Private ruling: GST and the payments under a particular legislation
Date of advice: 14 November 2018
Published: February 2019

Ruling: Q1: Do you make a supply under the A New Tax System (Goods and Services Tax) Act 1999 to another entity under a particular scheme in accordance with a particular legislation? | A1: No | Q2: If the answer to question 1 is ‘yes’, then, for GST purposes, is the payment received by you from the other entity under the scheme consideration for this supply? | A2: Not relevant.

Relevant facts and circumstances: You are an entity carrying on an enterprise and are registered for the goods and services tax (GST). You are a licensor of a particular type of products. The other entity is a not-for-profit entity. You are a member of another entity. Under the membership agreement you appoint the other entity as your non-exclusive agent in all matters relating to a particular licencing scheme under a particular legislation. Each year, some institutions pay the other entity an agreed amount calculated on the basis of a particular formula as per this legislation. There is no membership fees payable to the other entity. However, the other entity may deduct its’ administrative costs from the money it collects. The scheme Under a particular legislation, third parties may use certain material that is owned by you and pay an amount as per the legislation to the other entity.

Relevant legislative provisions: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Summary: Supply is defined in section 9-10 of the GST Act broadly as a supply in any form whatsoever. In Commissioner of Taxation v. MBI Properties Pty Ltd ( MBI Properties ), the High Court found an entity will make a supply whenever that entity provides something of value to another entity. The High Court further observed that the making of a supply does not necessarily involve an action on the part of the supplier. An entity can provide something, and therefore make a supply, by refraining from acting or by tolerating an act or situation. In MBI Properties , the High Court determined that an entity was providing something, and therefore making a supply, by observing an obligation to provide continuing use and enjoyment of a premise. This obligation was initially created through contract then assumed by operation of law on the purchase of the premise. However, at paragraph 76 of Goods and Services Tax Ruling Goods and services tax: supplies (GSTR 2006/9) the Commissioner confirms that: While an entity may make a supply by observing an obligation, even if that involves no more than refraining from doing something or tolerating some action, there will be no supply where something occurs by operation of law without an entity providing something or without any obligation being placed on the entity to provide something. Therefore, you must provide something or be obliged to provide something to the other entity or the third party in order to be considered to have made a supply to these entities under the license scheme. Judicial commentary suggests that the payment required by the legislation is intended to compensate you for the statutory appropriation of their exclusive right to reproduce your work. The statutory license is brought about by the operation of a particular act. You do not provide something nor are you obliged to provide something. The statutory license scheme may operate without the involvement of entities such as yourself. Compulsory acquisition We have previously considered the GST treatment of compensation for the compulsory acquisition of rights in the context of real property vested in a government authority. Where legislation extinguishes an entity’s interest in real property and vests this interest in a government authority, the entity does not make a supply if the authority initiates this statutory process. The Commissioner confirms in Goods and Services Tax Ruling GSTR 2006/9 that: This is because the owner does not provide anything to the authority. It takes no action to cause its legal interest to be transferred or surrendered to the authority. It has no obligation to do anything, to refrain from doing something or to tolerate an act or situation. In the statutory license scheme under this case, you do not take any action to cause your legal rights to be extinguished. The third party initiates the statutory license scheme by presenting a particular notice to the other entity. You are not obliged to do or refrain from doing anything. You are also not obliged to tolerate an act or situation. Instead, you have no right to prevent the act or situation, namely the operation of the license. If a landowner accepts compensation payable on the compulsory acquisition or negotiates this compensation; the land is still acquired through the operation of statute rather than as a result of these actions. Similarly, your acceptance of a payment does not provide a sufficient nexus between the rights acquired and the means by which they are acquired for there to be a taxable supply. On this basis, we consider that the entity does not make a supply under the educational statutory license scheme. | Detailed Reasoning - Membership Agreement: Although you do not make a supply under the statutory license scheme, it remains necessary to consider whether there is any other supply by you that has sufficient nexus to the payment received from the other entity. As previously discussed, you will make a supply to the other entity if the other entity provides something or is obliged to provide something under the Membership Agreement. Subject matter of the Agreement The Membership Agreement considers the relationship between the other entity and its’ members whose work will be communicated or reproduced under statutory license schemes. Although members may elect to participate in the other entity’s voluntary license schemes through their online membership account, voluntary licenses are not contemplated by the Membership Agreement. Consequently, the rights and obligations created by the Members Agreement are confined to statutory license schemes and will be considered in this context. The money collected from the remuneration notices is merely passed through the other entity to you (less admin fees). This is consistent with an agency relationship. For completeness, we have also analysed the Agreement between other entity and you. Whilst there are components capable of being supplies the money received has no nexus or connection to these supplies.