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Edited version of your written advice
Authorisation Number: 1012830253862
Date of advice: 2 July 2015
Ruling
Subject: GST and payment of ex-gratia payments
Question
Is the Ex-gratia payment of $XXX made to you by the company, subject to goods and services tax (GST)?
Answer
Yes. The Ex-gratia payment made to you by the company is subject to GST.
Relevant facts and circumstances
• You are carrying on an enterprise of providing services and registered for goods and services tax (GST)
• You were formerly engaged by the company as an independent contractor pursuant to various consultancy agreements.
• The company gave notice to terminate your consultancy agreement in accordance with its terms.
• You made an application to the Fair Work Commission to deal with a General Protections Dispute, naming the company as the respondent.
• You also applied to the Australian Tax Office (ATO) disputing and claiming unpaid superannuation by the company.
• You and the company agreed to resolve the matters on the basis described in the Deed of Release.
• By signing the Deed of Release, you will convey the company your intention not to pursue the general Protections Application and the ATO dispute.
• You will release and forever discharge the company from all present and future claims, whether known or unknown.
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 - Subsection 9-10(2)
Reasons for decision
Under subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) GST is payable on taxable supplies.
Section 9-5 of the GST Act provides that you make a taxable supply if you make the supply for consideration; the supply is made in the course or furtherance of an enterprise that you carry on; 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.
Goods and Services Tax Ruling GSTR 2001/4 provides guidance on the GST consequences resulting from court orders and out-of-court settlements. Paragraph 21 relevantly states:
21. A 'supply for consideration' is the first step towards there being a taxable supply. However, for there to be a supply for consideration, 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.
Section 9-10 of the GST Act defines the meaning of supply. Among other things, a supply includes 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.
The definition of supply is broad and with respect to an out-of-court settlement could include any of the supplies referred to in section 9-10 of the GST Act.
GSTR 2001/4 explains that supplies related to out-of-court settlements are characterised according to the following categories:
1) an earlier supply: where the subject of the dispute is an earlier transaction in which a supply was made involving the parties; or
2) a current supply: a new supply created by the terms of settlement; or
3) a discontinuance supply: where as a condition of settlement one or more of the parties agree to release each other from all, or some of the existing claims and/or further claims or obligations in relation to that dispute.
By signing the Deed of Release, you have agreed not to pursue with the claims against the company under the General Protections Application and the ATO dispute. You also agreed to accept the Ex-gratia payment for not pursuing with your claims against the company.
Paragraph 54 of the GSTR 2001/4 characterises a discontinuance supply as:
(i) surrendering a right to pursue further legal action; or
(ii) entering into an obligation to refrain from further legal action; or
(iii) releasing another party from further obligations in relation to the dispute.
In this case, you took action against the company by making an application to the Fair Work Commission to deal with a General Protections Dispute. You also applied to the ATO claiming unpaid superannuation. As per the Deed of Release, you have agreed to withdraw and discontinue your applications to the Fair Work Commission and the ATO and give up your legal rights to pursue with your claims against the company. You will release and forever discharge the company from all present and future claims, whether known or unknown.
Based on the facts provided, it is considered that there are no supplies which would come within the scope of a current supply or earlier supply. Your dispute was finalised when you surrendered your rights and entered into obligations to abide by the Deed of Release. Therefore, the only supply arising from the settlement of the dispute is in the nature of a discontinuance supply.
For a supply to be a taxable supply, the supply must be made for consideration.
To determine if the discontinuance supply made by you to the company is a taxable supply, it is necessary to consider the terms of the Deed of Release to establish whether there is a nexus between the payment and the discontinuance supply.
According to paragraph 109 of the GSTR 2001/4, the ATO considers that a payment made under a settlement deed may have a nexus with a discontinuance supply only if there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply.
The agreed terms of the Deed of Release state that $XXX gross will be paid to you as an Ex-gratia payment provided the claims are lawfully discontinued by you. The agreed terms also state that by signing the Deed of Release, you will convey your intention not to pursue the General Protection Application and the ATO dispute. This clearly indicates that the payment of $XXX has been paid to you provided you release and forever discharge the company from all present and future claims. As explained above, the supply you will be making to the company would be the surrender of your rights to pursue with your dispute claims. Therefore, there is a nexus between the payment of $XXX and the discontinuance supply as identified.
The discontinuance supply satisfies the requirements of section 9-5 of the GST Act. The discontinuance supply was made for a consideration; and was made in the course or furtherance of your enterprise; and the supply was connected with Australia and you are registered for GST. The supply was not a GST-free or input taxed. Therefore, the discontinuance supply was a taxable supply and subject to GST.
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