Edited version of private advice

Authorisation Number: 1051820658661

Date of advice: 25 March 2021

Ruling

Subject: GST and representatives of an incapacitated entities

Question 1

Are you, Individual A and Individual B, in your capacity as Administrators of the Deed of Company Arrangement (DOCA), liable for GST under subsection 58-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in respect of the 'Settlement Sum' received in accordance with the terms of the Settlement Deed?

Answer

No.

Question 2

Is ABC Pty Ltd (Subject to a Deed of Company Arrangement) liable for GST under subsection 9-40 of the GST Act in respect of the 'Settlement Sum' received in accordance with the terms of the Settlement Deed?

Answer

Yes.

Relevant facts and circumstances

ABC Pty Ltd (ABC) is registered for GST.

ABC entered into two sub-contracts (Contracts) to supply XYZ Pty Ltd (XYZ) with works. The works represented taxable supplies by ABC. ABC supplied goods and services for two Projects.

In addition, ABC issued XYZ multiple invoices between dd/mm/yyyy and dd/mm/yyyy for the works provided.

On dd/mm/yyyy Individual A and Individual B were appointed as Administrators of ABC.

In a report to creditors dated dd/mm/yyyy the following information was provided in relation to the works provided to XYZ on the Projects:

•         The Contracts allowed ABC to invoice upon various stages of completion on a monthly basis.

•         Delays were experienced towards completion of both projects due to the slow relocation of XYZ' equipment and as a result, ABC was unable to perform works efficiently in line with the pricing offered in the Contracts.

•         As a result of the delays, ABC provided a summary of the additional work necessary to XYZ including variations, costings, hourly rates and provided a deadline for an agreement.

•         ABC issued an initial claim to XYZ for the final stage of the Projects in mm/yyyy.

•         In or around mm/yyyy, XYZ disputed the variations on the Contracts and entered into an adjudication process.

•         A determination by an adjudicator was finalised on dd/mm/yyyy where the adjudicator provided a decision invalidating the claim.

On dd/mm/yyyy ABC entered into a Deed of Company Arrangement (DOCA) with its creditors. The voluntary administration ended and the voluntary administrators (Individual A and Individual B) were appointed as joint and several administrators of the DOCA.

Australian Taxation Office records show the methods of accounting for GST as follows:

•         ABC accounts on a cash basis (CAC 1)

•         Individual A and Individual B as Administrators account on a cash basis (CAC 3)

•         Individual A and Individual B as Administrators of the DOCA account on a cash basis (CAC 4).

On dd/mm/yyyy Individual A and Individual B in their capacity as Administrators of the DOCA entered into a Settlement and Release Deed (Settlement Deed) with XYZ.

Settlement Deed

The Background to the Settlement Deed relevantly states:

'Background

A.    In late yyyy, ABC and XYZ entered into two contracts for works on two projects (the Projects).

B.    Events transpired which resulted in ABC making claims against XYZ in respect of the Projects for the outstanding contract sum, approved variations and delay costs (ABC Claims).

C.   XYZ disputes the ABC Claims and has claims for damages against ABC in respect of the Projects (XYZ Claims).

D.   Without admission of liability, the parties have agreed to settle the Dispute on the terms set out in this document.'

The following terms are defined in the Settlement Deed:

Dispute All liabilities, claims, demands, suits, causes of action, damages, debts, cross-claims, liabilities, losses (including loss of profits and consequential losses), costs, expenses, fees, verdicts and judgments whatsoever, whether any such claim is past, present or future and whether vested or contingent, whether at law or in equity or under any statute in connection with or arising out of the ABC Claims and the XYZ Claims.

Settlement Sum AUD X,000,000

Clause 2 of the Settlement Deed states:

'Payment

In consideration of the parties' respective rights and obligations under this Deed and the assistance referred to in clause 3, XYZ agrees to pay the Settlement Sum to ABC via four (4) instalments in full and final settlement of the Dispute.'

Clause 3 of the Settlement Deed states:

'XYZ Upstream Claims

3.1 ABC to assist

In consideration of the Settlement Sum, Individual X and Individual Y of ABC shall provide (and ABC shall do all things reasonably necessary to ensure that they provide) reasonable assistance and cooperation to XYZ in support of XYZ's Upstream Claims against the head contractors in respect of the Projects.

3.2 Assistance

(a)    The form of assistance and cooperation required to be provided by ABC, Individual X and Individual Y pursuant to clause 3.1 includes the production of all relevant and/or available documents requested by XYZ within a reasonable timeframe but in any event no later than the due date for payment of the next instalment of the Settlement Sum.

(b)    The assistance and cooperation to be provided by ABC, Individual X and Individual Y pursuant to clause 3.1 is not to exceed a total of xx hours per person (being a maximum of xx hours per person prior to the due date for payment of each instalment of the Settlement Sum).

(c)    The assistance and cooperation to be provided by ABC, Individual X and Individual Y pursuant to clause 3.1 is to be provided without unreasonable delay.

(d)    ABC will use reasonable endeavours to procure assistance from third parties to this Deed on the same terms as clause 3.1 and 3.4.

