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Ruling

Subject: GST and out of court settlements

Question

What is your goods and services tax (GST) liability on the out of court settlement reached between you and the owner of the commercial premises?

Decision

The owner incurred a GST liability equal to 1/11th of the settlement sum paid by you under the deed of settlement and release reached between the parties. If you hold a valid tax invoice from the owner and satisfy the other requirements of the GST Act for claiming input tax credits, you could be entitled to an input tax credit equal to 1/11th of the consideration paid under the out of court settlement.

Relevant facts and circumstances

• You operated a shop at a shopping centre owned by the owner. As a result of a failure to pay the commercial lease and other outgoings, the owner took legal actions against you to recover the outstanding amounts, legal fees etc.

• A judgment was awarded against you for $X for unpaid lease and other outgoings, $Y for damages including interest and $Z for owner's legal fees.

• After the court order, you and the owner reached an out of court settlement. As per the deed of settlement and release, you agreed to pay a GST inclusive amount of $M to the owner.

Relevant legislative provisions

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

Reasons for the decision

Section 9-5 of the GST Act provides that you make a taxable supply if:

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

In considering the GST consequences of court orders or out of court settlements, it is necessary to ascertain whether the owner made any taxable supply to you. In this respect Goods and Services Tax Ruling GSTR 2001/4 (GSTR 2001/4 or ruling) refers to GST consequences of court orders and out of court settlements.

Paragraph 21 of the ruling provides that:

Supplies related to an out of court settlement

Paragraphs 45-47 of the ruling refer to 'earlier supply' and they are quoted below.

Paragraphs 97-99 of the ruling refers to whether a settlement or court awarded payment be consideration and are quoted below.

Nexus with the consideration

Paragraphs 100-102 of the ruling refer to which supply has the nexus with the consideration and they are quoted below.

We consider that the out of court settlement was related to the supply by the owner of the premises within the shopping centre to you under a commercial lease agreement. It is the earlier supply. The dispute originated from the default of the lease payments and other related outgoings on this earlier supply. We consider that sufficient nexus exists between the consideration paid under the out of court settlement and the earlier supply of the commercial premises under a lease. Therefore, paragraph 9-5(a) of the GST Act was satisfied.

The owner supplied the premises to you in the course or furtherance of their enterprise of commercial leasing of premises within the shopping centre and therefore, paragraph 9-5(b) of the GST Act was satisfied.

The supply was connected with Australia as the shopping centre was located in Australia and paragraph 9-5(c) was satisfied.

The owner was registered or required to be registered for GST and therefore, paragraph 9-5(d) was satisfied.

Accordingly, the earlier supply of the commercial premises by the owner to you under a lease satisfied the requirements of section 9-5 of the GST Act as a taxable supply. As per the deed of settlement and release, the settlement sum payable was a GST inclusive amount. Accordingly, the owner incurred a GST liability equal to 1/11th of the consideration paid by you.

If you hold a valid tax invoice from the owner and satisfy the other requirements of the GST Act for claiming input tax credits, you could be entitled to an input tax credit equal to 1/11th of the consideration paid under the out of court settlement.


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