Edited version of private ruling

Authorisation Number: 1011665152508

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Ruling

Subject: goods and services tax and out-of-court settlement

Question 1

Can you backdate your GST registration to claim input tax credits on the acquisitions you made relating to the legal action?

Answer

Yes. However, you are not entitled to an input tax credit for an acquisition you made under the settlement arrangement.

Question 2

Will you be entitled to claim input tax credits on your acquisitions of legal and accounting services relating to the legal action?

Answer

You will be entitled to input tax credits on your acquisitions of legal and accounting services relating to the legal action if your GST registration is backdated to the date you made the first of these acquisitions.

You will be entitled to claim these input tax credits where you satisfy the requirements of section 29-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 3

Will you be entitled to an input tax credit for an acquisition you made under the settlement arrangement?

Answer

No.

Question 4

Will you be entitled to claim an input tax credit for an acquisition you made under the settlement arrangement if B refuses to give you a tax invoice?

Answer

No.

Relevant facts and circumstances

You are not registered for GST.

You operated a property development business during the period from a certain year to a certain year, which consisted of the construction of units at a particular location. Construction was completed at a certain time, after which a number of the units were sold. GST was remitted for each sale.

GST registration was subsequently cancelled effective from a certain date.

After the GST registration was cancelled, the strata plan A pursued the statutory warranty from B to claim for defective work, and B subsequently took legal action to recover monies from you (this is after the actual builder went bankrupt).

On a certain date, you and B agreed to an out-of-court settlement of a certain amount of money to release you from all present and future claims arising from the defective work. You paid the settlement amount to B. B refuses to give you a tax invoice.

You incurred legal and accounting costs incidental to the legal action. You paid for the supplies of the associated legal and accounting services made to you. The supplies of these legal and accounting services made to you were taxable supplies. You acquired these services in certain financial years.

Your GST turnover has remained at zero at the times when you made acquisitions relating to the legal action.

The settlement deed provides the following:

PARTIES: B of a certain address of a certain part.

AND: you of a certain address of a certain part.

WHEREAS:

C at all relevant times was a person engaged in residential building work. C undertook residential building work on your behalf, being the construction of the units and the common property ("the Work") at a certain location ("the Property").

From about a certain date, you were the registered proprietor of the Property until the registration of strata plan A on a certain date. You are a Developer of the Works for the purposes of a certain provision of a certain Act.

D was the insurer of the residential building work undertaken by C at the Property pursuant to a certain part of a certain Act ("the Act"), under a Certificate of Insurance dated on a certain date issued pursuant to a certain Policy number ("the insurance")

D is an insolvent insurer pursuant to a certain part of the Act.

On a certain date strata plan A was registered and legal title to the common property of the Property vested in the Owners Corporation of strata plan A ("the Owners Corporation"). From time to time, individual lots in the Property were sold and transferred to the individual lot owners ("the Lot Owners").

The Owners Corporation has made a claim under the insurance pursuant to a certain part of the Act, being a certain claim number ("the claim"), lodged by the Owners Corporation on its own behalf and as agent of the Lot Owners with B (through its agent E). B has indemnified the Owners in relation to the Claim for a certain amount of money. Further, B has incurred additional expenses relating to the Claim in mitigating its loss in the sum of a certain amount of money.

B is entitled pursuant to a certain part of the Act to recover the indemnity paid and did so in a certain court of a particular State or Territory under a certain case number of a certain year ("the Proceedings").

By way of a compromise agreement and without admission by you of liability and reserving B's rights against any other party that it may have rights against, B and you have agreed to resolve the Proceedings on the following terms.

SOMETHING

Now this Deed witnesses that in consideration of the said payment of a certain amount of money within a certain number of days of this Deed being executed by you to B, the parties acknowledge and agree that:

B releases you from any present or future claim arising from the loss or damage which was the subject to the Claim and/or the Proceedings and loss or damage directly or indirectly resulting from same.

A payment made pursuant to this Deed may be made by any cheque which is subsequently honoured on presentation or by Electronic Funds Transfer.

If you fail to make payment in compliance with this Deed, then B shall be entitled to claim the outstanding amount, and interest upon the amount at the relevant court interest rate from the date of the failure to make the relevant payment, as a debt due and payable, and you agree not to raise any defence to that claim.

This Deed may be pleaded by you in bar to any action, claim, suit or demand brought by B and any person or entity claiming through it in relation to the Claim and/or Proceedings, subject to the rights of B under a certain clause of the Deed.

This Deed shall bind the parties hereto and any executor, administrator, liquidator, transferee, assignee, or trustee in bankruptcy appointed in respect thereof.

Each party shall bear its own costs of the negotiation and the execution of this Deed.

This Deed shall be governed and construed in accordance with the law of a certain State or Territory and the parties agree to submit to the jurisdiction of the Courts in that State or Territory.

