Edited version of your private ruling

Authorisation Number: 1012483219225

Ruling

Subject: GST and the sale of causes of action

Question 1

Is the sale of the causes of action a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the sale of the causes of action is a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999.

Relevant facts and circumstances

The company is registered for GST and carried on an enterprise.

You were appointed liquidator of the company.

Prior directors of the Company were Director A and Director B.

Director A alleged that Director B breached their duties as a director of the company and, as a consequence, the company suffered financial loss.

You did not intend to pursue these allegations as you had legal advice which suggested that the claim was not reasonably arguable. Director A proposed to acquire all claims against any director or any other person involved in a breach of duty, for a fee.

You offered for sale, the assignment of causes of action that the company has, or may have against any past or present officer (other than yourself) or any other person.

An Assignment Deed was entered into between the company (in liquidation) and a third party. It is understood that the third party was a shareholder of the company and is an associate of Director B

The causes of action are described as all claims that the company has, or may have, against any past or present officer of the company or any other person which are connected in any way to any act, omission or other conduct of any past or present officer.

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 58-5

A New Tax System (Goods and Services Tax) Act 1999 section 58-10

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

The sale of the causes of action by you, in your capacity as liquidator of the company is subject to GST if it is a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) which states:

You make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with Australia; and

(d) you are registered, or required to be registered.

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

As you are registered for GST, the sale is connected with Australia and the sale is neither GST-free nor input taxed, the sale will be subject to GST if it is a 'supply for consideration' and is made in the course or furtherance of an enterprise that you carrying on.

Supply

Goods and Services Tax Ruling, Goods and services tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) explains the circumstances in which a payment represents consideration for a supply because there is a link or nexus between a payment (or act or forbearance) and a supply.

An out-of-court settlement is described in paragraph 13 of GSTR 2001/4 as:

. . . 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:

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

(ii) they agree to have the action struck out without a consent order;

(iii) they enter into an agreement settling their differences before court action commences.

Although Director A believed that Director B breached their duties as a director of the company, you investigated those allegations and subsequently received legal advice to the effect that there was no breach of duty to exercise the requisite degree of care and diligence which would constitute a breach of the Corporations Act 2001. You received further legal advice to the effect that there was no breach of the duties of good faith and proper purpose, and that it would not be an appropriate use of the company's funds to commence an action against Director B.

As the liquidator of the company, you did not instigate a dispute with Director B.

It is also noted that the Assignment Deed assigns all claims that the company has or may have against any past or present officer or any other persons which are connected in any way to any act, omission or other conduct of any past or present officer of the company. That is, the assignment is not in relation to potential claims against only Director B but includes any and all past and present officers of the company.

Furthermore, the Assignment Deed was not entered into by Director B, but by a third party. Any dispute between you, as liquidator of the company and Director B would be settled with Director B, not a third party.

Consequently, it is concluded that the Assignment Deed of the causes of action is not a 'settlement' of a dispute between you, as liquidator of the company, and Director B.

Consideration

Nevertheless, the sale of the causes of action will only be subject to GST, where there is a supply and the supply is made 'for consideration'. A supply is defined by section 9-10 of the GST Act as:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a financial supply;

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

(i) to do anything; or

(ii) (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).

Under the Assignment Deed, you, as liquidator of the company, are assigning any and all claims or potential claims that may exist against any past or present officer of the company. These causes of action are rights that the company has which you, as liquidator, are transferring under the Assignment Deed. The assignment of these rights is a supply under paragraph 9-10(2)(e) of the GST Act.

A claim for damages may arise out of negligence causing a loss of profit. Paragraph 72 of GSTR 2001/4 states:

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.

However, there has never been a claim for damages against Director B by the company. The Assignment Deed is not a settlement for a claim for damages against Director B, it merely assigns certain rights (that may in fact be worthless) that the company had. The payment provided by the third party to you will be 'consideration for the supply' if it satisfies section 9-15 of the GST Act:

(1) Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

(2A) …

For a payment to be consideration 'for a supply', there must be a sufficient connection between the two. Paragraph 81 of GSTR 2001/4 states:

81. It will not be sufficient for there to be a supply and a payment. GST is not payable on supplies unless they are made for consideration, and the other tests in section 9-5 are satisfied. There must be a sufficient nexus between the supply and the payment….

The payment must be 'in connection with', 'in response to' or 'for the inducement of' a supply. You offered for sale, the causes of action specified in the Assignment Deed. The payment provided by the third party is directly connected to the assignment of the causes of action. The third party has paid an amount to acquire the rights inherent in the causes of action. Although the payment made by the third party, effectively means that no action will be taken against Director B, the payment is made for the acquisition of the right to pursue Director B or any other officer of the company in relation to any breach of duty. Therefore, the payment is consideration for the supply of the rights under the Assignment Deed.

Enterprise

The supply of the causes of action under the Assignment Deed will not be subject to GST unless it is a supply made in the course or furtherance of an enterprise that you carry on (as liquidator of the company). Carrying on an enterprise is defined in section 195-1 of the GST Act to include 'doing anything in the course of the commencement or termination of the enterprise'. Therefore, steps taken in the course of terminating an enterprise are still done 'in the course or furtherance of an enterprise that you carry on'. 'Enterprise' is defined in section 9-20 of the GST Act as an activity, or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d) …

An activity doesn't need to be a trading activity that is part of the normal operation of the business for it to be an activity done in the course or furtherance of an enterprise. The rights contained within the causes of action are assets of the company even though they may be worthless to the company. They have value because there are third parties who are willing to purchase those rights. The sale of the causes of action is an activity that is done in the nature of trade and is therefore done in the course or furtherance of an enterprise that you carry on, as liquidator of the company. This is explained at paragraph 234 of Miscellaneous Taxation Ruling, The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1):

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Section 58-5 of the GST Act ensures that any supply that you make in your capacity as liquidator of the company is taken to be a supply made by the company. However section 58-10 of the GST Act operates to make you liable for the GST on any taxable supplies that you make in the course of your appointment.

As all the requirements of section 9-5 of the GST Act are met, you made a taxable supply when you sold the causes of action under the Assignment Deed.