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Ruling

Subject: goods and services tax (GST) and court settlement

Question 1

Is GST payable by you where you received the court ordered settlement payment?

Answer

Yes. However, GST is only payable on part of the payment.

Question 2

Are you required to issue a tax invoice?

Answer

Yes.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

You are registered for GST.

You supplied construction services to the entity.

You supplied these services in the course or furtherance of your enterprise.

You performed these services in Australia.

You originally claimed a certain amount of money plus GST for these services.

There was a dispute between you and the entity over payment of this amount. This dispute arose after you supplied the construction services.

A court ordered judgment in your favour to the extent of a certain amount of money.

The certain amount of money payment was 'all inclusive'. The payment was to settle the dispute over payment for your construction services but it was also inclusive of interest and costs.

The court order does not dissect the settlement amount into an amount to pay for your construction services; an amount for interest, and an amount for costs you incurred in relation to the dispute.

The entity requested you to provide a tax invoice in respect of the certain amount of money payment.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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 9-70

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-75(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-70(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-5(1)

Reasons for decisions

Question 1

Summary

GST is payable by you where you received the court ordered settlement payment, as the payment is partly consideration for a taxable supply you made to the payer. See detailed reasoning for guidance on determining the GST amount.

Detailed reasoning

Question 1

Summary

GST is payable by you where you received the court ordered settlement payment, as the payment is partly consideration for a taxable supply you made to the payer. See detailed reasoning for guidance on determining the GST amount.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

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.

(*Denotes a term defined in section 195-1 of the GST Act)

A payment made under a court order may or may not trigger a GST liability for the recipient of the payment. It depends on the situation.

In order for a recipient of a payment to have a GST liability, the payment must be consideration for a supply.

Goods and Services Tax Ruling GSTR 2001/4 deals with the GST implications of court and out-of-court settlements of disputes.

Paragraph 46 of GSTR 2001/4 discusses earlier supplies. It provides that where the subject of a dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to as an 'earlier supply' in GSTR 2001/4.

Paragraph 47 of GSTR 2001/4 provides an example of a dispute involving an earlier supply. It states:

47. Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settlement, with the retailer paying all monies owed. The supply of the toys, that is the subject of the dispute, is an earlier supply because it occurred before the dispute arose.

We consider that the supply of the toys in the above example would have also been an earlier supply if the dispute was resolved through a court ordered settlement.

Paragraph 101 of GSTR 2001/4 discusses under what circumstances a payment made under a court order will be consideration for an earlier supply. It states:

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.

Paragraphs 148 and 149 of GSTR 2001/4 discuss recovery of costs incurred in relation to a dispute. They state:

148. As we have seen for a supply to be a taxable supply the conditions under section 9-5 of the GST Act must be met. In the instance of the payment of costs under the court order or settlement there is no supply for consideration from the successful party to the unsuccessful party. This is essentially paying compensation for costs or losses incurred in the dispute and will be treated in the same manner as damages under paragraphs 110 and 111.

149. Accordingly, the payment of court ordered costs or costs negotiated in a settlement in the circumstances described will not be consideration for an earlier or current supply. It does not matter that the payment of the costs order or settled amount is made by an entity other than the unsuccessful party.

Paragraphs 115 to 119 of GSTR 2001/4 discuss the situation where a court ordered settlement payment relates to a supply as well as damages. They state:

115. Where payment made under a court order or out-of-court settlement has a sufficient nexus with more than one supply, with one or more supplies being taxable and one or more being GST-free or input taxed, the payment will be for each of the relevant parts. This will also be the case where the payment is partly for an item of damages which is not a supply.

116. Where a court order (issued in accordance with the court's judgment on the case) itself dissects and itemises the payment into the heads of claim relating to the individual supplies and / or item of damages, that itemisation will be accepted as representing the amounts of these relevant parts.

118. Where no dissection is made, even though the payment has a sufficient nexus with more than one supply, or to a supply and an item of damages which is not a supply, the payment should be apportioned into amounts representing these relevant parts in order that the correct GST consequences result.

119. The apportionment should be determined by the parties on a reasonable basis. Where a payment is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application.

We consider that similar principles as are set out in paragraphs 115 to 119 of GSTR 2001/4 should apply to the situation where a settlement payment is partly consideration for a supply and partly compensation for costs incurred in relation to the dispute. A settlement payment that is partly to compensate a party for costs incurred in relation to the dispute is not consideration for a supply to that extent just as a payment that is partly to compensate a party for damages is not consideration for a supply to that extent. In accordance with paragraph 148 of GSTR 2001/4, paying compensation for costs or losses incurred in the dispute is treated in the same manner as damages.

You have received a court ordered settlement payment, which was to settle the dispute over payment for the construction services. The settlement payment was inclusive of interest and costs.

Your case is similar to the example in paragraph 47 of GSTR 2001/4. As in the example in paragraph 47 of GSTR 2001/4, you made an earlier supply. The earlier supply is your supply of construction services. This supply is an earlier supply because it occurred before the dispute arose. As in the example in paragraph 47 of GSTR 2001/4, you and your customer were in dispute over payment for an earlier supply.

You originally claimed a certain amount of money plus GST for your services.

There is a sufficient nexus between part of the certain amount of money payment and your earlier supply, that is, your supply of construction services as the certain amount of money was partly paid to settle the dispute over payment for your supply of these services. Therefore, this payment is partly consideration for that supply. The certain amount of money payment was partly interest, which is consideration for a financial supply. Hence, the requirement of paragraph 9-5(a) of the GST Act is satisfied.

You made these supplies in the course or furtherance of an enterprise that you carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Your supplies are connected with Australia. Hence, the requirement of paragraph 9-5(c) of the GST Act is satisfied.

You are registered for GST. Hence, the requirement of paragraph 9-5(d) of the GST Act is satisfied.

There are no provisions in the GST Act under which your supply of the construction services is GST-free or input taxed. However, your financial supply is input taxed under subsection 40-5(1) of the GST Act.

You made a taxable supply of construction services in return for part of the court ordered settlement payment, as all of the requirements of section 9-5 of the GST Act were satisfied. Hence, GST is payable where you received the settlement payment to the extent that the payment is consideration for your supply of construction services.

To the extent that the settlement payment was payment of interest, the payment is not consideration for a taxable supply as to that extent the payment is consideration for an input taxed supply. Hence, GST is not payable on the payment to the extent that it was payment of interest.

To the extent that the settlement payment was to compensate you for costs you incurred in relation to the dispute, the payment is not consideration for a supply (in accordance with paragraph 148 of GSTR 2001/4). Hence, to that extent the payment is not consideration for a taxable supply. Therefore, to that extent GST is not payable on the payment.

The court order does not dissect the settlement amount into an amount to settle the dispute over payment for your construction services; an amount of interest, and an amount to compensate you for costs you incurred in relation to the dispute.

Therefore, you will need to apportion the settlement amount between your supply of construction services; payment of interest, and compensation for costs you incurred in relation to the dispute on a fair and reasonable basis.

The GST payable in respect of the settlement payment will be 1/11^th of the amount you determine represents consideration for your supply of the construction services.

Question 2

Subsection 29-70(2) of the GST Act provides that a supplier of a taxable supply must, within 28 days after the recipient of the supply requests it, give to the recipient a tax invoice for the supply unless it is a recipient created tax invoice.

As you have made a taxable supply in return for part of the court ordered settlement payment, and the recipient of the supply has requested a tax invoice, you must issue a tax invoice to the recipient. The price to show on this tax invoice will be the part of the settlement amount that represents consideration for your supply of the construction services.