Edited version of your private ruling

Authorisation Number: 1012546172832

Ruling

Subject: GST and out of court settlement

Question

Is any party to the Settlement Deed making a taxable supply to you in return for the Payment?

Answer

Yes. The Receiver of Entity A is making a taxable supply when it releases you from your obligations specified in the Settlement Deed in return for the Payment.

Relevant facts and circumstances

· You are registered for goods and services tax (GST).

· Entities A and B formed a joint venture (JV) to produce a certain product (Product).

· A and B entered into a Purchase Agreement (PA) with you.

· All parties agreed under the PA that all Products would be sold by the Joint Venturer to you.

· Later the Joint Venturers entered into a Management Agreement (MA). Under MA, another party agreed to provide management services to the Joint Venturers in respect of the assets owned by the Joint Venturers.

· Later A and B were both under voluntary administration.

· A and B entered into a Deed of Company Arrangement as a consequence of the administration.

· As a result of the Joint Venturers entering into administration, you wish to be released from your obligations under the PA, AMA and other related projects and finance documents to which you are a party.

· In order to be released from those obligations the relevant parties intend to enter into the Settlement Deed. All parties to the Settlement Deed are registered for GST.

· Under the Deed, you will agree to make the Payment of $XX m to Entity A in order to be released from those obligations under the PA and for the parties to provide mutual releases of each member's obligations under the various agreements the parties have entered.

· The Payment will be made to entity A in accordance with the terms of the Payment

· The remaining parties to the Settlement Deed agree in the Deed to provide their agreement that the Payment will release you from all its obligations under the PA, MA and other related project and finance documents

The key points of relevant documents/deeds are reproduced as follows:

Settlement Deed

Background

· In connection with a proposed Deed of Company Arrangement for the Entities A, B you wish to terminate the PA.

· You wish to be released from your obligations under the PA and the other Project Documents.

· The termination of the PA and the release of your obligations under the other documents require the prior written consent of the creditor. The creditor has agreed to provide that consent on the terms of this Deed.

· You have agreed to make the Payment to entity A the Payment can be applied towards discharging Entity A's liabilities to the Creditor and in consideration of, and conditional upon your release from all your obligations under all relevant documents that you are a party.

The Payment

Following the Settlement Deed, the Payment Letter was issued by the Receivers of Entity A to you.

Direction to pay

· The Payment will be made at a date pursuant to a clause of the Settlement Deed. Under this clause, the Receivers of entity A direct you to pay the Payment plus any applicable GST grossed up if required to the Creditor at the agreed date.

· The Payment will be applied by the Creditor against the amounts owing by Entity A to the as at the agreed date.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

s 9-5

ss 9-10(2)

s 9-15

s 9-20

Reasons for decision

Summary

The Receivers of A make a supply of releasing your obligations as described in the Settlement Deed in return for the Payment.

Detailed reasoning

Matters in dispute may be resolved either by the judgement of a court or by agreement between the parties (out-of-court settlement).

An out-of-court settlement will include any form of dispute resolution in which the terms of the resolution are agreed between the parties including an agreement between the parties settling their differences before court action commences.

The views of the Commissioner of Taxation on the GST consequences resulting from out of court settlements are expressed in goods and services tax ruling GSTR 2001/4. This ruling explains how a payment (or act of forbearance) that is made in compliance with an out of court settlement constitutes consideration for a supply and if so, whether the supply is taxable, GST-free or input taxed.

You have provided that you will make the Payment to the Receivers of Entity A. Entity A was under voluntary administration and the Receivers & Managers were appointed. Under Division 58 of the GST Act (that sets out how GST applies where representatives were appointed to act for incapacitated entities), supplies, acquisitions and associated acts or omissions, by the representative (Receivers and Managers) are taken to be a supply, acquisition by the incapacitated entity (Entity A).

The Settlement Deed provides that at the agreed date, the Payment will be made to the Receivers of Entity A:

· to discharge Entity A's liabilities to the creditors and

· in consideration of and conditional upon each of the following:

(a) your release from its obligations under all the documents to which you are a party;

(b) the termination of all relevant documents.

Upon the agreed date, your obligations under all relevant Documents, Deed will be terminated (the Release).

Is there a supply by the Receivers of Entity A under the Settlement Deed?

