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Ruling

Subject: GST and liability of a representative of an incapacitated entity

Questions

1. Are you, in your capacity as liquidator of Company Y liable for goods and services tax (GST) in relation to an out of court settlement negotiated in respect of taxable supplies made prior to your appointment as liquidator?

Answer: No.

In your capacity as liquidator of Company you are not liable for GST in relation to the out of court settlement negotiated in respect of taxable supplies made by the incapacitated entity prior to your appointment.

2. Will the out of court settlement negotiated by you, as liquidator, result in an adjustment event under section 19-10 of the GST Act?

Answer: Yes.

The out of court settlement gave rise to an adjustment event which had the effect of changing the consideration for the taxable supplies made by the incapacitated entity for a specified period under paragraph 19-10(1)(b) of the GST Act.

Question 3

3. If the answer to question 2 is yes, will the adjustment event be attributable to the tax period of the incapacitated entity, or to you, the liquidator under section 58-10 of the GST Act?

Answer: The adjustment event will be attributable to the tax period of the incapacitated entity pursuant to section 9-40 of the GST Act.

Relevant facts and circumstances

Company Y, registered for GST on a specified date, accounting on a non-cash basis.

1. You, were appointed as liquidator of Company Y (In Liquidation) on a specified date.

2. Company Y (In Liquidation) registered for GST, accounting on a cash basis.

3. Prior to liquidation, Company Y derived income through the sale of products and services as a licensed dealer for Company X. Company X paid Company Y a commission in relation to the sale of these products.

4. On a specified date, Company Y raised concerns that fraud was committed by an employee of Company Y between certain dates.

5. Company X estimated the GST-inclusive value of revenue derived by Company Y from fraudulent activities to be a specified amount. Company X commenced deducting GST inclusive instalments from Company Y's entitlement to commission payments.

6. Company Y objected to the GST inclusive instalments being deducted by Company X, however Company X continued to deduct instalments from Company Y commissions until they went in to Liquidation.

7. You, in your capacity as liquidator for Company Y (In liquidation), negotiated a settlement with Company X in respect of taxable supplies made by Company y prior to liquidation.

8. The disputed commission was settled pursuant to a settlement agreement.

9. The settlement agreement, provided a number of specified terms and conditions.

10. As per the terms of the settlement, Company X issued Company Y with a recipient created tax invoice & adjustment note for a specified amount. (GST inclusive).

Reasons for decision

Question 1

Out-of-court settlement

The Commissioner's view of the GST consequences of payments made under out-of-court settlements is set out in Goods and Services Tax Ruling GSTR 2001/4. The ruling explains how a payment (or an act or forbearance) that is made in compliance with a court order or out-of-court settlement should be treated for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Paragraph 13 of GSTR 2001/4 states that an out-of-court settlement will include any form of dispute in which the terms of the resolution are agreed between the parties, rather than imposed by the court.

In your circumstance, the settlement deed represents a resolution of a dispute where the parties have entered into an agreement settling their differences. Therefore, the settlement between Company Y, Company X and you can be characterised as an out-of-court settlement for the purposes of GSTR 2001/4.

For a supply to have GST consequences, it has to be a taxable supply as defined in section 9-5 of the GST Act which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered or *required to be registered for GST.

(An asterisk denotes a defined term in section 195-1 of the GST Act.)

The word 'you' referred to in section 9-5 of the GST Act generally refers to an entity which is further explained in section 184-1 of the GST Act to mean an individual, a body corporate, a corporation sole, a body politic, a partnership, any other unincorporated association or body of persons, a trust or a superannuation fund.

In your case, the word 'you' refers to you, the liquidator or Company Y (In Liquidation), the incapacitated entity.

The first requirement in section 9-5 of the GST Act is that you make the supply for consideration. Therefore, for the payment Company X made to Company Y (in Liquidation) to be subject to GST there must be sufficient nexus between the payment and a taxable supply, such that it represents consideration for that taxable supply.

Supplies relating to the settlement

GSTR 2001/4 identifies three different types of supply that may relate to an out-of-court settlement. These are earlier supply, current supply and a supply related to a discontinuance of action However, the existence of a particular supply in relation to a given settlement will not necessarily mean sufficient nexus exists between that supply and a payment made under the settlement.

