Private ruling: GST and ex-gratia payments made in lieu of local government rates
Published: March 2012

Ruling: Q1: Are ex-gratia payments made by Entity A to you in lieu of local government rates treated as consideration, for supplies made by you to Entity A under section 9-5 of the GST Act? | A1: No. The ex-gratia payments made by Entity A to you in lieu of local government rates are not consideration for supplies made by you to Entity A. Therefore, you are not making taxable supplies to Entity A under section 9-5 of the GST Act for which the ex-gratia payments are consideration. | Q2: Are the ex-gratia payments made by Entity A to you in lieu of local government rates considered Australian taxes, fees or charges under Division 81 of the GST Act for the purposes of that Division prior to 1 July 2011 or after 1 July 2011? | A2: No. The ex-gratia payments made by Entity A to you in lieu of local government rates are not considered Australian taxes, fees or charges under Division 81 of the GST Act from the implementation of the GST.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Your submission includes the following: · You, a local government authority, are registered for GST from 1 July 2000. · A head lease agreement (the Agreement) was entered into between Entity A (the Lessee) and Entity B (the Lessor) for the lease of the specified property (the Property). · The Lessor subsequently acquired additional land that also forms part of the Property, and entered into 2 further lease agreements with the Lessee in relation to the additional land that was purchased on effectively the same terms as the Agreement (the initial agreement). · The Agreement requires Entity A to pay a rate equivalent to you in respect of certain parts of the Property that are located within the boundary of the area for which you are responsible under the Local Government Act 1993. The rate equivalent amounts are calculated by you in accordance with the Local Government Act 1993 . That is, they are calculated as they would be, had Entity A been liable to pay the rates in relation to those parts of the Property as specified in the Agreement. · The Agreement includes that the lessee must pay, on or before the due date, all Rates, Land Tax and Taxes without contribution from the Lessor. The Agreement also includes that where rates are not payable for stated reasons, the lessee must promptly pay to the relevant Governmental Authority such an amount as may be notified to the Lessee by such Governmental Authority as being equivalent to the amount which would be payable for rates as if such rates were leviable or payable in respect of those parts of the Property. The 2 further lease agreements contain similar terms to the initial agreement. The terms defined in the Agreement include: o 'Governmental Authority' means ...or local government authority. o 'Rates' means all rates...levied or imposed by a Government Authority on land or on owners or occupiers of land in relation to their ownership or occupation of that land. · You have engaged a contractor to prepare and issue an annual notification to Entity A for rate equivalent amounts on those parts of the Property that both parties agree comply with the requirements of the Agreement. · The ex-gratia payments received by you from Entity A are held in your consolidated fund as required under the Local Government Act 1993 which states that all money and property received by a council must be held in the council's consolidated fund unless it is required to be held in the council's trust fund. · The monies held in the consolidated fund can be used for whatever purposes you decide to the extent that it complies with the requirements of the Local Government Act 1993 and other relevant Acts by which you are bound. This is provided for in the Local Government Act 1993 which states that "Money and property held in the council's consolidated fund may be applied towards any purpose allowed by this or any other Act." · Under the Local Government Act 1993 , you must provide certain services to your community which would indirectly include Entity A. All services provided by you are non-regulatory. Examples of services (or non-regulatory) functions include: · community services and facilities · sporting, recreational and entertainment services and facilities · environment conservation, protection and improvement services and facilities · waste removal, treatment and disposal services and facilities · public transport services and facilities · water, sewerage and drainage works and facilities · storm water drainage and flood prevention, protection and mitigation services and facilities · fire prevention, protection and mitigation services and facilities · land and property development · housing · industry development and assistance · tourism development and assistance No services are provided by you to Entity A within the Property. Entity A is responsible for repairs, maintenance and the development of the Property as provided for under the lease. The provision of commercial services to the Property is provided by a private contractor and not by you. Another service function conferred on you relates to the provision and management of roads as provided for under the Roads Act 1993 (NSW). No non-regulatory services provided by you are provided directly to Entity A. Instead, any benefit derived by Entity A is merely incidental and is derived as a consequence of you performing your service functions for the benefit of the community. · You have no rights (either under statute or by agreement) to enforce the payment of the ex-gratia payments by Entity A with respect to the property. All rights are reserved with the Lessor pursuant to the lease entered into between Entity A and the Lessor. · You are under no obligation to provide any services to Entity A in return for the ex-gratia payments. · You advise that no agreement has been entered into by you with Entity A pursuant to the lease agreement in relation to ex-gratia payments made by Entity A to you.

