline within a petroleum lease. The option fee amounts are shown on a GST-exclusive basis but as the Entity is granting the easement (making a supply) it is expected that the company will gross up the option amount to include GST. The deed provides guidance in relation to GST and it states: (c) Unless expressly included, the consideration for any supply under or in connection with this Deed does not include GST. (d) To the extent that any supply made under or in connection with this Deed is a taxable supply, the consideration for that supply is increased by an amount determined by the supplier, not exceeding the amount of that consideration (or its market value) multiplied by the rate at which GST is imposed in respect of the supply. (e) The supplier must issue a Tax Invoice to the recipient of a supply to which clauses 24(c) and 24(d) apply no later than seven (7) days following payment of the GST inclusive consideration determined under those clauses. (f)
The Grantee and the Owner warrant that, to the extent that they are obliged by the GST Act, they are registered for Australian Business Number purposes. (g) If either party is entitled under this Deed to be reimbursed or indemnified by the other party for a cost or expense incurred in connection with this Deed, the reimbursement or indemnity payment must not include any GST component of the cost or expense for which an input tax credit may be claimed by the party entitled to be reimbursed or indemnified, or by its representative member. Once the option has been exercised, the agreements that govern the activities on the property will be two petroleum licence CCAs and the Easement. The Entity needs to grant the company an easement because some of the pipeline infrastructure is an area of the land outside of the tenement held by the company. It is understood that a resource company always seeks to obtain voluntary agreements (easements) in the first instance if the land in question is not within their tenement. While Chapter 4 of the Petroleum & Gas (Production & Safety) Act 2004
(Qld) provides for acquisition under a Part 5 permission, the government would only approve an application for compulsory acquisition where it is demonstrated that every effort has been made to obtain consent in the first instance. The pipeline is a low-pressure gathering line that the company is installing under a Petroleum Pipeline Licence as it crosses an area of the property outside of its tenement and through a tenement held by another resource company. This is a relatively small piece of infrastructure that would not warrant acquisition and if consent was not given the company may find another route for this section of gathering pipeline rather than going down the compulsory acquisition path. Given the relatively small amount of infrastructure and small area of land to be covered by the easement the amount of compensation received for this is substantially less when compared with the amount of compensation received under the two CCAs. The CCAs are conduct and compensation agreements under the Petroleum Legislation: • The Mineral and Energy Resources (Common Provisions) Act 2014 (Qld); • The Petroleum and Gas (Production and Safety) Act 2004 (Qld); • 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 (the company) 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 81(4) of the Mineral and Energy Resources (Common Provisions) Act 2014 defines "compensatable effect" as: (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) consequential damages the eligible claimant incurs because of a matter mentioned in paragraph (a).
The CCAs set out the infrastructure that the company intends to construct on the property. The operations will include operation and maintenance following construction and/or installation of proposed advanced activities, including Wells, Access Track, Right of Way and Above Ground Infrastructure. Ongoing access to the land will be required to attend to monitoring, operational and maintenance activities, including the workover of the wells, as required; proactive monitoring and management of subsidence, overland flow and any outbreak of invasive plants on the right of way. When the activities come to an end the wells will be plugged and abandoned with associated decommissioning and rehabilitation to take place. The general conditions to the CCAs provide: Compensation (a) We will compensate you for the Compensatable Effects of carrying out the Activities on the Land by paying you the Compensation in accordance with the Reference Schedule: Compensation and Compensatable Effect.
(b) Subject to your rights under the MERCP Act, the Compensation is in full and final satisfaction of our Compensation Liability to you for the Compensatable Effects of the Activities carried out on your Land. (c) Unless the parties otherwise agree, improvements made by us to existing roads and tracks on or that provide access to the Land do not reduce our Compensation Liability under the MERCP Act. The upfront payments are one-off payments that are to be made within 30 Business Days of the agreement date in accordance with the company's invoice procedure. The annual payment is to be calculated and paid in accordance with the following payment terms: Annual Payment (a) The payment described as Annual Payment in the Table- Summary of Compensatable Effect is an Annual Payment to be paid in accordance with the following payment terms: (i) The first Annual Payment is payable within 30 Business Days of the annual anniversary of the Agreement Date provided it is after the commencement of construction activities for the infrastructure described in Part 3 of the Reference Schedule.
