GST treatment of funding provided to Treaty of Waitangi claimants by the Crown through the Office of Treaty Settlements
QB (Nov 2006) finds funding provided to Treaty claimants is not subject to GST as there is no supply of goods/services, it's not 'consideration' or a grant/subsidy.
Sections 5(6D) and 8(1) of the Goods and Services Tax Act 1985-definitions of "consideration", "goods" and "services"
In the Interpretation Statement on Treaty of Waitangi Settlements-GST Treatment (published in TIB Vol 14, No 9 (September 2002)) it was considered that redress under a Treaty of Waitangi ("Treaty") settlement was not subject to goods and services tax (GST). The Commissioner has now been asked whether GST is chargeable on funding provided by the Crown through the Office of Treaty Settlements ("OTS") to claimants for negotiation costs ("claimant funding"). (This item does not address the GST treatment of supplies received by claimants that are paid for out of claimant funding.)
Claimant funding is not subject to GST, because:
- Claimant groups do not supply goods or services to the Crown in the course of negotiating a Treaty settlement;
- Claimant funding does not constitute "consideration" within the statutory definition as there is an insufficient relationship between claimant funding and any supply that might be made by a claimant group to the Crown; and
- Claimant funding is not in the nature of a grant or subsidy in terms of section 5(6D) of the Goods and Services Tax Act 1985 ("the Act").
The Crown accepts that historical breaches of the Treaty have occurred and has indicated its willingness to enter into negotiations to settle claims in respect of such Treaty breaches. The Crown provides a contribution (through the OTS) towards costs incurred by claimant groups in connection with the negotiation of the settlement of such claims. Funding is provided for negotiation costs such as rent, administration, travel, accommodation and communication costs, fees for legal, financial or other advice, negotiators' fees and hui costs. Claimants may decide to undertake additional research to establish a particular aspect of their claim. However, the Crown does not provide funding for research. The Crown may commission research if additional research is required in order to enable settlement to be reached. Claimant funding is not provided to a claimant group unless the group's representatives establish that they have a mandate to represent the group. The representatives of the claimant group receive claimant funding on behalf of the group.
Claimant funding does not necessarily cover all the negotiation costs incurred by a claimant group. The amount of the funding approved by the Crown depends on the size and complexity of the claim, and whether any features of the claimant group could make negotiation and consultation with its members more difficult and expensive (for example, whether the members of the claimant group are in strong agreement about the proposed negotiations, the size of the claimant group and how scattered its members are, and whether hui are required).
The timing of instalments of claimant funding is linked to milestones in the negotiation progress (that is, Mandate, Terms of Negotiation, Formal Negotiation to Deed of Settlement and Ratification). The Crown advises claimant groups of the funding allocated to each milestone once Cabinet has approved the overall amount of claimant funding to be given to a group. Payments are made by instalments of no more than $50,000 each. Claimants must provide copies of itemised invoices for negotiation costs incurred by the claimants to enable the OTS to establish that the funding has been used for negotiation costs. The claimants must also undertake an annual audit and review to:
- Provide verification that the correct accounting standards have been used and procedures maintained and that the claimants' financial statements represent an accurate view of transactions that have occurred for the period; and
- Ensure claimant funding has been used on valid negotiation-related expenses.
Claimant funding is in addition to any financial redress under the Deed of Settlement between the Crown and the claimant group. It is provided because in the absence of funding by the Crown, it may be difficult to achieve settlement or the settlement reached may not be lasting.
Imposition of GST
Under section 8(1) of the Act, GST is imposed on the supply of goods or services in New Zealand by a registered person in the course or furtherance of a taxable activity carried on by that person by reference to the value of the supply. The value of a supply of goods or services is the "consideration" for the supply: section 10(2) of the Act.
Claimant groups may be registered persons. A supply of goods or services by a claimant group could be a supply made in the course or furtherance of a taxable activity carried on by the claimant group.
Whether claimant groups supply goods or services to the Crown
Claimant groups do not supply any goods in the course of negotiating a Treaty settlement. Claimant groups may transfer property to the Crown under the final Deed of Settlement signed on the completion of the negotiations. However, none of the agreements entered into in the course of settlement negotiations (the Deed of Mandate, Terms of Negotiation or Heads of Agreement) involves the transfer of property by the claimant group.
