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Ruling
Subject: GST and compensation payment
Question
Is the amount received as compensation, subject to Goods and Services Tax (GST)?
Answer
No, the amount received as compensation is not subject to GST.
This ruling applies for the following periods:
Not applicable.
The scheme commences on:
Not applicable
Relevant facts and circumstances
You are registered for GST and carrying on a specific enterprise.
You received an amount as compensation from the state government for damages in relation to your enterprise activities.
You made claims for damages to the state government and they did not agree with your reasons for claims.
Your representative has explained to you about the options available in relation to your compensation claim.
You have agreed in writing to accept the estimated settlement proposal offered by the state government.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 and
A New Tax System (Goods and Services Tax) Act 1999 Section 9-10.
Reasons for decision
Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides the requirements for a supply to be a taxable supply. This section states that you make a taxable supply if you make a supply for consideration, and the supply is made in the course or furtherance of an enterprise that you carry on, and the supply is connected with Australia, and you are registered or required to be registered.
However, the supply is not a taxable supply to the extent that is GST-free or input taxed.
To determine whether the sum paid by the state government to you is consideration for a supply, we must first determine whether you have made a supply and if so, whether there is a nexus between that supply and the sum paid by the state government to you in the context of section 9-5 of the GST Act. Subsection 9-10 of the GST Act provides the meaning of a supply under the GST legislation.
Goods and Services Tax Ruling GSTR 2001/4 (GSTR 2001/4) provides the Commissioner's view on GST consequences of court orders and out-of-court settlements. GSTR 2001/4 states:
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 profit, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.
72. When such as dispute arises, the aggrieved party will often assert its rights to an appropriate remedy….until such time 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 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.
In this case, the claim you made from the state government takes the form of damages and the payment that is to be made to you as compensation for your loss. The Tax Office view is that no supply is made in this type of damages claim. GSTR 2001/4 further states at paragraph 111, that a payment made in respect of a damages claim is not consideration for a supply. It states:
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.
Thus, in this case, there is neither a supply nor consideration in the context of section 9-5 of the GST Act. Consequently, there cannot be a taxable supply. Therefore, there are no GST consequences in relation to the amount received by you from the state government as compensation.