Edited version of your private ruling

Authorisation Number: 1012519406796

Ruling

Subject: GST and out of court settlement

Question

Do you make a supply to A and B, when A and B pay you out of court settlement payment (the settlement payment)?

Answer

No, you do not make a supply to A and B, and you are not liable to pay GST on receipt of the settlement payment.

Relevant facts and circumstances

· You operate a business. You are registered for GST.

· A is the distributor of the products in Australia. B operates a dealership selling and marketing the products. You purchased the products from B.

· You alleged the products are defective and commenced proceedings in Court against A, seeking to recover damages from A arising out of your purchase of the products. You state that you suffered loss of income as a result of not being able to use the faulty products.

· The Deed between A and B and you provide that A and B have agreed to settle any and all claims by you concerning the purchase and subsequent use of the products.

· The Deed states that the settlement payment is $X. There was no tax invoice issued for this settlement payment and the Deed did not make any mention of the GST treatment on this payment.

· The Deed provides that each party to the Deed has to keep the subject matter and information relating to the subject matter strictly confidential and without publicity.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

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

Reasons for decision

Goods and Services tax is payable on a taxable supply. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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.

Paragraph 9-5(a) of the GST Act

To determine if paragraph 9-5(a) of the GST Act is satisfied, we need to consider whether you have made a supply for consideration as a result of the out-of-court settlement.

Goods and Services Tax Ruling GSTR 2001/4 (GSTR 2001/4) provides guidance on the 'supply for consideration' requirement in considering the GST consequences of court orders or out-of-court settlements.

Paragraph 21 of GSTR 2001/4 provides that for there to be a supply for consideration, the following three fundamental criteria must be met:

 (i) there must be a supply;

(ii)  there must be a payment; and

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

The term supply is a broad concept for GST purposes and is defined in section 9-10 of the GST Act to include any form of supply whatsoever. 

GSTR 2001/4 sets out three different types of supply that might be related to an out-of-court settlement. These are: 

· earlier supply: where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is an earlier supply (paragraph 46 of GSTR 2001/4).

· current supply: a current supply is a new supply that may be created by the terms of the settlement (paragraph 48 of GSTR 2001/4).

· discontinuance supply: the terms of settlement will generally ensure that no further legal action in relation to the dispute can be taken, provided there is compliance with the terms of the settlement (paragraph 51 of GSTR 2001/4). 

In your case, the subject of your claim against A and B is for damages to compensate you for loss and suffering arising out of your purchase and use of the products. There is no identifiable earlier supply.

Paragraph 73 of GSTR 2001/4 states: 

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.

Paragraph 54 of GSTR 2001/4 characterises a discontinuance supply as: 

(i) surrendering a right to pursue further legal action;

(ii) entering into an obligation to refrain from further legal action; or

(iii) releasing another party from further obligation in relation to the dispute.

The terms of the Deed include a discontinuance clause whereby you agree to cease legal proceedings and release A and B from any further claim in relation to the dispute. Therefore the only identifiable supply which arises from the Deed is a discontinuance supply. 

You received a settlement payment of $X under the terms of settlement. While any payment would be consideration, GST will only be payable if there is a nexus between that consideration and any supply. It is therefore necessary to establish a nexus between the discontinuance supply that you made and the payment you received.

The nexus between the discontinuance supply that you made and the payment you received

Paragraph 106 of GSTR 2001/4 states:

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.

In relation to certain clauses of the Deed, where each party to the Deed has to keep the subject matter and information relating to the subject matter strictly confidential and without publicity, we consider that they do not have a separately ascribed value and are in the nature of a term or condition of the settlement, rather than being the subject of the settlement. The inclusion of these clauses in the Deed do not alter the substance of the original dispute, or the reason payment is made. This is in accordance to paragraphs 107 and 108 of GSTR 2001/4.

Further, paragraph 111 of GSTR 2001/4 discusses the payment for a claim for damages in the context of an out-of-court settlement. It states:

111. If a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement.

Therefore, the discontinuance supply is not a taxable supply as there is no nexus between the discontinuance supply and the settlement payment you received. Consequently, the settlement payment which you received under the terms of the settlement Deed is not consideration for any supply made by you. Since there is no consideration for your supply, paragraph 9-5(a) of the GST Act is not satisfied. We do not need to discuss the rest of the requirements of section 9-5 of the GST Act.

.As such, you are not liable to pay GST on receipt of the settlement payment.

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