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Edited version of your written advice

Authorisation Number: 1012808100123

Ruling

Subject: GST and out of court settlement

Question:

Are you liable for goods and services tax (GST) in respect of the payment received from an Entity A under a Deed of Settlement (Deed)?

Answer:

No, the settlement payment does not constitute consideration for a taxable supply made by you, and will not be subject to GST.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian entity that is registered for goods and services tax (GST).

You entered into a Contract with an Entity A to purchase vacant land in Australia. The property was purchased for $X including GST.

The Entity A is registered for GST.

Prior to entering into the Contract you received a marketing brochure and information memorandum relating to the property. The information memorandum stated that the parcel of land has services running past and is already cleared and ready to build on. The land is unencumbered and has no covenants attached to the sale.

Prior to the settlement, you undertook searches and these searches did not reveal any easements on title or any statutory easements, or any work undertaken on the property which could have any adverse impact on building on the land.

After the settlement of the Contract, you engaged a surveyor to survey and mark the boundaries of the land. The surveyor reported back to you that there are two storm water pipes and one sewer pipe ('the pipes') diagonally across the property

You enquired about the pipes with the local Councils. They claimed that they had no details about the pipes.

Then you attempted to obtain development approval from the local Council for a retail development on the land comprising an upper level and lower level car park. The owner of the sewerage pipe rejected the development proposal and said that it would not approve any development over the pipes.

These undisclosed problems prevented the planned development and caused a significant reduction in the value of the land. Therefore, you lodged a damages claim against the Entity A totalling of $Y.

You and the Entity A entered into a Deed of settlement (Deed). The settlement amount of $Z was negotiated between parties inclusive of interest, costs, diminution in value and GST.

Under the Deed, the payment of the settlement sum is on the condition that if the local Council or any other Local Authority or other body requires you to grant to it an easement or easements with respect to any of the pipes after to the date of this Deed, you will agree to grant such easement or easements to the Local Council or any other Local Authority or other body, and will not make any claim or seek compensation from the Entity A with respect to the granting of such easement or easements.

Under the Deed, the Purchasers release and forever discharge and shall indemnify, and at all the times keep indemnified, the Entity A and their officers, employees, servants and agents from all actions, suits, claims and demands by the Purchasers, or by anyone claiming by, through or under the Purchasers, for compensation or damages arising out of or connected with the Purchasers' claim, and also against all costs, charges and expenses which may be incurred by the Entity A, their officers, employees, servants and agents in defending and/or settling such actions, suits, claims or demands.

You have provided a copy of the following documents:

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 9-15

Reasons for decision

Taxable supply

GST is payable on a taxable supply. You make a taxable supply if all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied as follows:

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

The facts indicate that the supply (or supplies) is made in the course of an enterprise (business) that you carry on; the supply is connected with Australia (as the supply is either done in Australia or made through an enterprise in Australia); and you are registered for GST. Therefore, the requirements of paragraphs 9-5(b) to 9-5(d) of the GST Act are met.

What remains to be determined is whether you make a supply for consideration, and if so, whether the supply is GST-free or input taxed.

Supply for consideration

To be a taxable supply, there must be a 'supply for consideration'.

Goods and Services Tax Ruling GSTR 2001/4 provides guidance on court and
out-of-court settlements.  In particular, paragraph 21 of the GSTR 2001/4 sets out the fundamental criteria that must be satisfied for there to be a 'supply for consideration', namely:

The term 'supply' is defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever' and includes 'a creation, grant, transfer, assignment or surrender of any right', and 'an entry into, or release from an obligation: to do anything, or to refrain from an act, or to tolerate an act or situation'. Paragraph 22 of GSTR 2001/4 provides that a supply is essentially 'something which passes from one entity to another'.

Paragraphs 51 to 54 of GSTR 2001/4 state:

We refer to supplies of these kinds as 'discontinuance supplies'. However, whether a discontinuance supply would be a taxable supply would then depend on the requirements of section 9-5 of the GST Act being met in relation to that supply.

Under the Deed, you as the purchaser release and forever discharge and shall indemnify, and at all the times keep indemnified, the Entity A and their officers, employees, servants and agents from all actions, suits, claims and demands by the Purchasers, or by anyone claiming by, through or under the Purchasers, for compensation or damages arising out of or connected with the Purchasers' claim, and also against all costs, charges and expenses which may be incurred by the Entity A, their officers, employees, servants and agents in defending and/or settling such actions, suits, claims or demands.

Accordingly, the above condition in the Deed constitutes a supply for the purposes of the GST Act, and is referred to as a discontinuance supply. The next step is to determine if the settlement payment you receive was made in response to a supply.

In relation to discontinuance supply, paragraphs 106 to 109 of GSTR 2001/4 state:

Furthermore, paragraphs 73, 110 and 111 of GSTR 2001/4 state:

On the basis of the facts provided, a sufficient nexus cannot be established between the discontinuance supply and the settlement payment. The settlement payment under the Deed is therefore considered to be in response to the damages claim rather than the discontinuance supply. Furthermore the settlement payment made in response to the out of court settlement will not constitute, by itself, consideration for a supply made by you.

Accordingly, the settlement payment does not represent consideration for a discontinuance supply under the terms of settlement, or any supply underpinning the damages claim. As one of the requirements for a taxable supply under section 9-5 of the GST Act is not satisfied, you are not making a taxable supply in relation to the settlement payment received. The settlement payment is not subject to GST and therefore you are not required to remit GST to the Australian Taxation Office (ATO) on the settlement payment.


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