Relevant legislative provisions: The A New Tax System (Goods and Services Tax) Act 1999 Division 81 | The A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | The A New Tax System (Goods and Services Tax) Act 1999 Section 9-10 | The A New Tax System (Goods and Services Tax) Act 1999 Section 9-15 | The A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Note: All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated. All reference material referred to are available on the Tax Office website www.ato.gov.au You seek confirmation that the ex-gratia payments made by Entity A to you in lieu of local government rates are not consideration for supplies made by you to Entity A for GST purposes. Accordingly, we will consider the meaning of consideration. Section 195-1 states that consideration, for a supply or acquisition, means any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition. Subsection 9-15(1) provides: Consideration includes: (a) any payment, or any act or forbearance, in connection with a supply of anything; and (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. The note to the definition of consideration states that the meaning is affected by a number of sections, including sections 81-5, 81-10 and 81-15. Section 81-20 states that this Division has effect despite section 9-15 (which is about consideration). Accordingly, it is relevant to consider Division 81 which provides for payments of taxes, fees and charges. Division 81 has been amended pursuant to Tax Laws Amendments (2011 Measures No.2) Act 2011 (41 of 2011) to take effect from 1 July 2011. The provisions of Division 81 pre and post amendment make reference to an Australian tax, fee or charge. Therefore, it is appropriate to consider the definition of an Australian tax and an Australian fee or charge. The definition of an Australian tax and an Australian fee or charge did not change as a result of the amendments to Division 81. Section 195-1 includes the following definitions: Australian fee or charge means a fee or charge (however described), other than an Australian tax, imposed under an Australian law and payable to an Australian government agency. Australian tax means a tax (however described) imposed under an Australian law Australian law has the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) which states that an Australian law means a Commonwealth law, a State law or a Territory law. Australian government agency has the meaning given by section 995-1 of the ITAA 1997 which states that Australian government agency means: (a) the Commonwealth, a State or a Territory; or (b) an authority of the Commonwealth or of a State or a Territory. The Tax Office publication 'Payments to government agencies under Division 81' includes a discussion on what is an Australian tax and what is an Australian fee or charge: What is an Australian tax? Broadly, a tax is 'a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered'. Examples of Australian taxes imposed under an Australian law include: · stamp duty · payroll tax · local government rates (these are compulsory payments generally levied on the value of property and may be known as general rates, ordinary rates or municipal rates) · various levies including industry levies (for example the aircraft noise levy or Medicare levy). In your case, under the Agreement, Entity A must pay all rates without contribution from the Lessor. Where rates are not payable by Entity A, for stated reasons, the Agreement specifies that Entity A must pay to you the rate equivalent as an ex-gratia payment in lieu of the rate. Under the circumstances we consider the rates referred to in the Agreement would generally satisfy the definition of an Australian tax. However, we consider the ex-gratia payment by Entity A to you pursuant to the Agreement is not the payment of an actual local government rate that is levied or imposed by you in relation to the Property, but a payment that is worked out based on an amount that is equivalent to the rate had the rate been leviable by you. As such, the ex-gratia payment is not a local government rate to meet the definition of an Australian tax. In addition, the definition of an Australian tax requires that the tax be imposed under an Australian law. The ex-gratia payment made by Entity A to you is a payment agreed under the terms and conditions of the Agreement in relation to the Property entered into between the Lessor and Entity A as the Lessee. Accordingly, we consider the ex-gratia payment arises under a contractual obligation rather than the imposition of an Australian law. As the ex-gratia payment is not imposed under an Australian law, it also does not satisfy the definition of an Australian tax for this reason. Since the ex-gratia payment is not imposed under an Australian law, it will also not meet the requirements of the definition of an Australian fee or charge. As the ex-gratia payment is not the payment of an Australian tax or an Australian fee or charge, the special rules in Division 81 have no application. Therefore it is relevant to consider the application of the basic GST rules. As stated earlier, subsection 9-15(1) includes in the definition of 'consideration' (a) any payment, or any act or forbearance, in connection with a supply of anything and (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. The provisions of section 9-15 focus on the meaning of 'consideration' in the context only of supplies. 