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Edited version of private ruling
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Ruling
Subject: GST and a payment for damages
Issue
Is the payment received by an Australian company under a court order in respect of a damages claim subject to goods and services taxes (GST)?
Answer
No. The payment received by the Australian company under the court order in respect of the damages claim is not consideration for a taxable supply and is not subject to GST.
Relevant facts and circumstances
You are an Australian company which is registered for GST.
You have received a lump sum payment on settlement of a damages claim as a part of investigation against another Australian company (Company B) and its directors.
Court proceedings commenced in the Court against Company B. It is alleged that in operating the system, Company B failed to comply with the Code of Conduct and engaged in misleading and deceptive conduct and unconscionable conduct towards the relevant parties.
The final order for the proceeding was made by the Court, which ordered the calculations for a disbursement of an amount of damages.
In accordance with the court order, calculations were made and an amount was payable to you.
Reasons for decisions
GST is payable on a taxable supply. Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 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 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.
One of the requirements for a taxable supply is that you make a supply for consideration. The GST consequences will depend on whether the payment made under the court order constitutes consideration for a supply and, if so, whether the supply is in the nature of a taxable supply.
The term supply is defined in subsection 9-10(1) of the GST Act to include any form of supply whatsoever.
Goods and Services Tax Ruling GSTR 2001/4 considers the GST consequences of court orders and out-of-court settlements. Paragraphs 71 to 73 of GSTR 2001/4 explain the issue where the subject of a claim is not a supply.
Paragraphs 71 to 73 of GSTR 2001/4 state:
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.
72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the matter is resolved by a court or through negotiation.
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.
Paragraph 110 of GSTR 2001/4 further provides guidance on a payment made under court orders in respect of damages claims, and paragraph 110 of GSTR 2001/4 states:
110. With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the aggrieved party. If a payment made under a court order is wholly in respect of such a claim, the payment will not be consideration for a supply.
From the facts provided, following from an investigation against Company B and its directors for failing to comply with the Code of Conduct and engaging in misleading and deceptive conduct and unconscionable conduct towards the relevant parties, the Court ordered an amount for damages to the represented entities. You have received a lump sum payment for damages as a part of the court order. On the basis of these facts, the damages (substance of the dispute) cannot in itself be characterised as a supply made by you and the payment made under the court order in respect of the damages claim is not consideration for a supply.
Accordingly, the requirement in paragraph 9-5(a) of the GST Act is not satisfied. You have not made a taxable supply under section 9-5 of the GST Act, and the lump sum payment is not subject to GST.