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Ruling

Subject: GST and out-of-court settlement

Question 1

Are you entitled to goods and services tax (GST) credits in relation to the deed?

Answer

No, you are not entitled to GST credits in relation to the deed.

Question 2

If the answer to question 1 is yes, will the Commissioner exercise his discretion to treat the deed as a tax invoice so that you can claim a GST credit?

Answer

As the answer to question 1 is no, there is no need to address this question.

Relevant facts and circumstances

You are registered for GST.

You entered into a contract to purchase land from a vendor. You have provided a copy of the contract.

You were not able to perform your obligations under the contract and the vendor commenced legal proceedings.

You advised that there has not been any court order for damages in relation to the non-performance of the contract. Instead, an agreement was reached to settle the claims that the vendor may have against you and that you may have against the vendor. You have provided a copy of the deed in relation to this agreement.

The deed provides that you must pay to the vendor a sum of money inclusive of GST.

You have advised that the deed constitutes an out-of-court settlement as per paragraph 13 of GSTR 2001/4.

You contend that an earlier supply exists between the parties to the deed and you refer to the judgement of the full High Court of Australia in Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd (2008) 236 CLR 342 (Reliance Carpet case) to support your view. You also contend that if an earlier supply does not exist then there is a discontinuance supply.

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 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

Reasons for decision

Question 1

Summary

You are not entitled to claim GST credits in relation to the payments under the deed because the payments are in the nature of payments for damages rather than consideration for a discontinuance supply. As such, there is no taxable supply to you and therefore, you are not making a creditable acquisition.

Detailed reasoning

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless stated otherwise.

Under section 11-20 you are entitled to GST credits for any creditable acquisition that you make.

Section 11-5 provides that you make a creditable acquisition if, amongst other things, the supply of the thing to you is a taxable supply.

One of the requirements of a taxable supply is that the supply is for consideration.

Goods and Services Tax Ruling GSTR 2001/4 provides guidance on the GST consequences of court orders and out-of-court settlements.

Paragraph 13 of GSTR 2001/4 states:

13. Matters in dispute may be resolved either by the judgment of a court, or (at a time prior to the court delivering its judgment) by agreement between the parties. An agreement between the parties is referred to in this Ruling as an out-of-court settlement. Out-of-court settlements will include any form of dispute resolution in which the terms of the resolution are agreed between the parties, rather than imposed by the court. Some examples of this are:

· the parties obtain a consent order, the draft of which has been agreed to in a settlement deed;

· they agree to have the action struck out without a consent order;

· they enter into an agreement settling their differences before court action commences.

We consider that the deed in this case represents an out-of-court settlement.

GSTR 2001/4 also discusses our view in relation to an earlier supply, a current supply and a supply related to discontinuance of legal action.

Earlier supply

An earlier supply relates to an earlier transaction in which a supply was made.

You contend that the deed relates to an earlier supply and you refer to the High Court decision in the Reliance Carpet case to support your view. We don't agree with this view. The issue in the Reliance Carpet case was whether a deposit paid by a purchaser under a contract for sale is consideration for a supply under that contract when the deposit is forfeited. The issue at hand is not in relation to the deposit that you paid.

Therefore, we do not consider that the deed relates to an earlier supply.

Current supply

A current supply is one where a new supply may be created by the terms of the settlement. From the facts provided, we do not consider that the deed relates to a current supply.

Discontinuance supply

You contend that if an earlier supply does not exist then there is a discontinuance supply.

Paragraphs 50 to 55 of GSTR 2001/4 discuss supplies related to discontinuance of legal action. They provide that:

· even where there is no earlier or current supply, one or more new supplies will probably crystallise on an out-of-court settlement being reached

· 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

· supplies may be characterised as:

o surrendering a right to pursue further legal action

o entering into an obligation to refrain from further legal action, or

o releasing another party from further obligations in relation to the dispute, and

· we refer to supplies of these kinds as discontinuance supplies.

In your case:

· an agreement was reached to settle the claims and this resulted in the deed, and

· the deed provides for discontinuance in relation to the court proceedings.

Therefore, we consider that the deed includes a discontinuance supply.

However, paragraph 106 of GSTR 2001/4 states:

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.

In addition, paragraphs 107 and 109 of GSTR 2001/4 explain that in most instances, a discontinuance supply will not have a separately ascribed value or give rise to an additional payment in its own right but will merely be an inherent part of the legal machinery to add finality to a dispute. In other words, it is in the nature of a term or condition of the settlement, rather than being the subject of the settlement. However, a payment made under a settlement deed may have a nexus with a discontinuance supply, if there is overwhelming evidence that the claim is so lacking in substance that the payment could only have been made for the discontinuance supply.

Furthermore, the distinction between a damages claim and a discontinuance supply is explained at paragraphs 110 and 111 of GSTR 2001/4. With respect to an out-of-court settlement, paragraph 111 of GSTR 2001/4 makes the following comment:

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.

In this case, there is no earlier or current supply. In addition, the deed does not give the discontinuance supply a separately ascribed value nor is the claim so lacking in substance that the payments made could only be for the discontinuance supply.

Therefore, in line with paragraph 111 of GSTR 2001/4, the payments made under the deed are more in the nature of payments for damages rather than consideration for the discontinuance supply and as such, the payments will not be consideration for a supply.

As your payments are not consideration for a supply then it follows that there is no taxable supply to you. As such, you are not making a creditable acquisition under section 11-5 and you are not entitled to claim GST credits under section 11-20.

Question 2

As determined in Question 1 above, you are not entitled to claim GST credits in relation to the payments made under the deed and therefore, the Commissioner cannot exercise his discretion to treat another document (such as, the deed) as a tax invoice.