Private ruling: Compensation payments and the application of Goods and Services Tax
Date of advice: 27 June 2017
Published: October 2017

Ruling: Q1: Will compensation payments to be received be subject to goods and services tax ( GST )? | A1: No.

Relevant facts and circumstances: A group of neighbouring entities (GE) own several adjoining parcels of land currently used for certain activities. A mining entity (ME) obtained a permit to carry out mining activities and extract certain minerals from the central parcels of land. All government regulations and relevant state legislation was followed by ME. The extraction process of the mining activities involves much disruption and damage to the relevant parcels of land and will stretch over a period of some years. Consequently ME made certain payments in compensation to GE. There was nothing in the agreements signed between ME and GE which required GE to provide anything more than the compensation payments.

Relevant legislative provisions: A New Tax system (Goods and Services Tax) Act 1999 Section 9-5.

Reasons for decision: Summary: Goods and Services Tax Ruling 2001/4, Goods and services tax: GST consequences of court orders and out-of-court settlements ( GSTR 2001/4 ) sets out the ATO’s view relating to the meaning of 'supply’. It states, 'Essentially, a supply is something that passes from one entity to another. The supply may be one of particular goods, services or something else.’ (paragraph 22 of GSTR 2001/4). The ruling also discusses where the subject matter of a claim for compensation is not a 'supply’ (paragraph 71 of GSTR 2001/4). The examples provided in the ruling include property damage. In this case, the payment will be paid and received as compensation by GE damage to or a permanent reduction in the value of the parcels of land resulting from the mining activities. Consequently, the loss that will be suffered by GE will not be a supply that they will make to ME. As there will be no supply, the requirements of section 9-5 of the GST Act will not be met, and will be out of scope of the GST Act. Therefore the compensation payments will not be subject to GST.

Subject: Compensation payments and the application of Goods and Services Tax: The GST treatment of compensation payments from mining activities on land.