Edited version of private ruling

Authorisation Number: 1011723113307

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Ruling

Subject: Contractual Supplies

Question1

Is the payment of the Settlement Sum by the vendor Entity A to the purchaser Entity B consideration for a separate supply or an adjustment to the consideration of the acquisition supply of shares from Entity B?

Answer

No. The payment of the Settlement Sum by the vendor Entity A to the purchaser Entity B is not consideration for a separate supply but is an adjustment to the consideration of the acquisition supply of shares from Entity B.

Question 2

Should the Settlement Sum received by Entity B be disclosed on the Business Activity Statement (BAS)?

Answer

No. There is no requirement to disclose the Settlement Sum received by Entity B in the BAS.

Question 3

Is the assignment of the specific claim by Entity B to Entity A, a taxable supply?

Answer

No. The assignment of the specific claim by Entity B to Entity A is not a taxable supply.

Relevant facts

Entity B and Entity A are parties to a securities purchase agreement (SPA) {and the Amending Deed to the SPA}.

Under the SPA, Entity A (the Vendor) agreed to sell the whole of the securities of Entity C.

The SPA provides for the purchase price to be adjusted for any movement in the working capital of the business. When settlement occurs, movements in the financial position between the time of the agreement and settlement form an adjustment to the purchase price.

Both the original SPA and the subsequent Deed to the SPA deal with a particular Adjustment. The Adjustment is set out in the SPA. The SPA provided the time frame for preparation of the Adjustment and certain other processes.

Entity B formed a view that some expected contract losses had not been taken into account within the financial statements of Entity B and were not reflected within the relevant Statement. As a result, the securities of Entity C had been overvalued and Entity B was entitled to a refund by the mechanism provided in the SPA.

A dispute in relation to the Adjustment arose between the parties.

The dispute became the subject of an independent review process as provided in the SPA. Once it became clear to the parties that the process would take significantly longer to resolve, Entity B also commenced proceedings against Entity A for contractual breaches of the SPA.

The court proceedings were commenced as a back-up to the Adjustment as a large number of the claims made in the court proceedings overlapped the adjustment sought by Entity B.

Entity C, as a previous subsidiary of Entity A, was covered under a policy held by Entity A.

Subsequent to the acquisition of Entity A, Entity C's independent valuers were engaged to determine the market value of the Entity A's businesses and the market value of the other assets of those businesses for accounting and income tax purposes. They did not assign any value to the policy at completion.

Entity B became generally aware of the existence of this policy.

Entity C submitted a preliminary claim under this policy seeking indemnity in respect of the payments and defence costs for the specific project.

Subsequently, Entity B and Entity A entered into a Settlement Deed.

The Settlement Deed provides that Entity A would pay a sum of money to Entity B and each party agreed to release the other party, from any Claim in connection with various specific claims including specific adjustment.

Entity B and Entity A also entered into another Deed in relation to all of its rights, title and interest under and in connection with the policy in respect of the specific claim.

In the settlement discussions Entity A asked that Entity C specifically assign its interest in the policy in respect of the specific claim. Subsequently, Entity C agreed to assign its rights in the claim to Entity A as one of the conditions of settlement. No consideration is payable in respect of the assignment of the claim to Entity A.

For accounting purposes and in accordance with the agreement of the parties, the Settlement Sum will be shown as a reduction in the purchase price of the assets and will be reflected by a reduction in goodwill upon acquisition.

For income tax purposes Entity B intends to treat the Settlement Sum as a reduction in the purchase price of the securities

Reasons for Decision

Question 1

Is the payment of the Settlement Sum consideration for a supply?

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on a taxable supply. Section 9-40 of the GST Act provides that an entity must pay the GST payable on any taxable supply that the entity makes.

Section 9-5 of the GST states that:

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.

(Terms denoted by asterisks are defined in section 195-1 of the GST Act.)

In this case, the issue is whether Entity B makes a supply for which the Settlement Sum is consideration.

