Private ruling: CGT and GST on conservation covenants
Date of advice: 26 May 2021
Published: August 2021
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 December 20XX

Ruling: Q1: Does CGT event D4 apply to the portion of the Offset Area Fee that relates to the conservation covenant? | A1: Yes | Q2: Are you liable for GST pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 when you enter into the Offset Deed ? | A2: Yes

Relevant facts and circumstances: You are registered for GST effective from XX October 20XX. You own land (the Property) located in Queensland. You acquired the Property following the passing of your spouse in XXX. You carry on an enterprise of primary production of livestock grazing on the land. In December 20XX an Offset Deed (Deed) was entered into between you (referred to in the Deed as the 'Landowner') and a Company. A signed copy of the agreement was provided. The Company prepared the Property's Offset Area Management Plan (OAMP) to address the requirement to provide a rehabilitation area offset on privately held property to compensate for indirect adverse impacts on matters of national environmental significance. Under the OAMP, the Company proposed to secure an offset area on the Property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 31-5 | Income Tax Assessment Act 1997 section100-45 | Income Tax Assessment Act 1997 section100-50 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-47 | Income Tax Assessment Act 1997 section 152-10 | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(a) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(b) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(c) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(d) | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(2) | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 ATO view documents | GSTR 2006/9 | Reason for decision | Section 104-47 of the ITAA 1997 provides that CGT event D4 happens if you enter into a conservation covenant over land that you own. The time of the event is when you enter into the covenant. | If the capital proceeds from entering into the covenant are more than the part of the cost base of the land that is attributed to the covenant, you make a capital gain. If the capital proceeds are less than the part of the reduced cost base of the land attributable to the covenant, you make a capital loss. | Subsection 31-5(5) of the ITAA 1997 defines a conservation covenant over land as a covenant that: | • restricts or prohibits certain activities on the land that could degrade the environmental value of the land; | • is permanent and registered on the title to the land (if registration is possible); and | • is approved in writing by, or is entered into under a program approved in writing by the Environment Minister. | The Offset Plan was approved in writing on XX March 2021 under the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) by the Assistant Secretary, from the Environment Approvals Division as a delegate of the Minister for the Environment. You and the Company are currently in the process of preparing a legally binding agreement that will be recorded on the property title, once approved. | In your case, the arrangement you have entered into satisfies the definition of a conservation covenant. Therefore, when the offset deed was entered into CGT event D4 occurred for the portion of the Offset Area Fee and Works Amount that relates to the conservation covenant over the land. | Moving forward in this ruling, | • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act. • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au | Section 9-40 provides that you are liable for GST on any taxable supplies that you make. | Section 9-5 provides you make a taxable supply if: | (a) you make the supply for consideration; and | (b) the supply is made in the course or furtherance of an enterprise that you carry on; and | (c) the supply is connected with the indirect tax zone; and | (d) you are registered, or required to be registered for GST. | However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. | However, prior to determining whether an entity has made a 'taxable supply' we need to establish whether a supply has been made. | The meaning of the term 'supply' for GST purposes is contained in section 9-10. Further examination of the meaning of the tern 'supply' is contained in Goods and Services Tax Ruling GSTR 2006/9; Goods and services tax: supplies . | Subsections 9-10(1) and 9-10(2) state: | 9-10 Meaning of supply | (1) A supply is any form of supply whatsoever. | (2) Without limiting subsection (1), supply includes any of these: | (a) 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 Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 the intended breadth of the term 'supply' stating that the term is 'defined broadly and is intended to encompass supplies as widely as possible'. | In this case you have entered into an Offset Deed (Deed) with the Company. | Clause 4 of the Deed effectively grants the Company permission to access the property for the purposes of the implementation of and compliance with the OAMP and exercising any rights and undertaking obligations pursuant to the Deed. | However, Clause 3.1(a) of the Deed provides that Clause 4 of the Deed will not be binding on the parties unless: | • you approve the terms and conditions of the OAMP; | • you provide the Company with written evidence of mortgagee consent to the registration of the Legally Binding Mechanism; and | • the Legally Binding Mechanism being registered on the title of the Property | Pursuant to clause 6 of the Deed, your obligations include: | • compliance with all applicable Laws; | • payment of all mortgage payments, rates and taxes affecting the property; | • keep the Company informed about all its dealings with the property that have the potential to impact the Offset Area; | • notify the Company of any notices affecting your occupation of the property; | • not undertaking any action that adversely affects the native vegetation within the Offset Area unless authorised in the OAMP; | • not be a party to or procure the doing of any act, matter or thing prejudicial to the goodwill, commercial reputation or public image of the Company; | • taking reasonable care to ensure that the performance of the OAMP is not interfered with or delayed or hindered by any other work you or your Agents may be doing on the property; | • inform the Company immediately if you become aware of any factor, circumstance, event or process that may impact negatively on the intended outcomes of the OAMP; and | • ensure that any Associated Persons of yours comply with this Deed, as applicable. | Clauses 3, 4 and 6 discussed above contain actions you will take that fall within the scope of a number of forms considered to a supply included in subsection 9-10(2) including the granting of a right (to the Company), surrender of some of your rights in relation to the property and the entry into obligations to do certain things and also refrain from certain acts. | Having established that you will be making a supply or supplies pursuant to the Deed, the next issue is whether the supply/supplies are taxable supplies as defined in section 9-5. | Annexure C to the Deed provides that the Company will pay $X amount upon registration of the Legally Binding Mechanism. Also, the Company will pay an annual fee of $X amount (adjusted annually from DD MM 20XX). These payments have sufficient nexus to the supplies you will make under the Deed satisfying the requirement of a taxable supply that the supply is made for consideration (paragraph 9-5(a)). | Your supplies under the Deed are also considered to be in the course or furtherance of an enterprise you carry on given the property is used in the ordinary course of the enterprise for which you are registered for GST thus satisfying paragraph 9-5(b). | Your supplies are connected to the indirect tax zone (Australia) and you are registered for GST satisfying paragraph 9-5(c) and 9-5(d) respectively. | Your supplies are neither GST-free nor input taxed. Given the above, your supplies pursuant to the Deed are 'taxable supplies' as defined in section 9-5. | Following on, you will be liable for GST in accordance with section 9-40 on the taxable supplies you make pursuant to the Deed.