(ii) All subsequent Annual Payments must be paid annually in advance, within 30 Business Days of the annual anniversary of the Agreement Date. (iii) The last Annual Payment for the infrastructure is deemed to have been paid on the anniversary prior to the rehabilitation of each respective item of infrastructure in accordance with the General Conditions. (iv) Annual Payments will be made in accordance with the invoice procedure set out in the General Conditions. The annual payments will be escalated by CPI in accordance with movement in the CPI index. The term of the CCAs is set out in the Agreement Particulars, as follows: This Agreement commences on the Agreement Date and continues until the earlier of: (a) the date the Tenure expires; or (b) the date that we provide written notice to you that in our sole discretion, and receipt of the same is acknowledged by you, we have elected to no longer pursue the Activities (subject to the terms of the Agreement) on the Land; or
(c) the date on which we provide written notice to you to confirm the Activities have been completed and the Agreement is concluded, and the receipt of the written notice is acknowledged by you. The special conditions to the CCAs provide guidance as to particular issues associated with general access and access during construction, maintenance and decommissioning. One of the CCAs provides as follows in relation to the final location of the infrastructure: At the completion of - a) Each the company Well and Deviated Well: b) The Right of Way (including gathering lines); c) The Access Tracks; and d) Any additional Infrastructure forming part of the activities, we will provide to you a map and the coordinates of locations and dimensions of any Infrastructure, including the centreline of any Infrastructure under the Land. Of particular concern to the Entity is the impact of the construction activities on the happening of a biosecurity event as defined in the Biosecurity Act 2014 (Qld) and the special conditions provides:
We acknowledge that we have a General Biosecurity Obligation under the Biosecurity Act to take all reasonable and practical steps to prevent or minimise any Biosecurity Risks posed by the Activities. The Entity is concerned by the potential for noxious weeds to enter and propagate on the land and the special conditions provide: If during the Term, you notify us of an outbreak of an Invasive Plant and where that outbreak is caused or contributed by us (Outbreak), we must undertake all reasonable and practicable steps to treat the Outbreak, having regard to the management regime implemented by you for outbreaks of Invasive Plants on the Land. Where gravel and other materials are brought onto the land there is a risk of introducing weed species and the special conditions provide: All quarry materials including gravel that are brought onto the Land must be accompanied by a valid Weed Hygiene Declaration and we will provide you with a copy of the certification. "Weed Hygiene Declaration" means a certificate given by a suitably qualified person that the materials are free of Invasive Plants.
The maintenance of an uncompacted soil profile is critical to the production of high quality and high yielding crops the special conditions provide: COMPACTION After each of the following stages: a. Construction; b. Initial Rehabilitation of the Right of Way; c. Decommissioning and Rehabilitation; we will ensure that soil compaction is remediated in accordance with our obligations under the relevant legislation and Environmental Authority and to allow for you to commence cropping activities if applicable. The presence of above ground infrastructure will create unavoidable obstructions to farming and agricultural activities on the land and the special conditions provide: ABOVE GROUND INFRASTRUCTURE We will work with you at the time of construction to ensure Above Ground Infrastructure locations: a. take into account your operational practices; and b. are effective, from an engineering perspective, for the intended operational purpose of the Above Ground Infrastructure and we will use best endeavours to facilitate your requests as much as possible. The special conditions provide as follows in relation to the proposed easement: EASEMENT
The parties acknowledge that there is a registered Easement attached as an Annexure. Our Activities will cross over and under a section of the Easement. We will ensure use of the Easement or a suitable alternate option is available adjacent to the Easement at all times for access by you and all those entitled to use the Easement for the Term. The general conditions provides as follows in relation to the objective of the CCAs: The objectives of this Agreement are so far as is reasonably practicable to: (a) record the agreement reached between the parties; (b) provide the foundation for a cooperative working relationship between you and us and our respective Associates; (c) ensure the safety of you, ourselves, and our respective Associates whilst on the Land; (d) use best endeavours whilst we are conducting the Activities to avoid interference with your amenity; (e) ensure you, and ourselves, and our respective Associates treat each other with courtesy and respect; (f) find workable solutions, which may involve reasonable adjustments on the part of both parties to minimise the adverse impact of Activities on the Land;