The meaning of 'supply' is given in section 9-10 of the GST Act. Subsection 9-10(1) of the GST Act provides that a 'supply is any form of supply whatsoever.' Subsection 9-10(2) of the GST Act provides a non-exhaustive list of things that are included as supplies.

The payment of money does not generally constitute a supply for GST purposes. This is provided for in subsection 9-10(4) of the GST Act which states:

However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

The Commissioner's view on the meaning of 'supply' is set out in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies. (GSTR 2006/9).

GSTR 2006/9, amongst other things, sets out a number of propositions to assist in analysing a transaction to identify a supply.

Paragraph 222 of GSTR 2006/9 states:

222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

Accordingly, in determining whether or not the settlement sum is consideration for a separate supply or is an adjustment to the consideration of the acquisition supply of securities, it is pertinent that the SPA be examined. In doing so, it is evident that the main objective of the SPA is to outline the legal rights and obligation of Entity B and Entity A in respect of the transaction. Therefore, it is our view that the underlying supply in the SPA is the sale of securities which is prima facie an input taxed supply, provided the conditions in regulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) are met.

Further, the SPA makes allowances for purchase price adjustments to capture adverse events that were undetected at the time of purchase. In particular, the SPA deems any payment made by the vendor to the purchaser to be a reduction in the purchase price of the securities.

For these reasons, we are of the view that Entity B's receipt of the Settlement Sum from the vendor Entity A has merely occurred as a consequence of a contractual term or obligation of the SPA and is therefore, not consideration for a separate supply. It has no aim in itself and has a clear nexus to the consideration for the earlier acquisition supply from Entity A.

Support for this conclusion can also be ascertained by paragraphs 71 to 73 of GSTR 2006/9 which states:

Proposition 5: to 'make a supply' an entity must do something

71. In overseas jurisdictions the term 'supply' has been held to takes its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9, a ruling which is about the assumption of liabilities:

In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'. (Emphasis added.)

72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw') in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.

73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.

It follows from the above paragraphs in GSTR 2006/9 and the judicial authority of Shaw that a supply cannot be made unless the supplier engages in some kind of positive action. In applying these principles to Entity B's circumstances, it is our view that Entity B did not engage in such positive action when it received the Settlement Sum. The Settlement Sum was received as a result of Entity B's entitlement to an adjustment under the SPA.. It was merely invoking its rights and obligations under the SPA. Therefore, where no supply is made by Entity B, it follows that the Settlement Sum is not considered to be consideration for a supply by Entity B. Consequently, without a supply there would not be a taxable supply and no GST is payable. This conclusion accords with your primary submission to this question in your ruling request.

The purchase price of the securities will be reduced making it an adjustment event pursuant to subparagraph 19-10(1)(b) of the GST Act. However, there will be no GST consequences in terms of an increasing or decreasing adjustment because the provision, acquisition and disposal of securities is a financial interest and therefore an input taxed supply under Division 40 of the GST Act.

Question 2

Should the Settlement Sum received under the Settlement Deed be disclosed on the BAS?

The settlement sum received merely reduces the price of an earlier input taxed supply and therefore, has no GST consequences. Accordingly, it does not need to be disclosed in the BAS. However, this may have an impact on Entity B's apportionment formula if a revenue method is used. To that end we refer you to Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies.

Question 3

Is the assignment of a specific claim a taxable supply for GST purposes?

You have advised that the specific claim was of no economic value to you because you could not make any claim under it. Therefore, it was assigned to Entity A without any monetary or non monetary consideration. Furthermore, the policy was not taken into consideration in calculating the relevant Adjustment and consequently the Settlement Sum. For these reasons you submit that whilst the assignment of the relevant claim is potentially a supply under sub paragraph 9-10(2)(e) of the GST Act it is not a taxable supply. This is because a supply can only be a taxable supply if the supply is made for consideration. We agree with your submission and conclude that this assignment is not a taxable supply.

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