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Ruling

Subject: GST and settlement payment

Questions:

What are the GST implications for the Australian company (you) in regard to the settlement payment you received under a Settlement Deed?

As you only received an email telling you of the amount to be paid to you, do you need to generate a recipient created tax invoice (RCTI) for this payment?

Advice:

The settlement payment that you received under the Settlement Deed does not constitute consideration for a taxable supply that you have made and therefore will not be subject to the goods and services tax (GST).

No, you do not need to generate an RCTI for the settlement payment you have received as you have not received any supply under the Settlement Deed.

Relevant facts:

You are an Australian company that carries on enterprise in Australia and are registered for the GST.

You with other Australian businesses (the Group Members) who were victims of the alleged behaviour by another Australian company (AusCo) started a court action against AusCo with the assistance of an Australian law firm in order to claim damages and other relief.

A Settlement Deed was made where AusCo agreed to settle the claims sought by the Group Members and the law firm on the terms set out in the Settlement Deed. The Law firm was appointed to be the fund administrator for the Settlement Reserve fund as per arrangement in the Settlement Deed.

The Settlement Deed provided the following:

Upon court approval of the settlement and payments made:

the Group Members hereby release AusCo and their related bodies corporate and all past or present officers or employees from all claims, causes of action and demands, including without limitation all damages, interest, legal and administrative costs and disbursements present and future relating to or arising out of matters the subject of the Proceeding; and

Upon the finalisation of the Settlement Scheme, the Group Members' solicitors will move the court for orders:

· dismissing the proceeding with no order as to cost; and

· barring all Group Members from making or pursuing any claim arising out of the subject matter of the Proceeding.

You have received an email from the law firm advising you of the final assessed value of your 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 9-10;

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15.and

A New Tax System (Goods and Services Tax) Act 1999 Subsection 29-70(3).

Reasons for decisions

Question 1

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:

· you make the supply for consideration;

· the supply is made in the course of an enterprise that you carry on;

· the supply is connected with Australia; and

· you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

You make a taxable supply if all the requirements in section 9-5 of the GST Act are satisfied.

Goods and Services Tax Ruling GSTR 2001/4 GST consequences of court orders and out-of-court settlement (available at www.ato.gov.au) provides guidance on court and out-of-court settlements.

One of the requirements that must be considered in determining whether a particular supply is a taxable supply is whether there is a supply for consideration. Paragraph 21 of GSTR 2001/4 sets out the fundamental criteria that must be satisfied for there to be a 'supply for consideration', namely:

· there must be a supply;

· there must be a payment, and

· there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

Paragraphs 51 to 54 of GSTR 2001/4 state:

Generally (it is suggested in most if not all cases), the terms of a settlement, in finalising a dispute, will ensure no further legal action in relation to that dispute, provided that the terms of the settlement are complied with. This often takes the form of a plaintiff releasing a defendant from some (or all) of the existing claims and from further claims and obligations in relation to that dispute.

Sometimes, where a dispute involves counter claims, the terms of the settlement may provide for each party to release the other from such claims and obligations.

Where court proceedings have commenced, the filing of a notice of discontinuance pursuant to the relevant court rules may also be required to ensure the court is advised that a particular action will not proceed.

We consider that these conditions of settlement can create supplies for GST purposes. The supplies may be characterised as:

· surrendering a right to pursue further legal action .. or

· entering into an obligation to refrain from further legal action..; or

· releasing another party from further obligations in relation to the dispute...

We refer to supplies of these kinds as 'discontinuance supplies'. However, whether a discontinuance supply would be a taxable supply would then depend on the requirements of section 9-5 of the GST Act being met in relation to that supply.

Under the Settlement Deed the Group Members release AusCo and their related bodies corporate and all past or present officers or employees from all claims, causes of action and demands, including without limitation all damages, interest, legal and administrative costs and disbursements present and future relating to or arising out of matters the subject of the Proceeding. Further upon finalisation of the Settlement Scheme, all Group Members are barred from making or pursuing any claim arising out of the subject matter of the Proceeding.

Accordingly, the above condition in the Settlement Deed constitutes a supply for the purposes of the GST Act, and is referred to as a discontinuance supply. The next step is to determine if the settlement payment you receive was made in response to a supply.

In relation to discontinuance supply, paragraphs 106 to 109 of GSTR 2001/4 state:

106. Where the only supply in relation to an out-of-court settlement is a 'discontinuance' supply, it will typically be because the subject of the dispute is a damages claim. In such a case, the payment under the settlement would be in respect of that claim and not have a sufficient nexus with the discontinuance 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.

108. We do not consider that the inclusion of a 'no liability' clause in a settlement deed alters this position. 'No liability' clauses are commonly included in settlement agreements and we do not consider their inclusion to alter the substance of the original dispute, or the reason payment is made.

109. We consider that a payment made under a settlement deed may have a nexus with a discontinuance supply only if there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply.

Furthermore, paragraphs 73, 110 and 111 of GSTR 2001/4 state:

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.

110. With a dispute over a damages claim, the subject of the dispute does not constitute a supply. 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.

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.

On the basis of the facts provided, a sufficient nexus cannot be established between the discontinuance supply and the settlement payment. The settlement payment under the agreement is therefore considered to be in response to the damages claim rather than the discontinuance supply. Furthermore as per paragraphs 73,110 and 111 of GSTR 2001/4, the settlement payment made in response to a court or out of court settlement will not constitute, by itself, consideration for a supply made by you.

Accordingly, the settlement payment does not represent consideration for a discontinuance supply under the terms of settlement, or any supply underpinning the damages claim.

As one of the requirements for a taxable supply under section 9-5 of the GST Act is not satisfied, you are not making a taxable supply in relation to the settlement payment received. The settlement payment is not subject to GST and therefore you are not required to remit GST to the Australian Taxation Office (ATO) on the settlement payment.

Question 2

Subsection 29-70(3) of the GST Act provides that an RCTI is a tax invoice belonging to a class of tax invoices that the Commissioner has determined in writing may be issued by the recipient of a taxable supply.

Goods and Services Tax Ruling GSTR 2000/10 outlines the circumstances in which a recipient can issue RCTIs. An entity can issue RCTIs if the Commissioner has determined in writing that the nature of the industry in which the entity operates warrants the use of RCTIs and all the requirements in that determination are satisfied.

From the facts given, you have not received any supply under the Settlement Deed and therefore do not need to issue an RCTI.

Further since the settlement payment is not subject to GST you are not required to issue a tax invoice.