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Ruling

Subject: GST and settlement and release agreement

Question 1

Do you make a taxable supply pursuant to Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) under the Settlement and Release Agreement (Settlement Agreement)?

Answer

No.

Question 2

Is the subject of the dispute under the Settlement and Release Agreement a damages claim and therefore you do not make a taxable supply under Section 9-5 of the GST Act?

Answer

No.

Question 3

Do you make a creditable acquisition pursuant to Section 11-5 of the GST Act when you are issued with the vouchers by the Supplier?

Answer

Please see discussion below.

Question 4

If the answer is yes to Question 3 (i.e. you do make a creditable acquisition), what is the amount of the consideration attributable to the vouchers?

Answer

Please see discussion below.

Question 5

If the answer is yes to Question 3 (i.e. that you do make a creditable acquisition as the supply of the vouchers to it is a taxable supply), is the supply of the vouchers within the scope of Division 100 of the GST Act?

Answer

No.

Question 6

Does the supply of the voucher give rise to an adjustment event under Division 19 of the GST Act?

Answer

No.

Question 7

Do you make a creditable acquisition when you use/redeem the vouchers to acquire the products and services from the Supplier where the vouchers do not fall within the scope of Division 100 of the GST Act?

Answer

No.

Question 8

Do you make a creditable acquisition when it uses/redeems the vouchers to acquire the products and services from the Supplier where the vouchers do fall within the scope of Division 100 of the GST Act?

Answer

Not applicable.

Question 9

Where you do make a creditable acquisition of the vouchers at the time of issue and Division 100 of the GST Act does not have application, do you have an increasing adjustment where the vouchers subsequently expire and are not used to acquire anything?

Answer

No.

Question 10

Where the vouchers do fall within the scope of Division 100 of the GST Act, do you have a decreasing adjustment where the vouchers subsequently expire and are not used to acquire anything?

Answer

Not applicable.

Question 11

Do the vouchers that are redeemable for products represent a discount against the future supply of those products by the Supplier and therefore only have the GST impact of reducing the consideration of those future taxable supplies?

Answer

No.

Question 12

Do the vouchers that are redeemable for services and effected by way of the issue of credit notes at a future point in time represent a discount against the future supply of those services by the Supplier and therefore only have the GST impact of reducing the consideration of those future taxable supplies?

Answer

No.

Relevant facts and circumstances

You entered into an agreement with an Australian resident supplier (Supplier) for the provision of certain works. You came into dispute with the Supplier over the delivery of the works. The dispute concerned the level of completion of the works and the timing of delivery.

You claimed that the Supplier had not completed certain required works and/or those completed works did not meet the required completion performance levels within the required timeframes resulting in loss. You refused to make payment for the completion. The Supplier claimed that the required works had been completed as agreed and that payment was therefore due. Together you entered into the Settlement Agreement for the purpose of settling the dispute. Under the Settlement Agreement:

You agreed to settle and/or release the Supplier from a number of the claims in return for which you would receive vouchers to a specified value which you would be able to use for the acquisition of future products and services from the Supplier

the Supplier agreed to settle and/or release you from any claims it may have in return for the payment of money by you of the outstanding amounts the Supplier claimed as due and payable under the works agreement.

The Supplier issued a tax invoice to you for the outstanding amount payable, plus GST, for item I above, as agreed under the Settlement Agreement. For item II above, you are entitled to use the vouchers for the amounts as agreed under the Settlement Agreement. The vouchers are not in a separate physical form. Rather, the details of the vouchers are set out in Attachment 1 to the Settlement Agreement, setting out their stated monetary values and the specified products and services for which the vouchers may be used within a defined period of time before expiry.

The vouchers are able to be used as payment to acquire from the Supplier both products and services. Both the product and service vouchers fall into two broad categories:

· vouchers that specify the exact products and the value for which they may be used to acquire those specific products.

· vouchers for use against a number of listed products and services contemplated under a number of specified service and works contracts currently in existence.

All monetary values ascribed to the vouchers are stated as being GST exclusive.

The process for use (redemption) of the product vouchers involves you placing a work / purchase order with the Supplier. The Supplier then provides a written acknowledgement of the order and an acknowledgement that payment for the order can be effected by you by way of use of the particular product voucher. You are therefore not required to pay any amounts for the product up to the value of the voucher. There will be no tax invoice issued by the Supplier for the product unless an amount is required to be paid over and above the voucher value. The amount of GST payable by the Supplier will be based on the GST exclusive amount of the excess over the voucher value redeemed.

The process for use (redemption) of the service vouchers involves you placing a service order with the Supplier. The Supplier will then provide a credit note to you to the value of the voucher to offset the commitment you have entered into to acquire the services.

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 19-10

A New Tax System (Goods and Services Tax) Act 1999 section 100-5

A New Tax System (Goods and Services Tax) Act 1999 section 100-25

Reasons for decision

Question 1

Summary

You do not make a taxable supply as there is no consideration.