Nothing in this Deed shall be read in favour of you or against B due to the drafting of this Deed by or on behalf of B.

Upon payment of the settlement monies by you to B in accordance with a certain paragraph of the Deed, the parties agree to apply to a certain court to make the following Orders in respect of the Proceedings:

The Proceedings are dismissed.

No order as to costs.

IN WITNESS whereof the parties hereto have hereunto set their hands and seals on the day and year first above written.

Reasons for decisions

Question 1

Summary

You can backdate your GST registration to the date you began dealing with the legal action as you were carrying on an enterprise during the course of your dealing with the legal action, and the GST Act does not prevent your GST registration from being backdated to that date.

You can backdate your GST registration even if you do so for the sole purpose of claiming input tax credits on your acquisitions relating to the legal action.

Detailed reasoning

Section 23-10 of the GST Act provides that you may be registered for GST if you are carrying on an enterprise.

While you were dealing with the legal action (including making acquisitions relating to the legal action), you were carrying on your property development enterprise, as your activity of dealing with the legal action was connected with the property development enterprise, as the damages claim relates to the construction work that was done on your behalf and you arranged for this construction work to be undertaken as part of your property development enterprise.

Therefore, you were entitled to be registered for GST while you were dealing with the legal action

Section 25-10 of the GST Act sets out the rules for determining the date of effect of GST registration. It provides that if a taxpayer applies for GST registration, the date of effect must not be a day before:

§ the day specified in the taxpayer's application; or

§ if the Commissioner is satisfied that the taxpayer became required to be registered on an earlier day - the day that the Commissioner is satisfied is that earlier day.

There is no rule in section 25-10 of the GST Act that would prevent you from backdating your GST registration to the date you made the first of your acquisitions relating to the legal action.

As you were entitled to be registered for GST while you were dealing with the legal action and there is no rule in section 25-10 of the GST Act that would prevent you from backdating your GST registration to that date, you can backdate your GST registration to that date.

You can backdate your GST registration even if you do so for the sole purpose of claiming input tax credits on your acquisitions relating to the legal action.

Question 2

Summary

Provided that your GST registration is backdated to the date you made the first of your acquisitions of legal and accounting services relating to the legal action, you will be entitled to input tax credits on these acquisitions, as you will satisfy the requirements of section 11-5 of the GST Act.

You can claim these input tax credits where you have satisfied the requirements of section 29-10 of the GST Act.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition where you satisfy the requirements of section 11-5 of the GST Act, which states:

You make a creditable acquisition if:

a) you acquire anything solely or partly for a *creditable purpose; and

b) the supply of the thing to you is a *taxable supply; and

c) you provide, or are liable to provide, *consideration for the supply; and

d) you are *registered or *required to be registered.

(*Denotes a term defined in section 195-1 of the GST Act)

Creditable purpose

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it

in *carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

However, you do not acquire the thing for a creditable purpose to the extent

that:

(a) the acquisition relates to making supplies that would be *input taxed;

or

(b) the acquisition of a private or domestic nature.

You acquired legal and accounting services relating to the legal action in carrying on your property development enterprise. These acquisitions did not relate to making supplies that would be input taxed and they were not of a private or domestic nature. Hence, you acquired these services for a creditable purpose, and therefore, the requirement of paragraph 11-5(a) of the GST Act was satisfied.

Taxable supply

You make a taxable supply where you satisfy the requirements of 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.

However, the supply is not a *taxable supply to the extent that it is *GST-free

or *input taxed.

The supplies of the legal and accounting services relating to the legal action made to you were taxable supplies, and therefore, the requirement of paragraph 11-5(b) of the GST Act was satisfied where you acquired these services.

Consideration

You provided consideration for the supplies of the legal and accounting services relating to the legal action made to you. Therefore, you satisfied the requirement of paragraph 9-5(c) of the GST Act.

GST registration

Section 25-15 of the GST Act provides that if your GST registration is backdated to a given date (your registration day), then you are taken, for the purpose of determining whether an acquisition you made on or after your registration day was a creditable acquisition, to have been registered from and including your registration day.

If your GST registration is backdated to the date you made the first of your acquisitions of legal and accounting services relating to the legal action, you will satisfy the requirement of paragraph 9-5(d) of the GST Act.

As you will satisfy all of the requirements of section 11-5 of the GST Act if your GST registration is backdated to the date you made the first of your acquisitions of legal and accounting services relating to the legal action, you will be entitled to input tax credits on these acquisitions under such circumstances.

Attribution of input tax credits

You will be entitled to claim your input tax credits on legal and accounting services relating to the legal action where you satisfy the requirements of section 29-10 of the GST Act, which states:

(1) The input tax credit to which you are entitled for a *creditable acquisition is

attributable to:

(a) the tax period in which you provide any of the *consideration for the

acquisition; or

(b) if, before you provide any of the consideration, an *invoice is issued

relating to the acquisition - the tax period in which the invoice is

issued.