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. Also of relevance is paragraph 9-5(a) which provides that you make a taxable supply if you make a supply for consideration. Section 9-10 provides the meaning of supply for GST purposes. Under subsection 9-10(1) a supply is any form of supply whatsoever and subsection 9-10(2) states that without limiting subsection (1), supply includes any of these: (a) supply of goods; (b) a supply of services; (c) a provision of advice or information; (d) a grant, assignment or surrender of real property; (e) a creation, grant, transfer, assignment or surrender of any right; (f) a financial supply; (g) an entry into, or release from, an obligation: (i) to do anything; (ii) to refrain from an act; (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g). The question you have asked is specifically in the context of supplies 'made by you to Entity A'. Therefore, it is necessary to determine if there is sufficient nexus between the ex-gratia payment made by Entity A to you and a supply (if any) that is made by you to Entity A. Goods and Services Tax Ruling, Goods and services tax: supplies (GSTR 2006/9) examines the meaning of supply in the GST Act. It explains at paragraph 180 that: In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. F53 In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that: · the test is whether there is a sufficient nexus between the supply and the payment made; F54 this test is objective; · regard needs to be had to the true character of the transaction; and · an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made. | Detailed Reasoning - In this case:: The lease agreement between the Lessor and Entity A provides for ex gratia payment in lieu of rates to be made by Entity A to the relevant Government Authority. You have no rights (either under statute or by agreement) to enforce the payment of the ex-gratia payments by Entity A with respect to the Property. All rights are reserved with the Lessor pursuant to the lease entered into between Entity A and the Lessor. You have engaged a contractor to prepare and issue an annual notification to Entity A for rate equivalent amounts on those parts of the Property that both parties agree comply with the requirements of the Agreement entered into between Entity A and the Lessor. The rate equivalent amounts are calculated by you in accordance with the Local Government Act 1993 . That is, they are calculated as they would be, had Entity A been liable to pay the rates in relation to those parts of the Property as specified in the Agreement. All services provided by you are non-regulatory. No non-regulatory services provided by you are provided directly to Entity A. Instead, any benefit derived by Entity A is merely incidental and is derived as a consequence of you performing your service functions for the benefit of the community. The non-regulatory services are provided for the benefit of the general public and not specifically for the benefit of Entity A. The provision of commercial services to the Property is provided by a private contractor and not by you. No services are provided by you to Entity A within the Property. Entity A is responsible for repairs, maintenance and the development of the Property as provided for under the Agreement. You are under no obligation to provide any services to Entity A in return for the ex-gratia payments. The ex-gratia payments received by you from Entity A are held in your consolidated fund. The monies held in the consolidated fund can be used for whatever purposes you decide to the extent that it complies with the requirements of the Local Government Act 1993 and other relevant Acts for which you are bound. Based on the facts you have submitted, we consider for GST purposes you do not make a supply of services to Entity A. The services you provide are for the benefit of the community. Although Entity A also benefits, the services are not supplies made under section 9-10 as they are provided for the general public and not provided to any identified recipient. You are also not under any obligation to use the ex-gratia payments made by Entity A to you in any particular manner. That is, the ex-gratia payment is not connected with a supply of an obligation made by you to Entity A which goes to the purpose for which the ex-gratia payment is made. As such, pursuant to subsection 9-15(1) the ex-gratia payment made by Entity A to you in lieu of local government rates is: · not a payment or any act or forbearance in connection with a supply of anything made by you to Entity A, and · not a payment or any act or forbearance in response to or for the inducement of a supply of anything made by you to Entity A. Therefore, in the context of supplies 'made by you to Entity A' the definition of consideration under subsection 9-15(1) is not satisfied. This means, you are not making any taxable supplies under section 9-5 to Entity A for which the ex-gratia payments are consideration.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.