| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012684013612
Ruling
Subject: GST and legal class action
Question 1
Will goods and services tax (GST) be payable on any compensation received by you as a result of the class action taken against the scheme promoters?
Decision 1
No, any compensation received by you as a result of the class action will not be subject to GST.
Question 2
Are you entitled to claim input tax credits on the legal costs incurred by you as a result of participating in the class action to claim compensation from the scheme promoters?
Decision 2
Yes, you are entitled to claim input tax credits on the legal costs incurred as a result of participating in the class action against the scheme promoters.
Relevant facts and circumstances
• You were an investor in a number of agricultural managed investment schemes (schemes).
• Your financial advisors advised you to register for GST as an individual, so that you could claim input tax credits on inputs such as wood lot and grove lot insurance, maintenance, harvesting etc.
• The company promoting the schemes went into administration and one of the schemes was bought out by another company, which also went into administration.
• As a result of the collapse of these schemes, a class action was initiated by the investors against the company directors or promoters of these schemes. You joined the class action and incurred legal expenses in order to sell the scheme assets and claim compensation from insurers of these scheme promoters and recover some of your losses.
• If the class action against the scheme promoters is partly or fully successful, the insurers of the company directors may have to pay compensation to the investors.
• There is currently a court approved sale process of the assets of the affected schemes.
• As per our records, you are registered for GST.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-5.
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 11-5.
Reasons for the decisions
Decision 1
In order to determine whether GST is payable on any proceeds or compensation received by you as a result of the court approved sale process, it is necessary to ascertain whether the scheme promoters will make a taxable supply to you as a result of your class action.
Section 9-5 of the GST Act provides that an entity makes a taxable supply if:
(a) It makes the supply for consideration; and
(b) the supply is made in the course or furtherance of an enterprise that it carries on; and
(c) the supply is connected with Australia; and
(d) the entity is 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.
In this respect the Goods and Services Tax Ruling GSTR 2001/4 (GSTR 2001/4 or ruling) refers to GST consequences of court orders and out of court settlements.
Paragraph 21 of the ruling provides that:
21. A 'supply for consideration' is the first step towards there being a taxable supply. However, for there to be a supply for consideration, three fundamental criteria must be met:
(i) there must be a supply (see paragraph 22 onwards);
(ii) there must be a payment (see paragraph 74 onwards); and
(iii) there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration (see paragraph 100 onwards).
Paragraphs 71-73 of the ruling refer to situations, where the subject of the claim is not a supply and state:
Where the subject of a 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.F37
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.F38
As explained above, this loss or damage incurred by you, being the substance of the dispute, cannot be treated as a supply made by you to the scheme promoters. Similarly, we do not consider the scheme promoters made any supply to you as a result of your class action. This is further explained at paragraphs 110-114 of GSTR 2001/4, which refer to payments made for damages and they are quoted below.
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.F62
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.
Example - payment of damages
112. Bluey's Waste Removal contracts for a three month period with the local Council to collect waste from specified sites in a particular area and remove it to the Council's rubbish tip. Subsequently, one of Bluey's trucks has its suspension badly damaged on the tip site while delivering a load of rubbish in accordance with the contract. An obstacle, which should have been removed by Council staff, was the cause of this damage.
113. Bluey takes legal action to recover $50,000, being the cost to repair the truck and the loss of productive time caused by the truck being off the road. Subsequently, Bluey and the Council settle the dispute, with the Council paying Bluey $37,000 and Bluey agreeing to proceed no further with the action.
114. No part of the $37,000 paid by the Council to Bluey is consideration for a supply.'
Accordingly, there was no taxable supply from the scheme prompters to you and you will not incur any GST liability on any compensation payment received as a result of the class action.
Decision 2
Section 11-5 of the GST Act refers to what is a creditable acquisition and provides that you make a creditable acquisition if:
(a) you acquire anything solely or partly for a creditable purpose; and
(b) the supply of the thing to you is a taxable supply; and
(c) you provide or are liable to provide consideration for the supply; and
(d) you are registered or required to be registered.
It is necessary to determine whether you made a creditable acquisition of legal services from your legal representatives in participating in the class action. In this respect, paragraph 146 of GSTR 2001/4 states:
146. In any legal action the parties concerned are required to pay their legal advisers the solicitor client costsF70 incurred and the supply of these legal services will attract GST and be GST inclusive sums to the extent that they are not GST-free. Both parties to a dispute, as recipients of a supply of legal representation respectively, may be entitled to an input tax credit for a creditable or partly creditable acquisitionF71 of these services.
Your legal representatives provided a taxable supply of legal services to you and your consideration for such services was inclusive of GST. As you were registered for GST, we consider that you made a creditable acquisition of legal services and therefore, you are entitled to claim input tax credits on legal services acquired.