Detailed reasoning

The Settlement Agreement, at clause 2.1(b) contemplates that you have granted the Supplier rights and releases. In particular, at clause 3.2, you unconditionally and irrevocably release and discharge the Supplier (including the Supplier's and the Supplier's representative's employees, contractors, agents, consultants) for all and any claims arising from or in connection with certain components of the dispute.

The Settlement Agreement effectively allows the parties to vary the original Project Contract as from Settlement Date.

As outlined in GSTR 2001/4, a new supply may be created by the terms of a settlement (a current supply). While the terms of the Settlement Agreement contemplate an amended Project Contract, no new supply is created.

However, in finalising a dispute where the terms of settlement ensure that there is no further legal action in relation to the dispute, a supply related to discontinuance of action can be created. Typically this occurs when one party releases the other from existing and further claims and from further claims and obligations in relation to that dispute.

GSTR 2001/4 characterises and labels these supplies as discontinuance supplies:

· surrendering of a right to pursue further legal action;

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

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

You release the Supplier from existing claims and in doing so creates a discontinuance supply. This supply will be taxable where the requirements of section 9-5 of the GST Act are met. In particular paragraph 9-5(a) or the GST Act requires that a supply is made for consideration. Paragraph 109 of GSTR 2001/4 contemplates the linkage between a discontinuance supply and any perceived consideration:

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.

We do not consider that the claim that is the subject of the dispute between you and the Supplier is 'so lacking in substance that the payment could have only been made for the discontinuance supply'. The dispute and its subsequent resolution are solely concerned with completion of the Project Contract. Accordingly there is no nexus between this supply made by you and any consideration received. Therefore, while you make a discontinuance supply, it is not a taxable supply.

Question 2

Summary

The subject of the dispute under the Settlement Agreement is not a damages claim.

Detailed reasoning

As discussed above, in resolving the dispute, you have granted certain releases to the supplier; these releases create a discontinuance supply.

Question 3

Summary

You make a creditable acquisition of vouchers; the acquisition is a component of the acquisitions made under the Project Contract.

Detailed reasoning

The vouchers issued by the Supplier evidence a supply by way of the granting of rights to you for goods and services in consideration of the releases and other rights granted to the Supplier under the Settlement Agreement, as well as the consideration payable under the Project Contract. The rights are exercisable up to expiry. As discussed above, you do not make a taxable discontinuance supply in return for the vouchers; the supply of vouchers is not an additional (non-cash) payment in its own right as foreshadowed in paragraph 107 of GSTR 2001/4.

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.

From the Supplier's point of view the treatment of the payment evidenced by the vouchers fits within the Commissioner's policy on payments made under out of court settlements set out in GSTR 2001/4:

132. No attribution or adjustment action is required in respect of a settlement payment made under a court order or out-of-court settlement where:

(i)   the payment is not consideration for a supply; ….

The supply of vouchers is considered to be a component of the overall supply made under the Project Contract. Your acquisitions under the Project Contract are creditable; in particular the Supplier's supplies under the Project Contract are made in return for consideration. In this respect, the consideration for the vouchers is accounted for in the Project Contract rather than the Settlement Agreement.

You have indicated that the Supplier has/will apply GST to supplies made under the Project Contract. To the extent of consideration paid or payable by you under the Project Contract, the acquisition of the vouchers is a creditable acquisition.

Question 4

Summary

The amount of consideration paid for the vouchers is subsumed in the total consideration that is paid or payable under the Project Contract.

Detailed reasoning

The vouchers are one of a number of supplies made in relation to the Project Contract. The total monetary consideration payable by you under the Project Contract is already negotiated and the consideration attributable to the supply of the vouchers is accounted for within that negotiated amount.

In this instance an apportionment approach that separates the supply of vouchers from the greater supplies made under the Project Contract would not lead to a correct interpretation of the situation. No particular amount of consideration is attributable to your acquisition of the vouchers.

Question 5

Summary

The vouchers are considered to be too restrictive to be a supply within the scope of Division 100 of the GST Act.

Detailed reasoning

For the vouchers to be within the scope of Division 100 of the GST Act, they must satisfy the definition of a voucher under section 100-25 and meet the additional requirements under section 100-5 of the GST Act. A Division 100 voucher evidences a right of the holder to receive supplies up to a stated monetary value and can be evidenced in any form such as a letter. The Supplier's vouchers are set at stated monetary values and entitle you to use them to acquire a range of specified products and services within a defined period of time before expiry. There will be no further issuing of the vouchers in a physical form by the Supplier. However, the vouchers that will be redeemable for services will be affected by way of the Supplier issuing credit notes up to the voucher values. One of the additional requirements for Division 100 of the GST Act is that the vouchers must have a requisite degree of flexibility in terms of what the vouchers can be redeemed for. The Commissioner considers that where the redemption is limited to specific supplies and quantities, then this may not satisfy the flexibility requirement; this view is espoused in GSTR 2003/5.

74. The supplies to which the holder is to be entitled under section 100-5 are supplies up to the stated monetary value, not supplies of a stated monetary value. A voucher that entitles its holder to a specified supply is not one to which subsection 100-5(1) applies, even if a monetary value or price is stated on the voucher. What is required, is that the terms of the voucher must entitle the holder to a reasonable choice and flexibility as to the types of supplies for which the voucher may be redeemed.

