Edited version of your private ruling

Authorisation Number: 1012524191842

Ruling

Subject: GST and out of court settlement

Questions

1. For the purposes of the goods and services tax (GST) has any supply occurred when you the defendant made the agreed payment to Company X (plaintiff) under the Deed of Settlement (Deed)?

2. If Company C is liable to pay GST, are they entitled to claim back the GST paid on the payment made to the plaintiff under the Deed?

3. If an apportionment of the payment is required between you and Company C, how should this apportionment be done

Advice

1. Yes, the plaintiff has made a supply under subparagraph 9-10 2)(g) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to you the defendant when you made the agreed payment to the plaintiff under the Deed.

2. Under section 11-20 of the GST Act you are entitled to an input tax credit for any creditable acquisitions that you make. As stated in question 1, the plaintiff has made the supply to the defendant under the Deed. Accordingly, Company C has not made any acquisitions from the plaintiff under the Deed.

3. As stated in question 1 the plaintiff has made the supply to the defendant under the Deed. Accordingly, no apportionment of the payment is required between you and Company C since it was the defendant that made the payment to the plaintiff under the Deed.

Relevant facts

You were an employee of Company X for several years. You resigned from your work and started your own business through a company, Company C.

Company C is registered for GST and you are the director of Company C. You personally are not registered for GST.

Company X is registered for GST. Company X commenced proceedings in the District Court for breach of restraint of trade (the Proceedings) to stop Company C from trading.

A court order was made by the judge in the District Court. You are referred as the 'defendant' and Company X is referred as the 'plaintiff' in the Court Order.

The Court Order states the following:

1. The Defendant keep a separate record of transactions entered into by them with people or entities who had been customers of the Plaintiff during the Defendant's employment with the Plaintiff.

2. The Defendant kept a separate record of any communications they had with any dealer who referred business to the Plaintiff during the period of the Defendant's employment with the Plaintiff.

3. Until the earlier of XXX, trial or earlier order, the Defendant by themself, their servants or agents or otherwise howsoever is restrained from

(a) soliciting, canvassing approaching or accepting approaches from any person or entity who was at any time within the XXX year period prior to XXX a dealer who referred customers to the Plaintiff during the Defendant's period of employment with the Plaintiff;

(b) soliciting, canvassing, approaching or accepting approaches from any person or entity who was at any time within the XXX year period prior to XXX a customer of the Plaintiff with the purpose of establishing a relationship with them or obtaining their custom.

4. The parties make disclosure by XXX.

5. The request for the Trial to be dispensed with and the matter be listed for trial commencing on XXX.

6. Each party have liberty to apply on two (2) days written notice to the other party.

7. That the costs of and incidental to the application be the Plaintiff's costs in the cause.

You, Company C and Company X agreed to settle the whole of the disputes including the Proceedings by entering a Deed of Settlement (Deed). You are referred as the 'defendant' and Company X is referred as the 'plaintiff' in the Deed of Settlement.

The terms of settlement are as follows:

Agreement

The parties have reached the following agreement in full and final settlement of the dispute:

1. That the defendant pay to the plaintiff the sum of XXX)('the Settlement monies') within fourteen (14) days of execution of this Deed ('the payment').

2. That contemporaneously with the payment referred to in clause 1 above, the parties shall consent to an order that the Orders made in the District Court be set aside.

3. That contemporaneously with the payment referred to in clause 1 above, the parties shall sign all necessary documents and take all steps required to:

3.1.1 effect the setting aside of the Order referred to in clause 2 above; and

3.1.2 effect a discontinuance of the proceeding ('the proceeding').

4. That subject to the payment the parties acknowledge and agree that the facts and matters pleaded by the plaintiff's statement of claim in the Proceeding are, by this settlement, compromised and further:

4.1 the parties release, discharge and indemnify the other with respect to any and all causes of actions, claims or proceedings which either party may presently have against the other which relate to the matters involved in the Proceeding, including any claims against Company C, now or in the future arising out of or in connection with the facts and matters pleased in the Proceeding;

4.2 this settlement may be pleaded as a bar to any action, suit or proceeding commenced by either party against the other, or against Company C, in respect of any of the matters referred to in this settlement.

5. That subject to the payment the parties acknowledged and agreed that the terms set out under the heading 'Termination of Employment 'in paragraph Y of the letter of offer of employment to the defendant dated XXX shall not apply and be of no force or effect and as such the defendant is not either on his own accord or on behalf of any other person or entity, restrained from …

6. …..

7. .….

8. ..…

9. Release, Discharge and Indemnity

Subject to the terms of this Deed, the parties hereby release, discharge and indemnify each other with respect to any and all causes of actions, claims or proceedings which either party may presently have against the other but for the execution of this document which relates to the matters involved in the dispute.

10…

11……

12…..

13…..

14…..

15 Costs

Each party shall bear its own costs of the Proceedings and of the preparation and execution of this deed.