(g) ensure you are compensated as required under the MERCP Act; and (h) identify ways we and you can help each other in the spirit of being "good neighbours". The CCAs indirectly acknowledge that the Entity has had the opportunity to seek professional advice before signing the CCAs (and Deed of Option for Easement) and the company will compensate/reimburse the Entity under the Petroleum Legislation for reasonable and necessary costs incurred negotiating the agreements. Despite the fact that the compensation is in full and final satisfaction of the Entity's claims if there is a material change then the compensation may be re-negotiated. The definitions section of the CCAs provides as follows in relation to defining a material change: Material Change means a significant or important change of circumstances in relation to the impact of the Activities that results in a material change to the Compensatable Effects suffered by the Eligible Claimant, which: (a) is not addressed by the Compensation; (b) gives rise to us having a further Compensation Liability that warrants additional compensation to you; and
(c) has not been the subject of a prior Variation Agreement or Claim by you under clause 6.4. The general conditions go on to provide: Further Claims by you (a) This Agreement does not prevent you from bringing a claim, demand, action, suit or proceeding against us after the Agreement Date in respect of activities conducted by us on the Land that: (i) are not part of the Activities; or (ii) are not otherwise permitted or contemplated by this Agreement. (b) You must take reasonable steps to mitigate your loss. (c) We may ask you to provide reasonable evidence to us to support a claim under this clause. (d) If, as a result of the Activities contemplated as at the date of the Agreement, you consider acting reasonably, that you have suffered Loss over and above that for which the parties have already agreed Compensation or other payments elsewhere in this Agreement, you may give us notice of a Claim specifying: (i) the extent of the Loss over and above that for which the parties have already agreed Compensation or other payments elsewhere in this Agreement; (ii) how that Loss resulted from the Activities; and
(iii) whether the Loss involves damage to Property that is capable of repair and, if so, the manner in which and the time by which you, acting reasonably, requests the repair be made. (e) We will take reasonable steps to minimise the loss to you as described. (f) At your election acting reasonably, we must do all or any of these things: (i) repair the damage to the Property to your reasonable satisfaction; (ii) replace the Property; or (iii) reimburse you for the Loss resulting from the damage to the Property. (g) If we do not repair the damage to the Property within the time reasonably required by you, then: (i) You may carry out the repairs; and (ii) We will reimburse you for the reasonable and necessary cost of repairs to the Property. The CCA then goes on to provide in relation to taxation issues in the general conditions, as follows: GST (a) Terms used in this clause 8.1 that are defined in the GST Act have the meaning given in that Act. (b) Unless expressly provided otherwise, all amounts referred to in this Agreement are stated on a GST exclusive basis.
(c) If GST is imposed by one party to another, the party receiving the supply (Recipient) will pay to the party providing the supply (Supplier) an amount equal to the GST payable on that supply (GST Amount). Subject to clause 8.1(d), the GST Amount is payable at the same time as the consideration is payable for the supply, provided: i) the Supplier gives a valid tax invoice to the Recipient at or before the payment of GST is made by the Recipient (and the Recipient is not required to make any payment for GST until the Recipient has received a valid tax invoice); and ii) this clause does not apply if the consideration payable or to be provided by the Recipient for the supply includes GST. (d) Despite clause 8.1(c), where you are registered for GST and we are eligible to issue RCTIs for the purpose of the GST Act, we may notify you in writing (including by issuing an RCTI) that we will be issuing you with RCTIs in respect of the supplies you make to us under this Agreement. (e) If we notify you that we will issue you with RCTIs, then the parties acknowledge and agree that: i) we can issue tax invoices in respect of the supply;
ii) you will not issue tax invoices in respect of the supply; iii) you will notify the us immediately if you cease to be registered for GST; and iv) the Agreement in this clause 8.1(e) will terminate immediately if either party ceases to satisfy any of the requirements under the GST Act for issuing an RCTI. (f) Any payment to a party under this Agreement which is a reimbursement or indemnification, calculated by reference to a loss, cost or expense incurred by that party, shall be reduced by the amount of any input tax credit to which that party is entitled for that loss, cost or expense. Tax (a) You will be solely liable to pay taxes that may be imposed in relation to Compensation or any other payment made to you under this Agreement. (b) If we are required to withhold an amount in respect of tax from a payment made to you, we may withhold the tax from the payment and pay the tax to the taxing authority and such payment will be a good discharge of our obligation to pay that amount to you. (c) You indemnify us for any loss we suffer as a result of us failing to withhold from the payment an amount in respect of tax if:
i) the failure was caused by an act, representation or omission by you, or a change in your circumstances of which you failed to provide 30 days' notice to us before a payment was made; or ii) you are entitled to any tax credit or tax benefit pursuant to either the Income Tax Assessment Act 1997 (Cth) or the Taxation Administration Act 1953 (Cth), in respect of any loss suffered by us. The CCA negotiations considered 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 because of having industrial CSG activities on the land. This negative stigma is particularly concerning in the context of potential consumers of the high-quality crops produced by the farm, where such consumers may have diminished demand for primary production output produced in an industrial CSG environment.
