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Edited version of private ruling
Authorisation Number: 1011579088642
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Ruling
Subject : GST and payment received
Question
Whether the amount you received from the other party is subject to goods and services tax (GST)?
Advice/Answers
No.
Relevant facts
You are registered for GST.
You were engaged to provide services to another entity. On the day before the day you were due to commence work, the other entity advised that your services were not required.
You have not provided any actual work under the contract
You lodged a claim for compensation for breach of contract to the other entity.
The other entity recognised that some compensation for time in preparation for the actual commencement of the contact should be allowed together with an allowance for revenue lost arising out of missed opportunities to purse alternative work options.
The other entity offered you a global sum (undissected lump sum) of money in full settlement of all aspects of your loss.
You could not negotiate the settlement amount. You had to weigh the settlement amount against the entirety of your claim and accepted or rejected the offer as a whole.
You have signed a settlement of liability claim. In a discharge form you have agreed to settle your claim as follows:
In considering of receiving from the other entity the sum of a fixed amount of money in full satisfaction of all causes of action, claims and demands whatsoever now apparent or hereafter to become apparent which you or any person claiming through or under you now have or at any time hereafter but for the acceptance of such sum could or might have had against the other entity in respect of damages, expenses or loss suffered by us a result of an alleged breach of contract said to have been caused by the default of the other entity.
You undertook not to commence or proceed with any action suit or proceeding against the other entity in respect of the said damages or in respect of any claim which you or those claiming under or through you now have or might have against the other entity for any matter or thing whatsoever arising out of or in relation to the said breach.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(a)
Reasons for decision
Summary
The payment was not consideration for any supply and therefore the requirement in paragraph 9-5(a) of the GST Act is not met.
Detailed reasoning
Under subsection 7-1(1) of the GST Act, GST is payable on taxable supplies. Section 9-5 of the GST Act sets out the requirements for a supply to be a taxable supply. One of the requirement is that the supply is made for consideration under paragraph 9-5(a) of the GST Act.
Section 9-15 of the GST Act provides that a payment will be consideration for a supply if the payment is in connection with, in response to, or for the inducement of a supply. Therefore, there are two elements to the definition of consideration:
· the first is the payment from one entity to the other entity and
· the second is the nexus that must be established between the payment and a supply.
Consideration is defined in terms of payment and forbearance by an entity. Payment is not defined in the GST Act. The ordinary meaning of 'to pay' includes provision of value either in cash or in kind. Provided other requirements of section 9-5 of the GST Act are met, your receipt would be subject to GST if it was consideration for a taxable supply that you made in return for the payment.
In a letter to you the other entity has initially recognised a number of heads of claims:
· compensation for time in preparation for the actual commencement of the contact
· allowance for revenue lost arising out of missed opportunities to pursue alternative work options.
However, the other entity offered you a global (undissected) amount of money in full settlement of all aspect of your loss.
In a discharge form, you have agreed to settle your claim as follows:
In considering of receiving from the other entity the sum of a fixed amount of money in full satisfaction of all causes of action, claims and demands whatsoever now apparent or hereafter to become apparent which you or any person claiming through or under you now have or at any time hereafter but for the acceptance of such sum could or might have had against the other entity in respect of damages, expenses or loss suffered by us a result of an alleged breach of contract said to have been caused by the default of the other entity.
You undertook not to commence or proceed with any action suit or proceeding against the other entity in respect of the said damages or in respect of any claim which you or those claiming under or through you now have or might have against the other entity for any matter or thing whatsoever arising out of or in relation to the said breach.
Goods and Services Tax Ruling GSTR 2001/4 considers the GST consequences resulting from court orders and out-of-court settlements. The GST consequences of a court order or out-of-court settlement will depend on a number of matters, including whether a payment made under the order or settlement constitutes consideration for a supply and if so, whether the supply is in the nature of a taxable, input taxed or GST-free supply.