(e)    ABC' assistance under this clause shall include:

(i)            issuing any necessary or reasonable certificates, including the Certificates as to the work carried out under the Contracts; and

(ii)           rectifying any defective work requested and paid for by XYZ in accordance with clause 3.3 below.

3.3 Renumeration

In consideration of the assistance and cooperation to be provided by ABC pursuant to clauses 3.1 and 3.2 above, XYZ will pay ABC at a rate of $100 per hour plus GST as fair and reasonable remuneration for the assistance and cooperation provided.

3.4 Post Settlement Assistance

(a)    If any further assistance and cooperation is requested by XYZ from ABC after dd/mm/yyyy, ABC, Individual X and Individual Y of ABC will continue to provide such further assistance and cooperation to XYZ in support of XYZ's Upstream Claims including the form of assistance and cooperation referred to in clauses 3.2(a) and 3.2(e) above.

(b)    In consideration of any further assistance and cooperation provided by ABC pursuant to clause 3.4, XYZ will pay ABC:

(i)            at the rate of $xxx per hour plus GST; and

(ii)           where reasonable expenses are incurred (provided that such expenses are disclosed to and accepted by XYZ prior to the expenses being incurred), XYZ will remunerate such expenses incurred by Individual X and Individual Y of ABC,

as fair and reasonable remuneration for the further assistance and cooperation provided.

3.5 Dispute

Where a dispute about any assistance and cooperation provided or to be provided by ABC pursuant to either clause 3.1 or clause 3.4 arises, that dispute is to be determined by an independent third party, being a retired judge as agreed after hearing short oral submissions from the respective legal representatives of the Parties.

Clause 4 of the Settlement Deed states:

'Release

In consideration of payment of the Settlement Sum and the assistance and cooperation provided pursuant to either clause 3.1 or clause 3.4 and without affecting any obligation under this Deed:

(a)  ABC releases and discharges XYZ and its directors, officers, employees or agents from all claims which it has or which but for this document could, would or might at any time hereafter have or have had against XYZ and each of XYZ' directors, officers, employees or agents in connection with or arising out of the Dispute and the Projects, including but not limited to the ABC Claims, and

(b)  XYZ releases and discharges ABC and its directors, officers, employees or agents from all claims which it has or which but for this document could, would or might at any time hereafter have or have had against ABC and each of ABC' directors, officers, employees or agents in connection with or arising out of the Dispute and the Projects including but not limited to the XYZ Claims.

(c)   ABC agrees to have executed a separate release for claims in respect of the works under the Projects in the form of the attached Deed of Release by the director and shareholder of ABC.'

Clause 9 of the Settlement Deed provides:

'General

9.1 GST

(a)  ...

(b)  Unless otherwise expressly stated, all consideration, whether monetary or non-monetary, payable or to be provided under or in connection with this document is exclusive of GST (GST-exclusive consideration).

(c)   If GST is payable on any supply made by:

(i)            a party; or

(ii)           an entity that is taken under the GST Law to make the supply by reason of the capacity in which a party acts,

(Supplier) under or in connection with this document, the recipient of the supply, or the party providing the consideration for the supply, must pay to the Supplier an amount equal to the GST payable on the supply.

...'.

In a report to creditors dated dd/mm/yyyy the following information was provided:

After several months of negotiation, the claim against XYZ was finalised on the basis that XYZ pay $x.x million to ABC. The total amount agreed upon was $x.x million (incl GST). To date $x,xxx,xxx has been received.

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, subsection 9-15(1)

A New Tax System (Goods and Services Tax) Act 1999, subsection 9-40

A New Tax System (Goods and Services Tax) Act 1999, Division 58

A New Tax System (Goods and Services Tax) Act 1999, subsection 58-10(1)

A New Tax System (Goods and Services Tax) Act 1999, section 195-1

Reasons for decision

In this ruling,

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Question 1

Are Individual A and Individual B, in their capacity as Administrators of the Deed of Company Arrangement (DOCA), liable for GST under subsection 58-10(1) of the GST Act in respect of the 'Settlement Sum' received in accordance with the terms of the Settlement Deed?

Division 58 contains provisions detailing the GST implications involving activities of an incapacitated entity and a representative of the incapacitated entity.

Section 195-1 defines 'incapacitated entity' to include an entity which has a representative.

The definition of a 'representative' in section 195-1 includes an administrator of a deed of company arrangement executed by the entity.

Therefore, for GST purposes, and more specifically Division 58, ABC is considered an 'incapacitated entity' and you are a 'representative'.

Subsection 58-10(1) provides that a representative of an incapacitated entity (IE) is liable to pay any GST that the IE would be liable to pay on a 'taxable supply' to the extent that the making of the supply to which the GST relates is within the scope of the representatives responsibility or authority for managing the affairs of the IE.

Section 9-5 states that 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 that 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.

In this case, you, in your capacity as Administrators of the Deed of Company Arrangement (DOCA) entered into the Settlement Deed.