"Services" means some action that helps or benefits the recipient: Case S65 (1996) 17 NZTC 7,408; F B Duvall Ltd v CIR (1997) 18 NZTC 3,470. Claimants may undertake the following activities in connection with the negotiation of a Treaty settlement:
- The preparation for, and conduct of, negotiations with the Crown (including mandating, agreement on the terms of negotiation, preparation of a negotiation brief and formal negotiations);
- A forbearance not to pursue claims through the courts or the Waitangi Tribunal or by other means while in negotiation;
- Research (additional to research the Waitangi Tribunal or the Crown Forestry Rental Trust or the Crown carries out) to support its claims;
- The provision of invoices relating to negotiation costs and audited financial statements accounting for the use of claimant funding.
The pursuit of a Treaty settlement is an activity carried on for the claimant group's benefit, rather than an activity carried on for the Crown's benefit. Mandating establishes that the claimant group's representatives have the authority to represent that group in negotiations with the Crown, and is undertaken for the purpose of enabling a claimant group to initiate negotiations with the Crown. The agreement that negotiations will continue only if the parties do not pursue claims through the courts, the Waitangi Tribunal or by other means during negotiations is part of the framework for Treaty negotiations and relates to the process for negotiating settlement. If a claimant group carries out additional research, it does so in order to obtain evidence to support its claim against the Crown. The carrying out of additional research is part of a process of seeking compensation from the Crown and is incidental to the pursuit of redress from the Crown. Compliance with accounting requirements is not sought as an end in itself and is incidental to the negotiation of a Treaty settlement that is not itself a service. Viewed as a whole, the claimants' activities are directed at obtaining compensation for the Crown's Treaty breaches. Such activities are undertaken to recover compensation from the Crown rather than for the Crown's benefit and do not constitute a service provided by the claimants to the Crown.
Therefore, the Commissioner does not consider that claimant groups provide either goods or services to the Crown in the course of negotiating a Treaty settlement.
Whether claimant funding is "consideration" within the statutory definition
Also, for claimant funding to be subject to GST, it must be "consideration" for a supply of goods or services. The definition of "consideration" in section 2(1) of the Act reads as follows:
"Consideration", in relation to the supply of goods and services to any person, includes any payment made or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods and services, whether by that person or by any other person; but does not include any payment made by any person as an unconditional gift to any non-profit body:
A distinction is drawn between a payment in respect of the payee's taxable activity and a payment that is consideration for a supply of goods and services: Director-General of Social Welfare v De Morgan (1996) 17 NZTC 12,636; NZ Refining Co Ltd v CIR (1997) 18 NZTC 13,187 (CA). For a payment to be "consideration" within the statutory definition a sufficient relationship must exist between the making of the payment and the supply of goods or services. An expectation that the recipient of the payment would carry out a certain activity is not enough. It is not sufficient that the person who receives the payment carries out some activity that has the effect of benefiting either the person making the payment or some other person. It is also not sufficient that the payment enables the recipient to carry on an activity. The transaction must involve reciprocal obligations between the payer and payee: NZ Refining Co Ltd v CIR; Chatham Islands Enterprise Trust v CIR (1999) 19 NZTC 15,075.
Hence, it is not sufficient that the Crown agrees to provide claimant funding in the expectation that the claimants will begin and continue negotiations. It is also not sufficient that the claimants' activity in carrying out the negotiations provides a benefit to the Crown in facilitating Treaty settlements or that the provision of claimant funding enables the claimants to carry out negotiations.
The Commissioner considers that there is an insufficient relationship between claimant funding and any supply of goods or services that might be made by a claimant group to the Crown in negotiating a Treaty settlement with the Crown. The real and substantial relationship is between claimant funding and the Crown's Treaty breaches giving rise to the claims to which the negotiations relate. Therefore, the Commissioner considers that claimant funding is not "consideration" within the statutory definition.
