This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051272176230

Date of advice: 23 August 2017


Subject: GST and ex-gratia payment

Question 1

Is the ex gratia payment you received from an out of court subject to the goods and services tax (GST)?



Relevant facts and circumstances

Following an out of court settlement you received an ex gratia payment from an unrelated entity.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(2).

Reasons for decision

In this case we are informed that an entity accepted liability, settled out of court and agreed to make a one-off payment to you for loss of income.

Generally the act of settling will not be taxable for the purposes of the GST Act unless there is a nexus between the payment in respect of an earlier supply or if the settlement creates a new or current supply or there is a supply related to a discontinuance of action.

Goods and Services Tax Ruling GSTR 2001/4 considers the goods and services tax (GST) consequences resulting from court orders and out-of-court settlements.

All paragraphs further from the margin and quoted in smaller fonts in this ruling are from GSTR 2001/4.

    Earlier supply

    46. In these circumstances, where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to in this ruling as an 'earlier supply'.

    Example - Earlier supply

    47. Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settlement, with the retailer paying all monies owed. The supply of the toys, that is the subject of the dispute, is an earlier supply because it occurred before the dispute arose.

In this case there is no earlier supply made by you to the entity.

    Current supply

    48. A new supply may be created by the terms of the settlement. In this Ruling, such a supply is referred to as a 'current supply'.

    Example - Current supply

    49. A dispute arises over a claim by Beaut Enterprises Pty Ltd that Plagiariser Pty Ltd is using their trade name. Negotiations between the parties follow, resulting in Beaut entering into an agreement with Plagiariser that allows Plagiariser to use its trade name in the future. This would constitute the supply of a right under the agreement between Beaut and Plagiariser that amounts to a ' current' supply.

There is also no current supply between the parties.

    Supply related to discontinuance of action

    50. Even where there is no earlier or current supply, the very wide range of things that can constitute a 'supply' means that one or more new supplies will probably crystallise on an out-of-court settlement being reached.

    53. Where court proceedings have commenced, the filing of a notice of discontinuance pursuant to the relevant court rules may also be required to ensure the court is advised that a particular action will not proceed.

    54. We consider that these conditions of settlement can create supplies for GST purposes. The supplies may be characterised as:

      (i) surrendering a right to pursue further legal action [paragraph 9-10(2)(e)]; or

      (ii) entering into an obligation to refrain from further legal action [paragraph 9-10(2)(g)]; or

      (iii) releasing another party from further obligations in relation to the dispute [paragraph 9-10(2)(g)].

You informed that point (i), (ii) and (iii) above do not apply in this instance.

    Where the subject of a claim is not a supply

    71. Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.

    72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the matter is resolved by a court or through negotiation.

    73. The most common form of remedy is a claim for damages arising out of the termination or breach of a contract or for some wrong or injury suffered. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.

In your situation the money remitted to you by the entity was not paid in respect of something that was a taxable supply and the settlement also does not give rise to a taxable supply. Therefore, we consider that the payment to you is not the provision of consideration. Consequently you did not make a taxable supply. The payment received is not subject to GST.