Under section 9-10 of the GST Act, the term supply has a very broad definition of any form of supply whatsoever. In particular, paragraph 9-10(2)(g) provides that:

an entry into or release from an obligation:

(i) to do anything, or

(ii) to refrain from an act, or

(iii) to tolerate an act or situation

is a supply.

Paragraphs 37, 38 and 41 of GSTR 2001/4 discuss the ATO view where a transaction is a supply of a right or obligation.

37. For there to be a supply of a surrender of any right or entering into an obligation, such rights or obligations must be binding on the parties. The creation of expectations among the parties does not, in itself, necessarily establish a supply.

38. An agreement that does not bind the parties in some way would not be sufficient to establish a supply by one party to the other unless there is something else, such as goods or some other thing, passing between the parties.

41.This requirement that a transaction bind the parties in some way before it will involve a supply, is considered to have application in Australia where the transaction is the supply of a right or obligation.25

In your circumstance the Settlement Deed was entered into that binds all parties to the Deed. The substance of the transaction is the Release of you from your obligations under the Documents and Deed which is an entry into or release from an obligation. This is a supply under paragraph 9-10(2)(g) of the GST Act

For the supply to be a taxable supply it needs to be made for consideration. Therefore we need to consider whether there is a nexus between the Payment and the supply (the Release) such that the Payment is consideration for the supply.

Whether the payment under the Settlement Deed is consideration for the supply

Following the definition of consideration in section 9-15 of the GST Act, there are two elements to the definition of consideration:

· the payment from one entity to the other, and

· the nexus that must be established between the payment and the supply.

In GSTR 2001/4, the Commissioner is of the view that the supplies for an out-of-court settlement fall within three categories:

· Earlier supply - where the subject of the dispute is an earlier transaction in which the supply was made involving the parties.

· Current supply - where a new supply is created by the terms of the settlement.

· Discontinuance - supply where the terms of settlement, in finalising a dispute, create one or more new supplies to ensure that no further legal action in relation to the dispute.

The second component payment under the Settlement Deed is not made for an earlier supply (other than the first component). However, it is important to note that where there is an earlier supply and there is a nexus between the payment and that supply the payment will be consideration for that supply and so the supply will be taxable.

Rather, we consider that the payment is made for a current supply created by the terms of the Settlement Deed itself.

Under the Settlement Deed, you will make a payment to the Receivers of Entity A and in return, the parties will agree to release and discharge you from all of your obligations under the relevant Documents and Deed. By entering into the Settlement Deed:

· the Joint Venturers will no longer enforce their rights to require you to purchase the Products.

· other parties will release you from all obligations under relevant Documents and Deed and that you are a party.

There will be no Release if the Payment is not made. The Settlement Deed provides that you have

agreed to make the Payment so as the funds to be applied towards discharging the Entity A's liabilities to the Creditors and in consideration of, and conditional upon, each of the following:

[emphasis added]

Therefore, there is a nexus between the Payment and the Release. The Payment is made for the release of obligations, and therefore is made for that supply.

The supply is a taxable supply as:

· The supply is made for consideration (the Payment),

· The supply is made in the course of the supplier enterprise,

· The supply is made in Australia,

· The supplier is registered for GST. The supply is not input taxed or GST-free under any provision of the GST Act or other Acts.

Division 58 of the GST Act ensures the representative is responsible for certain GST consequences which arise from a supply, acquisition or importation that falls within the scope of the representative's responsibility or authority for managing the incapacitated entity.

As the supply (the Release) is made within the scope of the Receivers' responsibility or authority for managing the incapacitated entity, the Receivers are liable to remit the GST payable arising from the taxable supply (the Release.)

Note:

· It is noted that the entry into or release from any other obligations would also be supplies in their own rights, however unless they are made for consideration they will have no GST consequences.

· Although the payment is made for all releases by all parties to the Settlement Deed, the consideration for the supply is only provided to the Receivers of Entity A as agreed by all parties to the Settlement Deed.

Where releases made by other parties under the Settlement Deed are not made for consideration and therefore they will not be taxable supplies.

· Pursuant to a clause of the Settlement Deed, the Receivers of Entity A direct you to make the Payment to the Creditors. The payment may be made to the Receivers of Entity A to repay debt, however this does not change the character of the payment from you to the Receivers of Entity A which is made for the Release.

· The calculation of the Payment is not critical. It is the purpose of the Payment that is critical in determining the character of the Payment.

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