75. The Explanatory Memorandum to Division 100 explains this requirement in section 100-5 as follows:

1.97   Only vouchers that entitle the holder to supplies up to the monetary value stated on the voucher come within Division 100. The types of things contemplated are vouchers etc. which entitled the holder to goods or services from a particular provider up to the value stated (for example a gift voucher)...

1.98   Division 100 will not cover things which are for a specified good or service but which may also state a price or value of the good or service, such as a bus ticket, a movie ticket or an airline ticket. These types of supplies entitle the holder to a specified service such as a set number of trips on a bus or travel on a particular date or over a particular period (for example a monthly bus pass). These types of supplies are subject to the normal rules and subject to GST at the time of the supply of the ticket etc.

76. A voucher may be for a specific type of supply such as 'dog grooming services' and state a monetary value. To come within section 100-5, the voucher must not stipulate the specific supply or be limited to a specific supply. For example, a statement on a voucher that it entitles the holder to a deluxe dog wash and clip priced at $20 would preclude the voucher from being treated under section 100-5 as it is for a specific supply.

The Supplier's vouchers have a necessary degree of specificity as to what goods and services can be claimed upon redemption. In some instances the vouchers that specify the exact products and the values for which they may be used to acquire those specific products. Alternately, the remainder of the vouchers limits redemption to a range of different products, however redemption is restricted to listed products within a set product range and is specific to a number of contract works. Given the overall circumstances of the supply and the physical characteristics of the vouchers, it is considered that the vouchers are too restrictive in their terms to be considered Division 100 vouchers.

Question 6

Summary

The supply of vouchers does not give rise to an adjustment event.

Detailed reasoning

Subsection 19-10(1) of the GST Act defines what an adjustment event is and subsection 19-10(2) provides further clarification:

(1) An adjustment event is any event which has the effect of:

(a) cancelling a supply or acquisition; or

(b) changing the *consideration for a supply or acquisition; or

(c) causing a supply or acquisition to become, or stop being, a *taxable supply or *creditable acquisition.

Example: If goods that are supplied for export are not exported within the time provided in section 38-185, the supply is likely to become a taxable supply after originally being a supply that was GST-free.

(2) Without limiting subsection (1), these are *adjustment events:

(a) the return to a supplier of a thing, or part of a thing, supplied (whether or not the return involves a change of ownership of the thing);

(b) a change to the previously agreed *consideration for a supply or acquisition, whether due to the offer of a discount or otherwise;

(c) a change in the extent to which an entity that makes an acquisition provides, or is liable to provide, consideration for the acquisition (unless the entity *accounts on a cash basis).

As discussed above, no further consideration is paid or payable by you upon receipt of the vouchers; the consideration payable under the Project Contract did not alter upon the negotiation of the Settlement Agreement. With no change to consideration there can be no adjustment event.

Question 7

Summary

You do not make a creditable acquisition when you use or redeem the vouchers to acquire products and services from the supplier.

Detailed reasoning

As discussed above, the vouchers evidence a right to receive goods and services in the future. The consideration for the Project Contract is negotiated and the supplier has treated its supplies under the Project Contract, including the vouchers as taxable at this point. You have made a creditable acquisition of the Supplier's supplies of vouchers at an earlier point in time than afforded by redemption. You are not liable to pay any more consideration upon exercising these rights and therefore there is no additional acquisition made upon redemption.

Question 8

As discussed above, the vouchers are not within the ambit of Division 100 of the GST Act.

Question 9

Summary

You do not have an increasing adjustment where you make a creditable acquisition of the vouchers and the vouchers subsequently expire unused.

Detailed reasoning

The expiry of the vouchers does not give rise to any adjustment event. In particular, the expiry of the vouchers does not have the effect of cancelling the supply or acquisition as contemplated under paragraph 19-10(1)(a) of the GST Act. The expiry is merely a condition of the vouchers in the first instance. The supply being made under the vouchers is the right and entitlement to redeem the vouchers up to the specified value within the specified period of time. The expiry of the voucher would not cancel this supply, moreover expiry evidences the subsequent use (or in this case non-use) of a previous acquisition by the purchaser.

Question 10

As discussed above, the vouchers are not within the ambit of Division 100 of the GST Act.

Question 11

Summary

The vouchers are evidence of an earlier supply of rights rather than a discount against future supplies.

Detailed reasoning

As discussed above, one type of voucher evidences a right to receive goods in the future. The rights granted are taxable at the time they are conferred and are paid for through the normal workings of the Project Contract. The later supplies that the rights may realise if exercised will only be subject to GST if additional consideration is paid or payable.

Question 12

Summary

The vouchers are evidence of an earlier supply of rights rather than a discount against future supplies.

Detailed reasoning

As discussed above, one type of voucher evidences a right to receive services in the future. The rights granted are taxable at the time they are conferred and are paid for through the normal workings of the Project Contract. The later supplies that the rights may realise if exercised will only be subject to GST if additional consideration is paid or payable.