Goods and Services Tax Ruling GSTR 2001/4; Goods and Services Tax: GST consequences of court orders and out-of-court settlements discusses the GST consequences resulting from court orders and, in this case, out-of-court settlements.

Paragraph 44 of GSTR 2001/4 discusses supplies that are related to an out-of-court settlement fall within three categories:

•         Earlier supply - where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to as an 'earlier supply'.

•         Current supply - a new supply may be created by the terms of the settlement. In this Ruling, such a supply is referred to as a 'current supply'.

•         Discontinuance supply - 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. This kind of supply is referred to as a 'discontinuance supply'.

GSTR 2001/4 focuses on the 'supply for consideration' requirement of paragraph 9-5(a). Paragraph 21 of GSTR 2001/4 discusses that for there to be a supply for consideration, three fundamental criteria must be met:

(a)  there must be a supply;

(b)  there must be a payment; and

(c)   there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

Subsection 9-15(1) provides that 'consideration' includes:

(a)  any payment, or any act or forbearance, in connection with a supply of anything; and

(b)  any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

In determining whether a payment satisfies the requirements of subsection 9-15(1), the test is whether there is a sufficient nexus between the supply and the payment made.

Paragraph 101 of GSTR 2001/4 states:

Earlier supply

101. Where the only supply (other than a 'discontinuance' supply) in relation to a court order or out-of-court settlement is an earlier supply and a sufficient nexus exists between the payment made under that order or settlement and the earlier supply, the payment will be consideration for that supply.

In discussing 'discontinuance supplies', paragraphs 107 to 109 of GSTR 2001/4 state:

107. In most instances, a 'discontinuance' supply will not have a separately ascribed value and will merely be an inherent part of the legal machinery to add finality to a dispute which does not give rise to additional payment in its own right. They are in the nature of a term or condition of the settlement, rather than being the subject of the settlement.

108. We do not consider that the inclusion of a 'no liability' clause in a settlement deed alters this position. 'No liability' clauses are commonly included in settlement agreements and we do not consider their inclusion to alter the substance of the original dispute, or the reason payment is made.

109. We consider 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.

In this case, Clause 4 of the Settlement Deed contains details whereby in consideration of payment of the Settlement Sum, both parties release and discharge each other from all claims in connection with or arising out of the Dispute and the Project. We consider this a 'discontinuance supply' referred to above. Given the discussion in paragraphs 101, 107 and 109 of GSTR 2001/4, we are also of the view that only other supply with a connection or nexus to the Settlement Sum are the goods and services previously supplied by ABC to XYZ under the Contracts and prior to the appointment of the Administrators on dd/mm/yyyy.

As discussed above, a representative of an IE is liable to pay any GST that the IE would be liable to pay on a 'taxable supply' to the extent that the making of the supply to which the GST relates is within the scope of the representatives responsibility or authority for managing the affairs of the IE.

In this case, the making of the supply of goods and services under the Contracts were made prior to the appointment of the Administrators and your appointment as Deed Administrators and therefore the supplies were not made within the scope of your responsibility or authority for managing the affairs of the ABC.

ATO Interpretative Decision ATO ID 2012/7; Goods and Services Tax GST and liability for a supply made by an incapacitated entity prior to the appointment of a representative discusses a similar scenario stating:

'No, the representative of the incapacitated entity is not liable for GST under section 58-10 of the GST Act when it receives consideration for a supply that was made by the incapacitated entity prior to the appointment of the representative. (It is the incapacitated entity that is liable for GST, under section 9-40 of the GST Act.)

...

The mere subsequent receipt by the representative of the consideration for the supply that was made by the incapacitated entity before the appointment of the representative does not have the effect of bringing the 'making' of the supply within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

Accordingly, because the supply is not within the scope of authority of the representative, the representative is not liable for the GST on the taxable supply under subsection 58-10(1) of the GST Act, despite the fact that the representative receives all of the consideration for the supply.

Instead, the incapacitated entity is liable for GST, under section 9-40 of the GST Act.'

In conclusion, given the above you, in your capacity as Administrators of the DOCA, are not liable for GST under subsection 58-10(1) in respect of the 'Settlement Sum' received in accordance with the terms of the Settlement Deed.

Question 2

Is ABC Pty Ltd (Subject to a Deed of Company Arrangement) liable for GST under subsection 9-40 of the GST Act in respect of the 'Settlement Sum' received in accordance with the terms of the Settlement Deed?

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

As discussed above, ABC made supplies of goods and services to XYZ for a period prior to the appointments of Individual A and Individual B. Consideration for those supplies being the payment of the Settlement Sum. The supplies were made in the course or furtherance of an enterprise ABC carried on in providing goods and services. The supplies were connected with the indirect tax zone and ABC was registered for GST.

Furthermore, the supplies were neither GST-free nor input taxed.

Therefore, ABC has made a taxable supply when providing goods and services to XYZ.

Also as discussed above, you, in your capacity as Administrators of the DOCA, are not liable for GST under subsection 58-10(1) and it is ABC that will have the GST liability in respect of the 'Settlement Sum' received in accordance with the terms of the Settlement Deed under section 9-40.

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