Edited version of private advice

Authorisation Number: 1052334157610

Date of advice: 20 December 2024

Ruling

Subject: GST - damages payments

Question 1

If an online order is cancelled, and A procures compensation for loss suffered by A from X or Y, should that payment be treated as damages for the purposes of the GST law, with the result that the group representative is not required to pay GST under paragraph 48-40(1)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the portion of that payment that exceeds the delivery fee charged by X or Y.

Answer 1

Yes.

Question 2

Would the refund of the delivery fee constitute an adjustment to the delivery fee charged by X or Y resulting in an increasing adjustment for you under paragraph 48-50(1)(b) of the GST Act?

Answer 2

Yes. The refund of the delivery fee constitutes an adjustment to the delivery fee. This results in an increasing adjustment, except where you had not claimed an input tax credit for it in a previous BAS as there is nothing to adjust.

Relevant facts and circumstances

You are the representative member of a GST group.

A is a member of this GST group.

A is registered for GST.

Delivery contracts

A has entered into a contract with X and another contract with Z and Y under which X and Y are hired to deliver products to A customers who have placed orders via the A ordering platform.

A does not sell products to X/Y.

The process for ordering products and making a delivery

Customers order products online via the A ordering system.

Customers are charged a delivery fee for their order.

A accepts and collects payments from customers for their respective orders including the delivery fee.

Orders are forwarded to either X or Y delivery drivers.

Once the order is accepted, the driver picks up the order from A and delivers it to the customer.

A notifies customers that they may receive delivery status updates by e-mail, text messages and telephone calls from the contracted delivery business, being either X or Y.

A must make commercially reasonable efforts to ensure that products are available for pick up by 3rd party delivery drivers.

Delivery of the products to the customers at the delivery address is communicated by A via the order form.

Refunds paid by X/Y to A

In some circumstances, a delivery may not be completed by the 3rd party delivery partners, for various reasons including the following:

•                     Missing or incorrect items

•                     Damaged items

•                     X cancels order mistakenly.

When a delivery is not completed, A may receive a 'refund' from X in accordance with a clause of the contract with A and another part of the contract, or Y in accordance with a clause of its contract with A.

How the refund from X or Y is calculated:

The customer pays A a fee for the order which includes a fee for delivery. If the order is not delivered for one of the abovementioned reasons, A refunds the fee in total to the customer.

In your submission, you provided an example of a model transaction as follows: $XXXX purchase with an additional $XXX delivery fee. The model asked us to assume it was paid to X in this instance. The total purchase is $XXX (the numbers are illustrative only).

A then raises a non-delivery claim against X and if found to be proven, X will compensate A for the whole order that was not delivered i.e. $XXXX

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 19

A New Tax System (Goods and Services Tax) Act 1999 subsection 48-40(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 48-45(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 48-50(1)(b)

Reasons for decisions

Question 1

Summary

A is not making any supply in return for the damages payment it receives from X or Y. Therefore, the damages payment is not consideration for a taxable supply and the payment does not a result in a GST liability for you.

Detailed reasoning

You make a taxable supply if you meet the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if

(a)           the supply is made 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 (which includes Australia), 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 term defined in section 195-1 of the GST Act)

We shall firstly consider whether A makes a supply to X or Y in return for the payments in question.

Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements deals with the GST consequences of court orders and out-of-court settlements and, in particular, whether a payment made pursuant to a court order or out-of-court settlement has the necessary nexus with a supply for the purposes of the requirement in paragraph 9-5(a) of the GST Act that an entity makes a supply 'for consideration'. Paragraph 19 of GSTR 2001/4 states:

19. In considering the GST consequences of court orders or out-of-court settlements, this Ruling focuses on the 'supply for consideration' requirement. However, a supply for consideration will not be a taxable supply unless the other requirements set out in section 9-5 are also satisfied. For example, many settlements will not result in a taxable supply because the entity making the supply will not be doing so in the course or furtherance of an enterprise.

Paragraphs 71, 73 and 111 of GSTR 2001/4 provide the following treatment of damages payments:

71. Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.

73. The most common form of remedy is a claim for damages arising out of the termination or breach of a contract or for some wrong or injury suffered. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.

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.

A reaches an out-of-court settlement agreement with X/Y under which X/Y pays A damages as the best characterisation of the arrangements involves a breach of contract by X/Y resulting in damage/loss to A (such as the loss of the goods under the delivery process) and this damage/loss is not itself a supply. The payment in question is a payment to resolve a damages claim and there is no earlier or current supply that A makes. A does not sell the goods to X or Y. Therefore, the payment in question is not consideration for a supply at all (in accordance with paragraph 111 of GSTR 2001/4). Hence, you are not liable for GST on the payment in question (being the $XXX in the example), as the requirement of paragraph 9-5(a) of the GST Act is not met, and therefore, the damages payment in question is not consideration for a taxable supply.

Question 2

Summary

The refund of the delivery fee results in an increasing adjustment for you if you had claimed an input tax credit on the delivery service in a BAS for an earlier tax period. This is because, under such circumstances, there is an adjustment event which results in a reversal of the previously claimed input tax credit entitlement.

Detailed reasoning

In accordance with paragraph 48-45(1)(a) of the GST Act, an input tax credit that a member of a GST group would otherwise have under the basic rules is claimable by the representative member of the GST group.

In accordance with paragraph 48-50(1)(b) of the GST Act, any adjustment that a member of a GST group would otherwise have under the basic rules is to be treated as if the representative member has the adjustment.

Increasing adjustments can arise for a purchase of a good or service if the supply of the good or service is cancelled or the consideration for the purchase is refunded.

Subsection 19-70(1) of the GST Act states:

You have an adjustment for an acquisition for which you are entitled to an input tax credit (or would be entitled to an input tax credit if the acquisition were a creditable acquisition) if:

(a)           in relation the acquisition, one or more adjustment events occur during a tax period; and

(b)           an input tax credit on the acquisition was attributable to an earlier tax period (or, if the acquisition was not a creditable acquisition, would have been attributable to an earlier tax period had the acquisition been a creditable acquisition); and

(c)           as a result of those adjustment events, the previously attributed input tax credit amount for the acquisition (if any) no longer correctly reflects the amount of the input tax credit (if any) on the acquisition (the corrected input tax credit amount).

Subsection 19-10(1) of the GST Act states:

An adjustment event is any event which has the effect of:

(a)           cancelling the supply or acquisition; or

(b)           changing the consideration for a supply or acquisition; or

(c)           causing a supply or acquisition to become or stop being a taxable supply or creditable acquisition.

Section 19-80 of the GST Act states:

If the previously attributed input tax credit amount is greater than the corrected input tax credit amount, you have an increasing adjustment equal to the difference between the previously attributed input tax credit amount and the corrected input tax credit amount.

Where A receives a refund of a delivery fee, this is an adjustment event as it changes the consideration for an acquisition. Additionally, the acquisition may be cancelled.

Therefore, where you have already claimed an input tax credit on the originally contemplated delivery service, you will have an increasing adjustment equal to the input tax credit claimed, as the corrected input tax credit amount will be zero.

The Adjusting GST fact sheet states:

Sales and purchases not yet accounted for

If an adjustment event occurs but you haven't yet accounted for the relevant sale or purchase in an activity statement, you don't have to make an adjustment.

You can take the change into account when you first report the transaction on your activity statement. For example, if there is a price change, you include the final amended price on your activity statement.

Therefore, where you have an adjustment event, being the refund of a delivery fee to A, and you have not yet reported an input tax credit on the originally contemplated delivery, no adjustment in the BAS is required.

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