EXPLANATORY STATEMENT
Water Act 2007
Water Charge (Termination Fees) Amendment Rules 2011
Background
The Water Charge (Termination Fees) Rules 2009 (termination fee rules), made under the Water Act 2007 (Water Act) and applicable in the Murray-Darling Basin, were made in June 2009 and came into force on 1 September 2009.
Termination fees provide a contribution from irrigators who terminate access to an irrigation infrastructure operator’s network to the ongoing costs of maintaining the infrastructure. The termination fee rules specify the circumstances under which an operator can impose a termination fee on an irrigator, and the level at which the fee can be set. The rules set the maximum termination fee at 10 times the annual total network access charge the irrigator pays to the operator for access to its network.
It has recently become clear that Goods and Services Tax (GST) will apply to termination fees. The termination fees rules are currently silent on the imposition of GST to recover the GST liability associated with the revenue received from the imposition of the termination fee. The lack of an express provision in the termination fees rules regarding GST means that it is uncertain whether an operator can increase the termination fee above the 10 times multiple to recover the cost of the GST.
To ensure compliance with the termination fee rules, operators would in effect need to impose a termination fee of approximately nine times the total network access charge and then add the GST component. This is contrary to the policy intent underlying the termination fees rules.
Purpose of the Amendment Rules
Water charge rules must contribute to achieving the Murray-Darling Basin water charging objectives and principles set out in Schedule 2 of the Water Act 2007 (Water Act), which are based on best practice water pricing agreements under the NWI. Water charging objectives broadly seek to:
a) promote the economically efficient and sustainable use of water resources, water infrastructure assets and government resources devoted to the management of water resources;
b) ensure sufficient revenue streams to allow efficient delivery of the required services;
c) facilitate the efficient functioning of water markets;
d) give effect to the principle of user-pays and achieve pricing transparency in respect of water storage and delivery in irrigation systems and cost recovery for water planning and management; and
e) avoid perverse or unintended pricing outcomes.
The rule amendments will allow, where an operator faces a GST liability on termination fees, for the operator to impose a termination fee in excess of the 10 times multiple to recover the cost of the GST liability. As termination fees are calculated as a multiple of the network access charges, the rule amendments also ensure GST can not be recovered twice if the network access charges are ever considered as taxable.
By allowing operators to impose a termination fee in excess of the 10 times multiple to recover the cost of the GST liability, the rule amendments will ensure a reasonable balance between providing incentives for efficient investment in irrigation and on-farm infrastructure, rationalisation and water trade and will contribute to promoting the economically efficient and sustainable use of water infrastructure assets.
Terminating irrigators will be able to claim GST levied on termination fees as a business input tax credit, providing they are registered for GST and the GST claim is related to their business activities.
Authority
Subsection 92(1) of the Water Act provides that the Minister for Sustainability, Environment, Water, Population and Communities may make water charge rules, which relate to regulated water charges. Regulated water charges include charges for termination fees.
The Amendment Rules relate only to regulated charges for termination fees, and do not apply to charges in respect of urban water supply activities beyond the point at which the water has been removed from a Murray-Darling Basin water resource.
Details of the Rules are set out in the Attachment.
Process
The process for making rule amendments is set out in section 93 of the Water Act. In particular, section 93 requires the Minister to ask the Australian Competition and Consumer Commission (ACCC) for advice about rule amendments the Minister proposes to make and to have regard to that advice.
Section 93 also provides for regulations to set out the detailed process that the Minister must follow in making rule amendments. The Water Regulations 2008 set out this detailed process. Regulation 4.02 sets out the process the Minister must follow in requesting the ACCC’s advice.
The Minister requested the ACCC’s advice in May 2010. At the same time the Minister requested the ACCC to provide draft amendments as part of its advice. The ACCC provided its final advice to the Minister in June 2010.
Consultation
Under regulation 4.05 of the Water Regulations 2008 (Regulations), the Minister must undertake consultation on draft rule amendments unless the Minister is satisfied that the ACCC has already undertaken the required consultation.
The ACCC released draft advice and draft amendments for public comment in May 2010 before finalising its advice. Two submissions were received and both supported the amendments.
Under the Regulations, the Minister must also undertake further consultation if draft rule amendments, in the Minister’s opinion, are not substantially the same as those provided by the ACCC. The rule amendments are substantially the same as the draft rule amendments which the ACCC provided to the Minister together with its advice.
Other
Further explanatory material is available in final advice on an amendment to the Water Charge (Termination Fees) Rules, June 2010 provided by the ACCC and available at www.environment.gov.au/water.
The Amendment Rules are a legislative instrument for the purpose of the Legislative Instruments Act 2003.
The Amendment Rules commence on the day after they are registered.
ATTACHMENT
DETAILS OF THE WATER CHARGE (TERMINATION FEES) AMENDMENT RULES 2011.
- Name of Rules
Rule 1 provides that the title of the Rules is the Water Charge (Termination Fees) Amendment Rules 2011.
2. Commencement
Rule 2 provides that the Rules commence on the day after they are registered.
3. Amendment of the Water Charge (Termination Fees) Rules 2009
Rule 3 sets out the schedule to amend the Water Charge (Termination Fees) Rules 2009.
Schedule
Part 1, Rule 3, Definitions – The definition of “total network access charge” is amended to exclude any amount of Goods and Services Tax (GST) from the calculation of the charge. This is so that GST can not be added to the network access charge, prior to calculation of the termination fee, ensuring GST can not be recovered twice.
Part 3, Rule 7, Calculation of termination fee – This rule is amended to include a second sub-rule, to provide that where GST is payable in respect of a taxable supply relating to the termination or surrender of the whole or part of a right of access, the termination fee may be increased by an amount not exceeding the GST payable in respect of that taxable supply. This applies to circumstances where termination fees may be imposed under Rule 6, or determined under a contract referred to in Rule 7(1) paragraph (b).