With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the telco. Whether an out of court settlement is reached or payment is made under a court order, the compensation or other consideration that a telco receives as a result of the recovery action it has undertaken is not consideration for a supply.
One of the criteria for a taxable supply is that you make the supply for consideration. For there to be a supply for consideration, three fundamental criteria must be met:
- there must be a supply
- there must be a payment, and
- there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.
Claims arising out of property damage do not relate to a supply. When a dispute arises over property damage, the telco will often assert its right to an appropriate remedy, most commonly a claim for damages. The property damage, being the substance of the dispute, cannot in itself be characterised as a supply made by the telco. This is because the damage in itself does not constitute a supply under section 9-10 of the GST Act.
A defendant extinguishing a judgement debt by making the required payment does not constitute a supply by the telco for GST purposes.
Out of court settlements
The payment by a defendant of an agreed sum does not constitute a supply by the telco for GST purposes.
Supplies related to telco discontinuing recovery action ('settlement supplies')
Subsection 9-10(2) of the GST Act provides that supply includes:
- a creation, grant, transfer, assignment or surrender of any right;
- an entry into, or release from, an obligation:
(i) to do anything; or
(ii) to refrain from an act; or
(iii) to tolerate an act or situation.
One or more new supplies may crystallise on a settlement. The terms of a settlement finalising a dispute generally provide that, subject to those terms being complied with, no further legal action will occur. For example, the telco releases a defendant from all existing and future claims in relation to the dispute. These supplies created as conditions of settlement may be characterised as:
(i) surrendering a right to pursue further legal action (para 9-10(2)(e))
(ii) entering into an obligation to refrain from further legal action(para 9-10(2)(g)) or
(iii) releasing another party from further obligations in relation to the dispute (para 9-10(2)(g)).
Whether such supplies are taxable would depend on the requirements of section 9-5 being met in relation to that supply.
Where the only supply in relation to an out-of-court settlement of a damages claim is a settlement supply, the payment under the settlement is in respect of the claim and does not have a sufficient nexus with the settlement supply. 10