You have made claims against Company X for amounts you allege Company X is liable to pay, and you advised that the dispute relates to the commissions deducted by Company X for supplies which Company Y made to Company X during a specified period.

Earlier supply

According to paragraph 46 of GSTR 2001/4, an earlier supply refers to the situation where the subject of the dispute is an earlier transaction involving the parties to which the supply was made.

Based on the information provided, the settlement sum paid does have sufficient nexus with the earlier supply.

The earlier supply in this case is the supply of products and services by Company Y as a licensed dealer for Company X. The consideration is the commission payable by Company X to Company Y. Company Y was registered for GST and accounted for GST on an accrual basis.

At the time the dispute was initiated, Company Y had already performed the services for the set period as contractually agreed. However due to fraudulent activities committed by an employee of Company Y, Company X progressively deducted commission instalments and Company Y was not paid for the entire services already provided. Company X estimated the commission derived by Company Y to be a specified amount from the fraudulent activities. The final payment claim of a set amount (GST inclusive) was made.

Therefore, the subject of the dispute in this case is due to an earlier transaction, that is, services already provided but unpaid. On this basis, we consider that the settled amount represents consideration for that earlier supply.

Consequently, the payment representing consideration for the earlier supply will be subject to GST, as that earlier supply satisfies all the requirements of a taxable supply under section 9-5 of the GST Act.

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity must pay the GST payable on any taxable supply that the entity makes.

Liability in relation to a representative of an incapacitated entity

Division 147 of the GST Act which previously contained the GST special rules for representatives of incapacitated entities has been replaced by Division 58 of the GST Act which applies retrospectively from 1 July 2000. The amending legislation received Royal Assent on 4 December 2009. The amendment ensures that representatives of incapacitated entities are liable for GST consequences during the term of their appointment.

Section 58-5 of the GST Act sets out the relationship between incapacitated entities and their representatives and provides at subsection 58-5(1) of the GST Act that a supply, acquisition or importation by a representative in its capacity as representative, is taken for GST purposes, to be a supply, acquisition or importation by the incapacitated entity and not the representative.

The overall effect of section 58-5 of the GST Act is to ensure that all supplies, acquisitions and importations, and certain acts and omissions made during the period of a representative's appointment will be taken to be those of the incapacitated entity, regardless of whether it was the incapacitated entity or the representative that undertook the transactions or undertook the relevant acts or omissions.

GST liability of representative

Section 58-10 of the GST Act sets out the circumstances in which a representative of an incapacitated entity will be liable for GST on a taxable supply.

In particular, subsection 58-10(1) of the GST Act provides that a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would, but for section 48-40, be liable to pay on a taxable supply. This subsection applies retrospectively from 1 July 2000.

Note: section 48-40 relates to taxable supplies made by GST groups.

In this case, Company Y made taxable supplies to Company X between a set period of time. As this supply occurred before you were appointed as Company Y's representative, section 58-10 of the GST Act does not apply to you. Accordingly, you are not liable for the GST payable on the settled amount.

As a result Company Y, the incapacitated entity is liable for the GST payable on the taxable supplies it made to Company X under section 9-40 of the GST Act.

Question 2

As outlined in question one, we consider the settlement payment representing consideration for the earlier supply will be subject to GST as that earlier supply satisfies all the requirements of a taxable supply under section 9-5 of the GST Act.

However, you contend that the payment of the settlement sum is an adjustment event under paragraph 19-10(1)(b) of the GST Act because the adjustment has the effect of changing the consideration for a supply.

You advised that the settled amount represents a change in consideration to previously reported taxable supplies made by Company Y to Company X for the specified period. The original value of the supply was estimated at set amount.

Based on the information provided, we consider the out-of-court settlement is an adjustment event resulting in a change in consideration for the taxable supply. Hence, paragraph 19-10(1)(b) has been satisfied.

Question 3

We have determined in question one that since the supply occurred before you were appointed as Company Y's representative, section 58-10 of the GST Act does not apply to you. Accordingly, the adjustment event will be attributable to the tax period of the incapacitated entity pursuant to subsection 9-40 of the GST Act.

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