(2) However, if you *account on a cash basis, then

(a) if, in a tax period, you provide all of the *consideration for a

*creditable acquisition - the input tax credit for the acquisition is

attributable to that tax period; or

(b) if, in a tax period, you provide part of the consideration - the input tax

credit for the acquisition is attributable to that tax period, but only to

the extent that you provided the consideration in that tax period; or

(c) if, in a tax period, none of the consideration is provided - none of the

input tax credit for the acquisition is attributable to that tax period.

(3) If you do not hold a *tax invoice for a *creditable acquisition when you give

to the Commissioner a *GST return for the tax period to which the input tax

credit (or any part of the input tax credit) on the acquisition would otherwise

be attributable:

(a) the input tax credit (including any part of the input tax credit) is not

attributable to that tax period: and

(b) the input tax credit (or part) is attributable to the first tax period for

which you give to the Commissioner a GST return at a time when you

hold that tax invoice.

However, this subsection does not apply in circumstances of a kind

determined in writing by the Commissioner to be circumstances in which the

requirement for a tax invoice does not apply.

Question 3

Summary

You are not entitled to an input tax credit for an acquisition you made under the settlement arrangement as the settlement payment is not consideration for a taxable supply made to you.

Detailed reasoning

Goods and Services Tax Ruling GSTR 2001/4 discusses court and out-of-court settlements. This is relevant to your situation, as you were a party to an out-of-court settlement.

Paragraph 21 of GSTR 2001/4 discusses the concept of supply for consideration. It states:

21. A 'supply for consideration' is the first step towards there being a taxable supply. However, for there to be a supply for consideration, three fundamental criteria must be met:

(i) there must be a supply (see paragraph 22 onwards);

(ii) there must be a payment (see paragraph 74 onwards); and

(iii) there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration (see paragraph 100 onwards).

Paragraph 46 of GSTR 2001/4 discusses earlier supplies. It states:

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'.

Paragraphs 48 and 49 of GSTR 2001/4 discuss current supplies. They state:

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.

In your case, the subject of the dispute is not an earlier transaction in which a supply was made to you.

No current supply was made to you under the settlement arrangement.

Paragraphs 71 to 73 of GSTR 2001/4 discuss disputes involving claims for damages. They state:

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 case, the legal action arose over a matter that does not relate to a supply, as the claim was for damages. The damage is not a supply.

Paragraphs 50 to 55 and 109 of GSTR 2001/4 discuss discontinuance supplies. Paragraphs 50 to 55 state:

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.

51. Generally (it is suggested in most if not all cases), the terms of a settlement, in finalising a dispute, will ensure no further legal action in relation to that dispute, provided that the terms of the settlement are complied with. This often takes the form of a plaintiff releasing a defendant from some (or all) of the existing claims and from further claims and obligations in relation to that dispute.

52. Sometimes, where a dispute involves counter claims, the terms of the settlement may provide for each party to release the other from such claims and obligations.

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)].

55. In this Ruling, we refer to supplies of these kinds as 'discontinuance supplies'. However, whether a discontinuance supply would be a taxable supply would then depend on the requirements of section 9-5 being met in relation to that supply.

Paragraph 109 of GSTR 2001/4 states:

109. We consider that a payment made under a settlement deed may have a nexus with a discontinuance supply only if there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply.

You paid the settlement amount to B.

A certain clause of the settlement deed provides the following:

B releases you from any present or future claim arising from the loss or damage which was the subject of the Claim and/or proceedings and loss or damage directly or indirectly resulting from same.

Therefore, B made a discontinuance supply to you.

The claim which is the subject of the dispute in your case is not so lacking in substance that the settlement payment could only have been made for the discontinuance supply. Therefore, there is not a nexus between the discontinuance supply and the settlement payment. Hence, the settlement payment is not consideration for the discontinuance supply.

The settlement payment you made was not consideration for a supply. Therefore, the requirement of paragraph 9-5(a) of the GST Act was not satisfied. As not all of the requirements of section 9-5 of the GST Act were satisfied, a taxable supply was not made to you in return for the settlement payment. Therefore, the requirement of paragraph 11-5(b) of the GST Act was not satisfied. As you did not satisfy all of the requirements of section 11-5 of the GST Act, you did not make a creditable acquisition in return for the settlement payment. Therefore, you will not be entitled to an input tax credit for an acquisition you made under the settlement arrangement.

Question 4

As you will not be entitled to an input tax credit for an acquisition you made under the settlement arrangement, you will not be entitled to claim an input tax credit for an acquisition you made under the settlement arrangement.

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