Edited version of your private ruling

Authorisation Number: 1012480125626

Ruling

Subject: GST and deed of release

Question

Is the payments made to you by Company A (Releasee) under the Deed of Release subject to goods and services tax (GST)?

Answer

Yes

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· You are a company registered for GST.

· You and other parties (The Releasors) are engaged in inter alia, the purchase and development of real estate.

· Company A (The Releasee) is a firm of accountants, which was retained by the Releasees to provide accountancy services.

· The Releasors allege that the Releasee failed to provide appropriate advice to the Releasors ('Failure to Advise') regarding certain arrangements which were put in place between the Releasors with respect to the purchase and/or development of properties (Financing Arrangements).

· The Releasors allege that the Releasee's Failure to Advise resulted in parts of the Financing Arrangements being caught by the operation of Division 7A of the Income Tax Assessment Act (ITAA) and that certain loan amounts between the Releasors were deemed to be dividends and became potentially assessable as income.

· In or about 20XX, the Releasors made an application to the Australian Taxation Office under section 109R6 of the Act that the Commissioner exercise his discretion to disregard the operation of Division 7A of the Act with respect to the Financing Arrangements on the basis of an 'honest mistake or an inadvertent omission' ('Application'). In about 20YY, the Commissioner found in favour of the Releasors with respect to the Application.

· The Releasors retained lawyers and accountants for the purposes of seeking advice regarding the alleged Failure to Advise and the Application and incurred legal fees and accountancy fees in doing so ('Legal Fees and Disbursements') the Releasors claimed input tax credits with respect to the GST which was payable on the Legal Fees and Disbursements ('Input Tax Credits').

· The Releasors have sought reimbursement from the Releasee with regard to the Legal Fees and Disbursements ('Claim').

· Without any admission as to liability, the Releasee has agreed to pay the Releasors an amount in settlement of the claim (Deed).

· It has been agreed that a payment from the Releasee to the Releasors will be made in full and final satisfaction of the Claim.

· In respect of this, the Releasors agree that the following payment or payments by the Releasee will be made in full and final satisfaction of the Claim:

(a) a payment from the Releasee to the Releasors in the sum of $x (Settlement Payment); and

(b) In the event that the outcome of the Private Ruling is that GST is payable on the Settlement Payment a further payment which will not exceed $y by the Releasee to the Releasors (an amount equal to any GST liability imposed) ('Further Payment').

· Under the Deed, any moneys payable have been calculated without GST.

· The Releasors have provided a copy of the Deed.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-40.

Section 9-5.

Section 9-10.

Section 11-5.

Section 11-15.

Reasons for decision

Issue 1

Question 1

Summary

You are not liable to pay GST on the payment that you received under the Deed as the payment is not consideration for a taxable supply.

Detailed reasoning

You have advised that under the terms of the Deed you will receive an amount of $x from the Releasees as a settlement of your claim. You are seeking advice in relation to whether you are liable for GST in relation to this payment.

Specifically, we need to consider whether the payment is consideration for a taxable supply that you make.

Matters in dispute may be resolved either by the judgement of a court or by agreement between the parties (out-of-court settlement).

It is considered that an out-of-court settlement will include any form of dispute resolution in which the terms of the resolution are agreed between the parties including an agreement between the parties settling their differences before court action commences.

The views of the Commissioner of Taxation on the GST consequences resulting from out of court settlements are expressed in goods and services tax ruling GSTR 2001/4. This ruling explains how a payment (or act of forbearance) that is made in compliance with an out of court settlement constitutes consideration for a supply and if so, whether the supply is in the nature of taxable, GST-free or input taxed.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply where all of the following conditions are met:

· you make the supply for consideration

· the supply is made in the course or furtherance 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, there must be a supply and if there is a supply, the supply is not taxable to the extent that it is GST-free or input taxed.

All of the above conditions must be satisfied in order for the supply to be taxable.

Therefore, we need to consider whether the payments from the Releasee to you were made for any supply.

Supply is defined in subsection 9-10(1) of the GST Act as any form of supply whatsoever. A supply is essentially something that passes from one entity to another. A supply under subsection 9-10(2) includes:

(a) a supply of goods;

...

(g) an entry into, or release from an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

As such a transaction which is a supply of a surrender of any right or entering into an obligation would be a supply under paragraph 9-10(2)(g) of the GST Act.

In order for there to be a supply for consideration, paragraph 21 of the ruling explains that three criteria must be met:

(i)  there must be a supply;

(ii) there must be a payment; and

(iii) there must be a nexus between the supply and the payment.

In this case, there is no earlier or current supply.

Paragraphs 50 -52 and 53- 55 of the ruling describe a discontinuance supply as follows:

50. Even where there is no earlier or current supply, the very wide range of things that can constitute a supply means that one or more new supplies will probably crystallise on an out-of-court settlement being reached.

51. 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.

52. 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.

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

(i) surrendering a right to pursue further legal action [paragraph 9-10(2)(e)]; or

(ii) entering into an obligation to refrain from further legal action paragraph 9-10(2)(g)]; or

(iii) releasing another party from further obligations in relation to the dispute [paragraph 9-10(2)(g)].

55. In this Ruling, 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 being met in relation to that supply.

Clauses within the Deed provide for release, bar to proceedings and covenant not to sue and to recover losses you have incurred.

Paragraphs 71 to 73 of GSTR 2001/4 expand upon the specific issue of damages claims made by aggrieved parties and are particularly relevant to your query.

Where the subject of the claim is not a supply

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 profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.

72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as 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 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.

In addition, paragraphs 110 and 111 of GSTR 2001/4 further discuss the matter of damages claimed and paid as the result of a court order or out-of-court settlement.

Damages

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

As explained in these paragraphs, where damages are awarded or paid as a consequence of a court order or out of court settlement there is no supply of either goods or services by the plaintiff even though there is consideration paid. As a result one of the requirements of a taxable supply is not met, and so there cannot be a taxable supply in relation to any payment for damages as there is no supply.

Therefore there is no GST liability on the payment of damages.