There may be some very limited and temporary support for the market value of the land because of the Entity's entitlement to annual compensation payments however this temporary support disguises the fact that the actual market value of the land itself has fallen substantially/drastically because of the construction activities on the land. However, when the ongoing compensation ceases or dries up and the permanently damaged land is valued purely on its capacity to produce income from related primary production activities the real impact of the CSG activity on the land will be evident. It is noted that diminution also covers the concept of lesser marketability of the land because of the CSG activities on the land. 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 farming activities including the management of production activities and undertaking common farming tasks.
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. Certain activities cannot be carried out proximate to the gathering system may result in an inability to use laser levelling on the land or any other enterprise that requires deep cultivation of the soil. 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 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 including the communications tower 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. The value of non-business assets such as the residential property on the land 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; risk to or reduction in the value of market status of output.
Income Tax Assessment Act 1997 Division 104 Income Tax Assessment Act 1997 Division 110 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 A New Tax System (Goods and Services Tax) Act 1999 section 9-40
Question 1 Summary Part of the compensation received is related to any losses of business income that may be incurred by the Entity. This part of the compensation will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning 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. Whether a lump sum or other compensation payment constitutes assessable income in the hands of the recipient depends on whether it is a receipt of a capital or income nature which in turn depends upon a consideration of all the circumstances surrounding the payment. It is the character of the receipt in the hands of the recipient that must be determined. For income tax purposes, a compensation amount generally bears the character of that which it intends to replace. Sub-paragraph 81(4)(a)(v) of the Mineral and Energy Resources (Common Provisions) Act 2014 provides that "compensatable effect" includes any cost, damage or loss arising from the carrying out of activities under the resource authority on the land.
Clause 7.1 of the CCAs provides that you will be compensated for the Compensatable Effects of carrying out the Activities on the Land by paying you the Compensation in accordance with Part 2 of the Reference Schedule: Compensation and Compensatable Effect. Part of the compensation received is therefore related to any losses of business income that may be incurred by the Entity. This part of the compensation will be assessable income. Questions 2 to 4 Summary 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 CCAs or receiving the compensation payments. The acquisition cost of the land will be reduced by the compensation payments received in relation to the land. That is, the first element of the cost base of the land will be reduced by the compensation payments. As the rest of the compensation payments that are not related to income loss are considered to reduce the cost base of the land, they will not be assessable as ordinary income under section 6-5 of the ITAA 1997 or capital proceeds in relation to a CGT event happening under Division 116 of the ITAA 1997. Detailed reasoning Section 104-25 of the
Income Tax Assessment Act 1997 (1997 Act) outlines when a CGT event C2 happens. It states: (1) CGT event C2 happens if your ownership of an intangible * CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option--being exercised; or (f) if the asset is a * convertible interest--being converted. (2) The time of the event is: (a) when you enter into the contract that results in the asset ending; or (b) if there is no contract--when the asset ends. The right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. A right to seek compensation is an asset for CGT purposes. The right to seek compensation is acquired at the time of the compensable wrong or injury and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged. 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 amounts are 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 activities under the CCA resulted 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 CCAs or receiving the compensation payments. The acquisition cost of the land will be reduced by the compensation payments received in relation to the land. That is, the first element of the cost base of the land will be reduced by the compensation payments.
