Edited version of your private ruling

Authorisation Number: 1012311324620

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Goods and services tax (GST) and an out-of-court settlement.

Question

Is GST payable by you on the settlement payments?

Answer:

Yes.

Relevant facts and circumstances

You are registered for GST.

In a certain month of a certain year, you entered into a written agreement (agency agreement) with a number of parties referred to in the agreement as principals (names of the principals).

The agency agreement provided that you would be entitled to a commission of a certain amount if you effectively introduced a joint venturer to the principals. The joint venture would have involved development of a certain property (the development site).

Any joint venturer you introduced to the principals would have been required to construct buildings on the development site.

The agency agreement provided that the commission would be due and payable by the principals on their entering into an agreement with the joint venturer concerning the development and/or sale of the development site in the following manner:

· A certain percentage of the commission on the date of the commencement of construction or a certain date, whichever was the sooner.

· The remaining certain percentage of the commission would be paid on completion of the construction.

You introduced a joint venturer - (name of joint venturer) (names of certain entities) to the principals in Australia and (name of joint venturer) entered into a joint venture agreement with the principals.

Under the joint venture agreement, (name of joint venturer) agreed to construct buildings on the development site. After (name of joint venturer) entered into the joint venture agreement, it decided not to go ahead with participating in the joint venture. (Name of joint venturer) did not commence construction of buildings on the development site.

You subsequently invoiced the principals for commission.

The principals refused to pay the commission you invoiced them for.

You subsequently commenced court proceedings against the principals in a certain month of a certain year. As a result of your claim, the principals subsequently commenced a cross claim against (name of joint venturer) in a certain month of a certain year.

The legal case went to mediation and was settled out-of-court on a certain date. A deed of settlement and mutual release was entered into. The deed of settlement refers to the principals collectively as (a certain name).

The deed of settlement provides the following:

· The defence raised by (a certain name) was that there were no services provided and the deed that gave rise to the claim was void ab initio.

· The parties have agreed to resolve your claim and the cross claim by (a certain name) agreeing to pay a certain amount to you and (name of joint venturer) agreeing to pay a certain amount to you.

· There is to be no order in relation to costs with the intention that each party pay their own costs.

· You did not have a contract with (name of joint venturer) apart from the deed of settlement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(b)

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(2)

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

Reasons for decision

Summary

GST is payable by you on the certain amount in settlement payments, as

· these payments are consideration for your supply of services

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

· your supply was connected with Australia

· you are registered for GST, and

· the supply was not GST-free or input taxed.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that

· you *carry on; and

· the supply is *connected with Australia; and

· 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.

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

We need to first consider whether the certain amount in settlement payments is consideration for a supply made by you.

In accordance with paragraph 9-10(2)(b) of the GST Act, a supply includes a supply of services.

Section 9-15 of the GST Act defines consideration.

In accordance with subsection 9-15(1) of the GST Act, consideration includes any payment in connection with, in response to or for the inducement of a supply of anything.

Subsection 9-15(2) of the GST Act provides that it does not matter whether the payment is by the recipient of the supply.

Goods and Services Tax Ruling GSTR 2001/4 discusses the GST implications of court and out-of-court settlements.

You entered into an out-of-court settlement.

Paragraph 43 of GSTR 2001/4 states:

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.

For the purposes of GSTR 2001/4, supplies that are related to an out-of-court settlement fall within three categories of supply. These include earlier supplies.

Paragraphs 46 and 101 of GSTR 2001/4 discuss earlier supplies. They state:

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'.

101. Where the only supply (other than a 'discontinuance' supply) in relation to a court order or out-of-court settlement is an earlier supply and a sufficient nexus exists between the payment made under that order or settlement and the earlier supply, the payment will be consideration for that supply.

You were not paid the full originally agreed commission amount set out in the agency agreement and certain events that would have triggered payment of this amount did not happen. However, despite this, you still did work pursuant to the agency agreement. This work was done to assist the principals referred to in the agency agreement. You found a joint venturer and you introduced the joint venturer to the principals and the joint venturer entered into a joint venture agreement with the principals. We consider that by finding a joint venturer and introducing them to the principals, you supplied services to the principals. We consider that the subject of your dispute with the principals was this earlier supply.

We consider that there is a sufficient nexus between the certain amount in settlement payments and this earlier supply. Therefore, the certain amount in settlement payments is consideration for your supply of services. The fact that a number of the payers (names of certain payers) were not recipients of your supply does not prevent their certain amount payment being consideration for your supply of services. As you made a supply for consideration, the requirement of paragraph

9-5(a) of the GST Act is satisfied.

Your supply of the services also satisfies the requirements of paragraph 9-5(b) to 9-5(d) of the GST Act because:

· you supplied the services in the course or furtherance of an enterprise that you carry on

· this supply was connected with Australia, and

· you are registered for GST.

There are no provisions in the GST Act under which your supply of the services is GST-free or input taxed.

Therefore, you made a taxable supply in return for the certain amount in settlement payments. Hence, GST is payable by you on these payments.

Whether you pass on the GST liability to the parties that paid the settlement amounts is a contractual matter between you and those parties. This contractual matter is outside the jurisdiction of the Australian Taxation Office.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).