17 Goods and Services Tax

The parties agree that the Defendant and Company C will indemnity the Plaintiff in the event that any GST is payable in respect of the Settlement Monies.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 subparagraph 9-10(2)(g)

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

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

Reasons for decisions

Question 1

Summary

The plaintiff has made a supply under subparagraph 9-10(2)(g) of GST Act to the defendant when the defendant made the agreed payment to the plaintiff under the Deed.

Detailed reasoning

The GST consequences of a court order or out-of-court settlement will depend on whether the payment made under an order or settlement constitutes consideration for a supply and, if so, whether the supply is in nature of a taxable supply.

Goods and Services Tax Ruling GSTR 2001/4 sets out the Commissioner's view on the GST consequences resulting from court orders and out-of-court settlements. It analyses, amongst other things, the concept of supply and the nexus that must exist between a payment and a supply in order to establish the relationship of a supply for consideration.

According to paragraph 21 of GSTR 2001/4 three fundamental criteria must be met for there to be a supply for consideration and these three criteria are:

(i) there must be a supply;

(ii) there must be a payment; and

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

Essentially, a supply is something which passes from one entity to another. The supply may be one of particular goods, services or something else.

The term supply under subsection 9-10(1) of the GST Act includes any form of supply whatsoever. GSTR 2001/4 explains that supplies related to out-of-court settlements fall within one of three categories which are:

· earlier supply;

· current supply;

· discontinuance supply.

An earlier supply is a supply that occurred before the dispute arose, and which is the subject of the dispute.

A current supply is one that may be created by the terms of the court order or out-of-court settlement. Paragraphs 48 and 49 of GSTR 2001/4 discuss current supplies. They state:

48. A new supply may be created by the terms of the settlement. In this Ruling, such a supply is referred to as a 'current supply'.

Example - Current supply

49. A dispute arises over a claim by Beaut Enterprises Pty Ltd that Plagiariser Pty Ltd is using their trade name. Negotiations between the parties follow resulting in Beaut entering into an agreement with Plagiariser that allows Plagiariser to use its trade name in the future. This would constitute the supply of a right under the agreement between Beaut and Plagiariser that amounts to a ' current' supply.

A discontinuance supply may be characterised as:

· surrendering a right to pursue further legal action;

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

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

Paragraphs 50 to 55 and 109 of GSTR 2001/4 discuss discontinuance supplies. They state:

Supply related to discontinuance of action

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.

53. 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.

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.

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.

Subparagraph 9-10(2)(g) of the GST Act defines 'supply' to include an entry into an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation.

We will now consider whether a supply has occurred under the Deed based on the information received.

Has a supply occurred under the Deed?

Under clause 1 of the Deed the defendant had to pay an agreed amount to the plaintiff as an out-of-court settlement and Clause 3 in the Deed provides that at the time of payment the parties in the Deed would sign all necessary documents and take all steps required to effect the setting aside of the Order referred to in clause 2 of the Deed and effect the discontinuance of the Proceeding.

Pursuant to clause 2 of the Deed, at the time of payment the parties to the Deed entered into an obligation to consent to an order that the Orders made in the District Court be set aside. In this instance we consider the Plaintiff has supplied an obligation releasing the defendant (who is also the defendant in the Orders) from the obligations set out in the Order made in the State District Court. The supply of this released obligation is a supply under subparagraph 9-10(2)(g) of the GST Act and is considered to be a current supply for GST purposes because it is a supply that was created by the terms of settlements set out in the Deed.

Further, under clause 5 in the Deed, the plaintiff released the defendant from the obligating terms set out under the heading 'Termination of Employment' in paragraph Y of the letter of offer of employment to the defendant dated XXX. We consider that under this clause the plaintiff has made a release of obligation (which is a supply under subparagraph 9-10(2)(g) of the GST Act) to the defendant since it is the defendant who had to comply to the terms under the letter of offer of employment and thereby released from this obligation under the Deed. The release of this obligation is a current supply because it is a supply that was created by the terms of the settlement set out in the Deed

To summarise, we consider the plaintiff has made the above supplies to the defendant under the Deed and the supplies were made for consideration since there is sufficient nexus between the plaintiff's supplies and the agreed payment.

Additional information

GST is payable taxable supplies. You make a taxable supply where you satisfy all the requirements of section 9-5 of the 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.

(*Denotes a term defined in section 195-1 of the GST Act)

Based on the information received, the supplies made by the plaintiff would satisfy all requirements in section 9-5 of the GST Act and therefore would be taxable supplies. GST would therefore be applicable to the supplies.

Question 2

Under section 11-20 of the GST Act you are entitled to an input tax credit for any creditable acquisitions that you make.

As stated in question 1, the plaintiff made the supplies to the defendant under the Deed. Company C has therefore not made any acquisitions from the plaintiff.

Question 3

As discussed in question 1, the plaintiff made the supplies the defendant under the Deed. Accordingly, no apportionment of the payment is required between the defendant and Company C since it was the defendant that made the payment to the plaintiff.