The term 'supply' is defined in subsection 9-10(1) of the GST Act to mean 'any form of supply whatsoever'. Without limiting the general meaning of supply, subsection 9-10(2) of the GST Act provides a non-exhaustive list of activities or occurrences that are included within the meaning of supply. This list is a follows, in part
(a) a supply of goods
…
(d) grant assignment or surrender of any right
…
(g) 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
(h) any combination or any 2 or more of the matters referred to in paragraph (a) to (g).
Subsection 9-10(2) of the GST Act refers to two aspects of a supply, the thing which passes such as goods, services, a right or obligation and the means by which it passes, such as its provision, creation, grant, assignment, surrender or release.
As the definition of the term 'supply' is very broad, a supply referred to under any of the paragraphs above could be related to an out-of-court settlement.
It is not dispute that a payment has been made from one entity (the other entity) to another entity (you). We need to ascertain what was supplied in return for the payment and the nexus between the settlement amount and the supply.
Paragraphs 43 and 44 of GSTR 2001/4 provides for three categories of supply that are related to out-of-court settlement
43. A supply related to an out-of-court settlement may have occurred prior to the settlement (and in fact have been the subject of the dispute in the first place), or it may be created by the terms of the settlement itself. There may be more than one supply that is related to a settlement. In addition, the subject of the dispute may not be a supply at all (refer paragraph 71).
44. For the purposes of this Ruling, supplies that are related to an out-of-court settlement fall within the three categories of supply described below. This characterisation assists in the subsequent analysis of consideration for a supply, which commences at paragraph 100. The existence of a particular supply in relation to a given settlement will not necessarily mean a sufficient nexus exists between that supply and a payment made under the settlement.
The subject of the dispute was not an earlier transaction in which a supply was made as you have not commenced actual work for the other entity.
The terms of the settlement agreement have not created any new supply (no current supply).It should be noted that the terms of your settlement agreement, in finalising the dispute, will ensure no further legal action in relation to the dispute, provided that the terms of the settlement are complied with. This takes the form of you releasing the other entity from all of the existing claims and from further claim and obligations in relation to that dispute (Discontinuance supply).
In your circumstances, the dispute arose because of the termination of the contract prior to commencement. You have made a claim against the other entity for damages arising out the breach of the contract. It is the view of the Australian Taxation Office (ATO) in paragraph 73 of GSTR 2001/4 that the damage caused by a breach of contract, cannot in itself be characterised as a supply made by you, the aggrieved party. This because damages, loss in itself does not constitute a supply under section 9-10 of the GST Act.
Therefore, the only supply that was related to the payment was the discontinuance supply. Where the only supply in relation to an out-of-court settlement is a discontinuance supply, paragraphs 106 and 107 of GSTR 2001/4 provide that:
106. Where the only supply in relation to an out-of-court settlement is a 'discontinuance' supply, it will typically be because the subject of the dispute is a damages claim. In such a case, the payment under the settlement would be in respect of that claim and not have a sufficient nexus with the discontinuance supply.
107. In most instances, a 'discontinuance' supply will not have a separately ascribed value and will merely be an inherent part of the legal machinery to add finality to a dispute which does not give rise to additional payment in its own right. They are in the nature of a term or condition of the settlement, rather than being the subject of the settlement.
Although, one of your head of claim was the 'compensation for time in preparation for the actual commencement of the contact' and the settlement amount was actually agreed as the global amount for satisfaction of all causes of action in respect of general damages, expenses and other loss you suffered as a result of the alleged breach of contract.
As you could not negotiate the settlement amount, and all you had to do was to weigh the monetary offer against the entirety of your claim, and accept it or reject it as a whole, to accept the lump sum was not to assent to any figure in respect of any individual item of your claim (refer McLaurin v FC of T (1961) CLR 381).
It follows that apportionment is not required. The whole settlement amount was not a payment that has nexus to any supply, and therefore was not subject to GST because not all the requirements under section 9-5 of the GST Act were met.
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