Whether claimant funding is in the nature of a grant or subsidy
As claimant funding is provided by the Crown through the OTS, section 5(6D) of the Act potentially applies. If section 5(6D) applies, claimant funding would be deemed to be consideration for the supply of goods or services by a claimant group. For section 5(6D) to apply, claimant funding must be a "payment in the nature of a grant or subsidy" and must be paid to a claimant group "in relation to or in respect of" a taxable activity carried on by the claimant group.
The words "in relation to or in respect of" are words of the widest import: Shell NZ Ltd v CIR (1994) 16 NZTC 11,303. It is possible that there may be some relationship between claimant funding and a taxable activity carried on by the claimant group.
The definition of "payment in the nature of a grant or subsidy" in section 5(6E) of the Act is not an exhaustive definition. Therefore, case law on the meaning of "grant or subsidy" is relevant to the interpretation of the phrase "payment in the nature of a grant or subsidy". The case law indicates that:
- A "grant or subsidy" is financial assistance the Crown or a public body pays in money to promote some activity for the benefit of the community or a section of the community.
- A "grant or subsidy" is a gift in the sense that it is assistance the Crown provides gratuitously and voluntarily.
- A payment the Crown or a public authority makes merely for the purpose of discharging an obligation is not a payment in the nature of a grant or subsidy.
See Placer Development Ltd v Commonwealth of Australia (1969) 121 CLR 353; First Provincial Building Society v Commonwealth of Australia 95 ATC 4145; GTE Sylvania v R  CTC 751; Reckitt & Colman Pty Ltd v FCT 4 ATR 501; Director-General of Social Welfare v De Morgan; and Kena Kena Properties Ltd v A-G (2002) 20 NZTC 17,433.
The Crown agrees to enter into negotiations to settle Treaty claims because it accepts that it has breached its obligations under the Treaty in respect of the claimants. The need for the claimants to incur costs in negotiating a settlement with the Crown is occasioned by the Crown's Treaty breaches. Claimant funding is provided by the Crown in order to enable the Crown to discharge obligations in respect of historical breaches of the Treaty that the Crown acknowledges did occur. The provision of claimant funding is occasioned by an obligation to provide redress for a loss suffered by the claimants as a consequence of the Crown's Treaty breaches and it is provided to facilitate settlement. Claimant funding compensates the claimants for costs that they incur directly as a result of the Crown's Treaty breaches.
A public benefit (in the form of better race relations and social harmony) may result from the settlement of long-standing Treaty grievances generally. However, the t claimant funding is provided in order to enable the Crown to discharge its obligations in respect of breaches of the Treaty.
Therefore, the Commissioner considers that for the purposes of section 5(6D) of the Act claimant funding is not a payment in the nature of a grant or subsidy.
Surplus in claimant funding
It is possible that the amount of the claimant funding that the Crown has agreed to provide may exceed the negotiation costs the claimants have incurred. Any amount that the Crown has agreed to provide and that has not been spent when settlement is finalised is paid to the claimant group in addition to the Financial Redress (as defined in the Deed of Settlement). In legal terms, a surplus in claimant funding is not part of the Financial Redress. However, in practice, claimant funding is taken into account in developing the overall financial package offered to the claimants.
Whether or not claimant funding, which the Crown has agreed to provide, has been spent in full on negotiation costs, it is not "consideration" for GST purposes, because an insufficient relationship exists between a payment in respect of claimant funding and any goods or services a claimant group may potentially supply and is not a payment in the nature of a grant or subsidy.
Advance payments of financial redress used for negotiation costs
The amount of claimant funding approved by Cabinet will not normally be increased. However, if the claimants' negotiation costs exceed the amount of the approved funding and good progress has been made in negotiations and settlement is close, the Crown may provide additional funds to the claimants. Additional funds are generally in the form of an advance out of any financial redress that may ultimately be agreed. Any advance payment is deducted from the final settlement amount paid under the Deed of Settlement. Financial and commercial redress under a Treaty settlement is not subject to GST (TIB Vol 14, No 9 (September 2002)). A pre-payment of financial redress is still financial redress and is not subject to GST. It is not relevant that an advance payment is used by a claimant group to meet negotiation costs.