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Ruling

Subject: GST and out of court settlements

Question

Is the amount of $XXX you received as a result of an out of court settlement, consideration for a taxable supply?

Answer

Yes.

Relevant facts and circumstances

You acquired the Property located in Australia.

Sale Contract

On dd/mm/yyyy, you entered into a contract, for the sale of the Property to entity A. The contract specified a purchase price and a deposit. Settlement was to occur on a specified date.

Reimbursement Deed

On the contract date, you also entered into another contract whereby Entity B, an entity related to entity A, agreed to reimburse you for certain expenses.

Clause R states "This Deed is subject to the completion of the Sale Contract. If the Sale Contract is terminated for any reason (other than the default of the purchaser under the Sale Contract) this deed automatically terminates and neither part will have any further claim against the other."

Clause S states "A default by the purchaser under the Sale Contract is a default by entity B under this Deed. If the Sale Contract is terminated for the default of the purchaser under the Sale Contract, and notwithstanding anything else under this Deed, entity B becomes liable to make the reimbursement required under clause U on demand made by you."

Clause T requires you to endeavor to provide a report on your various costs and a tax invoice to entity B.

Clause U states "entity B must pay you, by bank cheque, the sum of $XXXX plus GST, by way of reimbursement (or partial reimbursement) of the various costs on the Payment Date." The payment date is defined to be the later of the date of completion of the Sale Contract, and 7 days after a copy of the Report is delivered to entity B, pursuant to clause T.

Clause V states "Entity B acknowledges that the obligation to reimburse you under clause U is not conditional on the Report verifying any particular level of your various costs."

You also entered into an agreement to provide project management services to entity B from the time you entered into the contract until the settlement date. There was a fixed monthly fee plus GST.

Proof of Debt

You issued a tax invoice for reimbursement, in accordance with the Reimbursement Deed, of the various costs that you had incurred and listed on the tax invoice. The tax invoice showed an amount, which included GST.

Entity A failed to attend settlement. Following this you terminated the Sale Contract.

As a consequence of entity A's default under the Sale Contract, entity B was deemed to be in default and, in accordance with clause S of the Reimbursement Deed, became liable to pay the amount specified at clause U of the Reimbursement Deed. You demanded payment. However, entity B did not pay.

You served a creditor's statutory demand for payment on entity B, relying on entity B'S breach of the Reimbursement Deed, demanding payment of the specified amount. Entity B failed to comply with the statutory demand. You therefore applied to the Court for an order that entity B be wound up. The Court ordered that entity B be wound up and two Liquidators were appointed as joint and several liquidators of entity B.

You lodged Proofs of debt in the winding up for a total of $XXXX.

Your Proofs were formally admitted by the Liquidators.

A director and shareholder of entity B appealed the admission of the Reimbursement Deed Proof by the Liquidators

Settlement Deed:

The matter did not proceed to trial, and the parties entered into a Deed of Settlement (Settlement Deed). The relevant clauses are:-

o On or before a specified date the director of entity B, or his nominee, will pay to you the Settlement Sum.

o In exchange for payment of the Settlement Sum, you agree to amend the Deed Proof to an amount of $XXXX and lodge an amended proof with the Liquidators.

o The Settlement Sum will be paid by way of electronic funds transfer directly to the nominated bank account.

o Upon payment of the Settlement Sum

· By force of operation of this Deed, the Deed Proof lodged in the Liquidation shall be deemed to have been amended and thereafter shall be deemed to be admitted by the Liquidators; and

· The parties irrevocably instruct their solicitors to execute a Notice of Discontinuance in the Proof Proceedings in the form contained at Schedule 1, which Notice of discontinuance is to be filed in the Proof Proceeding by the director of entity B no later than 3 business days after receipt of the Notice of Discontinuance signed by the other parties.

o If clause X is not complied with, then the parties hereby irrevocably consent to an order that the Proof Proceeding be dismissed.

o You and the director of entity B release each other from any claims in relation to the liquidation of entity B, the Proofs and the proceedings brought by the director of entity B in relation to the admission of the Proofs.

o You undertake not to provide funding to the liquidator for the purposes of enquiring into the conduct of, or taking action against, the director of entity B.

o The director of entity B nominated entity C to pay the Settlement Sum.

Relevant legislative provisions

Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

As stated in paragraph 17 of Goods and Services Tax Ruling GSTR 2001/4: GST consequences of court orders and out-of-court settlements (GSTR 2001/4), the GST consequences of an 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.

At paragraphs 45 to 55, the ruling identifies, and discusses, three types of supplies that are related to out-of-court settlements:

· earlier supplies

· current supplies and

· supplies related to discontinuance of action.

You incurred various costs. You provided a detailed listing of those expenses and issued a tax invoice whereby, in accordance with the Reimbursement Deed, you sought reimbursement of the specified amount.

Payment was to be received:

o By the later of the date of completion of the Sale Contract, and 7 days after a copy of the Report was delivered to entity B, if the sale proceeded in accordance with the Sale Contract, or

o On demand by you if the Sale Contract was terminated for the default of the purchaser under the Sale Contract.

We consider that incurring various costs and issuing the tax invoice to entity B was an earlier supply to entity B. Therefore, if the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) are satisfied, your supply will be a taxable supply

As stated in section 9-5 of the GST Act, you make a taxable supply if:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia and

· you are registered or required to be registered.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

On the facts provided, you received consideration and the other requirements of section 9-5 of the GST Act were satisfied. Further, in your factual situation, there is no provision in the GST Act whereby your supply was GST-free or input taxed.

Consequently, the amount of $XXXX that you received as a result of the out-of-court settlement, was consideration for a taxable supply.

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