As the rest of the compensation payments that are not related to business income loss are considered to reduce the cost base of the land, they will not be assessable as ordinary income under section 6-5 of the ITAA 1997 or capital proceeds in relation to a CGT event happening under Division 116 of the ITAA 1997. Question 5 Summary The grant of easement results in CGT event D1 applying the Entity will record a capital gain being the excess of the amount received for the granting of the easement and the costs of granting the easement. The CGT event D2 that occurred when the option was granted will be disregarded when the option is exercised and the easement is granted. Detailed reasoning
Section 104-40 of the ITAA 1997 provides that CGT event D2 happens if you grant an option to an entity, or renew or extend an option you had granted. The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the right and any expenditure you incurred on it. The CGT discount does not apply to CGT event D2. If the option you granted is later exercised, you ignore any capital gain or capital loss you made from the grant, renewal or extension. You may have to amend your income tax assessment for an earlier income year. Taxation Determination TD 2018/15 Income tax: capital gains: does CGT event D1 happen if a taxpayer grants an easement, profit à prendre or licence over an asset? provides that CGT event D1 happens if a taxpayer grants an easement, profit à prendre or licence over an asset. The determination provides: Yes. CGT event D1 (about the creation of rights) rather than CGT event A1 (about the disposal of an asset) happens if a taxpayer grants an easement, profit à prendre or licence over an asset. Consequently:
• no part of the cost base of the asset can be taken into account in working out the amount of any capital gain or capital loss that arises from the grant • any capital gain or capital loss from the grant cannot be disregarded merely because the asset was acquired prior to 20 September 1985 • any capital gain from the grant is not a discount capital gain, and • no exemption is available under Division 118 if the grant relates to a main residence because CGT event D1 is not one of the events listed in subsection 118-110(2) that is relevant to that exemption. Given that the grant of easement results in CGT event D1 applying the Entity will record a capital gain being the excess of the amount received for the granting of the easement and the costs of granting the easement. The CGT event D2 that occurred when the option was granted will be disregarded when the option is exercised and the easement is granted. Question 6 Summary
The compensation received relates to damages suffered by the Entity because of activities carried out by the company on their land and is not consideration for a supply and accordingly no supply will be made by the Entity. In addition, as no part of the compensation is attributable to discontinuance supplies, there are no GST consequences for the discontinuance supplies. As the compensation is not considered to be consideration for a supply its receipt will not give rise to a GST liability . Detailed reasoning 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 the Entity is making any supplies when entering the CCA within the meaning of the GST Act we need to examine whether any activities undertaken or obligations entered into by the Entity 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 Entity has provided something to the company, in return for the compensation amounts that are paid to them. Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies 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. Of course, Entity can only transfer or surrender rights in land that they own. In the case of mining rights, the Entity does not transfer or surrender their rights related to mining on the land to the mining company because the mining company is already the holder of these rights as they were vested in the mining company upon the grant of the statutory authority by the State Government.
The Entity is not providing a right in relation to the land and so the question then is why is the Entity receiving compensation? As identified earlier the payment to the Entity is in respect of compensation for any damages caused or likely to be caused to their land and any inconvenience suffered by the Entity because of the activities carried out by the mining company on their land. 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. Goods and Services Tax Ruling 2001/4: Goods and Services Tax: GST consequences of court orders and out-of-court settlements
at paragraphs 106 to 109 discusses '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 other words, in relation to the Entity, no part of the consideration under the CCA is attributable to a discontinuance supply and as such there is no 'earlier or current supply' that is related to the payment of compensation then the damages claim does not give rise to any supply. Notwithstanding that their acceptance of the terms contained in the compensation agreement may amount to supplies within the meaning of paragraphs 9-10(2)(e) or 9-10(2)(g) GST Act, no part of the amount paid as compensation is consideration for these supplies. The subject of the dispute, being the settlement of damages claims between the parties in relation to the activities conducted on the land, is not lacking in substance and is what the compensation is paid for.
Hence, the compensation received relates to damages suffered by the Entity because of activities carried out by the company on their land and is not consideration for a supply and accordingly no supply will be made by the Entity. In addition, as no part of the compensation is attributable to discontinuance supplies, there are no GST consequences for the discontinuance supplies. As the compensation is not considered to be consideration for a supply its receipt will not give rise to a GST liability. Question 7 Summary The supply is a taxable supply, and the Entity is liable to remit 1/11 th of the easement amounts they receive for this taxable supply. Detailed reasoning GST is payable by you where you make a taxable supply. The creation of an easement is the creation of an interest in real property. The GST Act provides that a taxable supply is made when the conditions of section 9-5 are met: Section 9-5 of the GST Act states: 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. The receipt of an amount for granting of an option for easement and the easement consideration itself are amounts received because the Entity voluntarily grants a right to the company. In other words, they are making a supply and provided that the other requirements of section 9-5 of the GST Act are satisfied then the Entity will have a GST liability on the easement amounts. There is a sufficient nexus between the supply and the amounts received because these monies are paid for the granting of the easements. Therefore, the easement amounts are a consideration for a supply. Hence, the requirement of subsection 9-5(a) of the GST Act is met.
The Entity makes this supply in the course or furtherance of their enterprise as the supply is incidental to their enterprise given that they are granting an easement over their land. Hence, the requirement of subsection 9-5(b) of the GST Act is met. The supply is connected with Australia. Therefore, the requirement of subsection 9-5(c) of the GST Act is met. They are registered for GST. Therefore, the requirement of subsection 9-5(d) of the GST Act is met. The supply is neither GST-free nor input taxed. Therefore, as all the requirements of section 9-5 of the GST Act are satisfied, and the supply does not satisfy any of the GST-free or input tax provisions in the GST Act, they are making a taxable supply. Therefore, the Entity is liable to remit 1/11 th of the easement amounts they receive for this taxable supply.