Edited version of private ruling

Authorisation Number: 1011692139304

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Ruling

Subject: Goods and services tax (GST): out of court settlement

Question 1

Are you liable for GST on the receipt of $X from an out-of-court settlement?

Answer

No, you are not liable for GST on the receipt of $X from an out-of-court settlement as it was not a payment for any taxable supply by you.

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 not registered for GST nor were you required to be registered for GST prior to the sale of the shares.

However you were unable to advise us if either

· the supply was made in the course or furtherance of and enterprise or

· you were required to be registered for GST.

On a specified date you entered into a sale agreement under which you sold all of your shares in an entity to another entity. The supply of shares was done in Australia.

Under the sale agreement the purchase price payable, was to be paid in three installments. Only the first two installments were paid.

The parties were in dispute as to the requirement to pay and the quantum of the third (and final) installment of the purchase price.

You alleged that the other party has failed to comply with the alleged obligations in respect of payment of the third installment of the purchase price.

The other party alleges (and you deny) that you are in breach of certain warranties contained in the sale agreement.

The dispute between the parties was settled by entry into an out of court settlement and you supplied a copy of this deed. The deed was entered into by the parties as an out-of-court settlement of the dispute in relation to the sale of shares.

In particular, the dispute relating to payment of the third installment of the purchase price payable under the sale agreement has been resolved by payment of $XX.XX by the other party to you as referred to in clause 2.1 of the Settlement Deed.

There is no court order that dissects and itemises the payment into the heads of claim.

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

A New Tax System (Goods and Services Tax) Act 1999 Section 40-5

A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 40-5.08, and

A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 40-5.09

Reasons for decision

For the purposes of Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements, (GSTR 2001/4) supplies that are related to an out-of-court settlement fall within three categories of supplies:

· earlier supplies

· current supplies and

· supplies related to a discontinuance action.

These categories of supply are discussed further at paragraphs 45 to 55 of GSTR 2001/4.

In your case, there were two types of supplies made in relation to your out-of-court settlement:

There was an earlier supply of shares. The alleged non-payment of a portion of the consideration for this supply resulted in the dispute you were involved in.

You have also made discontinuance supplies as a result of the deed of settlement. They relate to surrendering rights to pursue further legal action, entering into an obligation to refrain from further legal action, and releasing the other party from further obligations in relation to the dispute.

There are no other separately identifiable supplies under this arrangement.

Of relevance to your supplies, paragraphs 101 to 102 and 107 of GSTR 2001/4 provide that:

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.

Example - payment for an earlier supply

102. In the Widget Company example at paragraph 47, the out-of-court settlement reached with the retailer provides for the retailer to make payment in full to Widget for the toys. The supply of the toys is an earlier supply and there is a sufficient nexus between it and the payment. The payment is consideration for that supply.

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.

We find that your supply of shares has sufficient nexus with the receipt of the $XX.XX and that the discontinuance supplies have not separately ascribed value.

As a result of the dispute process over the final payment for your supply of shares, you entered into an out-of-court settlement. In this settlement you agreed not to pursue any further action if you were paid the amount of $XX.XX in settlement of your claims for additional amounts for your earlier supply of shares. There was no dissection of this amount in the settlement documents, therefore the payment only relates to the supply of shares.

You have asked whether you are liable to GST on the receipt of this amount of money for your supply of shares. Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that GST is payable on any taxable supply that you make. Section 9-5 of the GST 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

· the supply is connected with Australia and

· you are registered or required to be registered for GST

However the supply will not be taxable to the extent that it is GST free or input taxed.

Your supply of the shares will be a taxable supply and therefore subject to GST you if you meet all of the criteria (a) to (d) and the supply of your shares are not input taxed or GST free.

In your case you have made a supply of shares for consideration. The supply is connected with Australia and you are not registered for GST nor were you required to be registered for GST prior to the sale of the shares. Furthermore there are no provisions of the GST Act that would make the supply of shares GST free.

However you were unable to advise us if either

· the supply was made in the course or furtherance of an enterprise or

· you were required to be registered for GST.

In answering your question on this supply of shares we therefore have had to postulate two scenarios. This is in part because an entity can only make input taxed supplies if it is registered for GST.

Scenario 1 You did not meet one of these criteria; either you did not make the supply in the course or furtherance of your enterprise or you were not required to be registered. Under this scenario your supply would not meet the criteria for a taxable supply and therefore you would not have a GST liability.

Scenario 2 You made the supply in the course of your enterprise and you were required to be registered for GST. Under this scenario we can hypothetically examine whether if you were registered for GST whether the supply of shares would be input taxed or taxable.

Division 40 of the GST Act provides for the supplies that are input taxed. If a supply is input taxed, then no GST is payable on the supply. Section 40-5 of the GST Act sets out that a financial supply is input taxed.

Subsection 40-5(2) of the GST Act provides that the term 'financial supply' has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST regulations):

Regulation 40-5.08 in the GST regulations provides that a supply is a financial supply if the supply is mentioned as a financial supply in regulation 40-5.09.

Regulation 40-5.09 in the GST regulations at item 10 lists securities as financial supplies. Part 8 of the GST regulations provides at item 2 that 'shares in, or debenture or convertible notes of, a body' are an example of a security.

Therefore, your supply of shares meets the criteria set out above and is input taxed. As a result, you were not making a taxable supply when you supplied the shares and you are not liable for GST on the receipt of the $XX.XX from the out of court settlement.

Consequently, you are not liable for GST regardless of which of Scenario 1 or 2 (as outlined above) applies to your circumstances.