Edited version of your written advice

Authorisation Number: 1051349924502

Date of advice: 14 March 2018

Ruling

Subject: Goods and services tax and out of court settlement

Question

Is GST payable on the settlement sum received by entity A under the Deed of Settlement and Release?

Answer

No

This ruling applies for the following period:

1 July 2017 to 30 June 2018

Relevant facts and circumstances

● Entity A is not currently registered for goods and services tax (GST) but does have an Australian business number.

● Entity A had taken court action legal representatives for loss and damage by breach of contract for the provision of legal services and being negligent in providing advice causing loss and damage.

● The parties reached an agreement to resolve the proceedings. The terms of this agreement was set out in a Deed of Settlement and Release (Deed).

● Under the Deed, each party agreed to unconditionally and irrevocably release and discharge each other from all claims, actions, costs, etc once the settlement sum was paid.

● Under the Consent Orders attached to the Deed, the parties sought orders that included having the proceedings dismissed.

● Entity A has received full payment of the amounts referred to in the Deed.

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 9-40

Reasons for decision

All legislative references in this Ruling, unless otherwise stated are to A New Tax System (Goods and Services Tax) Act 1999. The relevant legislative provisions are discussed below.

Section 9-40 provides that GST is only payable on a taxable supply.

Section 9-5 defines a taxable supply as:

9-5 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 you *carry on; and

(c). the supply is *connected with the indirect tax zone; 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.

(* denotes a defined term under section 195-1)

The first requirement of a taxable supply is that the supply is for consideration.

Goods and Services Tax Ruling GSTR 2001/4 provides guidance on the GST consequences of court orders and out-of-court settlements.

Paragraph 13 of GSTR 2001/4 states:

13. Matters in dispute may be resolved either by the judgment of a court, or (at a time prior to the court delivering its judgment) by agreement between the parties. An agreement between the parties is referred to in this Ruling as an out-of-court settlement. Out-of-court settlements will include any form of dispute resolution in which the terms of the resolution are agreed between the parties, rather than imposed by the court. Some examples of this are:

(i) the parties obtain a consent order, the draft of which has been agreed to in a settlement deed;

(ii) they agree to have the action struck out without a consent order;

(iii) they enter into an agreement settling their differences before court action commences.

We consider that the Deed in this case represents an out-of-court settlement.

GSTR 2001/4 also explains that supplies that are related to an out-of-court settlement fall within one of three categories. These categories are an earlier supply, a current supply and a supply related to discontinuance of legal action. GSTR 2001/4 discusses our view in relation to each of these supplies.

We do not consider that the Deed relates to an earlier supply.

A current supply is one where a new supply may be created by the terms of the settlement. From the facts provided, we do not consider that the Deed relates to a current supply.

Paragraphs 50 to 55 of GSTR 2001/4 discuss supplies related to the discontinuance of legal action. They provide that:

● even where there is no earlier or current supply, one or more new supplies will probably crystallise on an out-of-court settlement being reached

● sometimes, where a dispute involves counter claims, the terms of the settlement may provide for each party to release the other from such claims and obligations

● where court proceedings have commenced, the filing of a notice of discontinuance pursuant to the relevant court rules may also be required

● supplies may be characterised as:

● surrendering a right to pursue further legal action

● entering into an obligation to refrain from further legal action, or

● releasing another party from further obligations in relation to the dispute.

● we refer to supplies of these kinds as discontinuance supplies.

In your case:

● an agreement was reached to settle the claims and this resulted in the Deed, and

● the Deed and the Consent Orders provide for discontinuance in relation to the court proceedings.

Therefore, we consider that the Deed includes a discontinuance supply.

However, 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 addition, paragraphs 107 and 109 of GSTR 2001/4 explain that, in most instances, a discontinuance supply will not have a separately ascribed value or give rise to an additional payment in its own right but will merely be an inherent part of the legal machinery to add finality to a dispute. In other words, it is in the nature of a term or condition of the settlement, rather than being the subject of the settlement. However, a payment made under a settlement deed may have a nexus with a discontinuance supply, if there is overwhelming evidence that the claim is so lacking in substance that the payment could only have been made for the discontinuance supply.

Furthermore, the distinction between a damages claim and a discontinuance supply is explained at paragraphs 110 and 111 of GSTR 2001/4. With respect to an out-of-court settlement, paragraph 111 of GSTR 2001/4 makes the following comment:

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.

In this case, there is no earlier or current supply. In addition, the Deed does not give the discontinuance supply a separately ascribed value nor is the claim so lacking in substance that the payments made by the legal representatives could only be for the discontinuance supply.

Therefore, in line with paragraph 111 of GSTR 2001/4, the settlement sum payments made under the Deed are more in the nature of payments for damages rather than consideration for the discontinuance supply and as such, the payments will not be consideration for a supply.

As the settlement sum payments received are not consideration for a supply then it follows that there is no taxable supply being made. Consequently, no GST is payable on the settlement sum received by entity A under the Deed.

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