Reasons for decision: Summary: Section 104-47 of the ITAA 1997 provides that CGT event D4 happens if you enter into a conservation covenant over land that you own. The time of the event is when you enter into the covenant. If the capital proceeds from entering into the covenant are more than the part of the cost base of the land that is attributed to the covenant, you make a capital gain. If the capital proceeds are less than the part of the reduced cost base of the land attributable to the covenant, you make a capital loss. Subsection 31-5(5) of the ITAA 1997 defines a conservation covenant over land as a covenant that: • restricts or prohibits certain activities on the land that could degrade the environmental value of the land; • is permanent and registered on the title to the land (if registration is possible); and • is approved in writing by, or is entered into under a program approved in writing by the Environment Minister. The Offset Plan was approved in writing on XX March 2021 under the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) by the Assistant Secretary, from the Environment Approvals Division as a delegate of the Minister for the Environment. You and the Company are currently in the process of preparing a legally binding agreement that will be recorded on the property title, once approved. In your case, the arrangement you have entered into satisfies the definition of a conservation covenant. Therefore, when the offset deed was entered into CGT event D4 occurred for the portion of the Offset Area Fee and Works Amount that relates to the conservation covenant over the land. Moving forward in this ruling, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act. • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides you make a taxable supply if: (a) you make the supply for consideration; and (b) the supply is made in the course or furtherance of an enterprise that you carry on; and (c) the supply is connected with the indirect tax zone; and (d) you are registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. However, prior to determining whether an entity has made a 'taxable supply' we need to establish whether a supply has been made. The meaning of the term 'supply' for GST purposes is contained in section 9-10. Further examination of the meaning of the tern 'supply' is contained in Goods and Services Tax Ruling GSTR 2006/9; Goods and services tax: supplies . Subsections 9-10(1) and 9-10(2) state: 9-10 Meaning of supply (1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (a) 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 Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 the intended breadth of the term 'supply' stating that the term is 'defined broadly and is intended to encompass supplies as widely as possible'. In this case you have entered into an Offset Deed (Deed) with the Company. Clause 4 of the Deed effectively grants the Company permission to access the property for the purposes of the implementation of and compliance with the OAMP and exercising any rights and undertaking obligations pursuant to the Deed. However, Clause 3.1(a) of the Deed provides that Clause 4 of the Deed will not be binding on the parties unless: • you approve the terms and conditions of the OAMP; • you provide the Company with written evidence of mortgagee consent to the registration of the Legally Binding Mechanism; and • the Legally Binding Mechanism being registered on the title of the Property Pursuant to clause 6 of the Deed, your obligations include: • compliance with all applicable Laws; • payment of all mortgage payments, rates and taxes affecting the property; • keep the Company informed about all its dealings with the property that have the potential to impact the Offset Area; • notify the Company of any notices affecting your occupation of the property; • not undertaking any action that adversely affects the native vegetation within the Offset Area unless authorised in the OAMP; • not be a party to or procure the doing of any act, matter or thing prejudicial to the goodwill, commercial reputation or public image of the Company; • taking reasonable care to ensure that the performance of the OAMP is not interfered with or delayed or hindered by any other work you or your Agents may be doing on the property; • inform the Company immediately if you become aware of any factor, circumstance, event or process that may impact negatively on the intended outcomes of the OAMP; and • ensure that any Associated Persons of yours comply with this Deed, as applicable. Clauses 3, 4 and 6 discussed above contain actions you will take that fall within the scope of a number of forms considered to a supply included in subsection 9-10(2) including the granting of a right (to the Company), surrender of some of your rights in relation to the property and the entry into obligations to do certain things and also refrain from certain acts. Having established that you will be making a supply or supplies pursuant to the Deed, the next issue is whether the supply/supplies are taxable supplies as defined in section 9-5. Annexure C to the Deed provides that the Company will pay $X amount upon registration of the Legally Binding Mechanism. Also, the Company will pay an annual fee of $X amount (adjusted annually from DD MM 20XX). These payments have sufficient nexus to the supplies you will make under the Deed satisfying the requirement of a taxable supply that the supply is made for consideration (paragraph 9-5(a)). Your supplies under the Deed are also considered to be in the course or furtherance of an enterprise you carry on given the property is used in the ordinary course of the enterprise for which you are registered for GST thus satisfying paragraph 9-5(b). Your supplies are connected to the indirect tax zone (Australia) and you are registered for GST satisfying paragraph 9-5(c) and 9-5(d) respectively. Your supplies are neither GST-free nor input taxed. Given the above, your supplies pursuant to the Deed are 'taxable supplies' as defined in section 9-5. Following on, you will be liable for GST in accordance with section 9-40 on the taxable supplies you make pursuant to the Deed.