Edited version of your written advice

Authorisation Number: 1012827103062

Date of advice: 23 June 2015

Ruling

Subject: GST

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in respect to the specified sum payment pursuant to the 'Deed of Settlement and Release' dated a specified date?

Answer

No.

This ruling applies for the following periods:

1 July 2014 to 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Entity A owns commercial property located at a specified address.

You, entity B, on or about a specified date purported to enter into a contract of sale in respect to the property. You supplied a copy of this contract signed by representatives on behalf of yourself and entity A. You are registered for GST.

Entity A denied the existence of any such contract and refused to proceed with the sale.

You commenced proceedings in a specified court on a specified day seeking, among other things, specific performance and damages.

Entity A and you have agreed to settle any and all issues, claims and disputes arising out of or in connection with the property or the proceedings on the terms set out in the Deed of settlement and release dated a specified date. You supplied a copy of the 'Deed of Settlement and Release'.

Entity A agreed to pay you a specified sum plus any applicable GST in full and final settlement of any and all claims in respect to the property and the proceedings. Entity A has also agreed to working towards releasing the deposit back to you.

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

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that 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.

In your case the relevant issue is whether there is a supply and whether the payment you receive is consideration for that supply.

You need to, among other things, make a supply for there to be a taxable supply in respect to the specified sum payment.

Subsection 9-10(2) provides a non-exhaustive list of activities or occurrences that are included within the meaning of supply. The list includes the following items of relevance in this instance:

(b) a supply of services;

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

(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;

Paragraph 21 of Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 201/4), explains that for there to be a supply for consideration, three criteria must be met:

• there must be a supply;

• there must be a payment; and

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

Supply

Paragraph 22 of GSTR 2001/4 explains that a supply is something which passes from one entity to another. The supply may be one of particular goods, services or something else.

Paragraph 43 of GSTR 2001/4 explains that a supply related to an out-of-court settlement may have occurred prior to the settlement (and in fact have been the subject of the dispute in the first place).

The ruling identifies three types of supplies: earlier supply, current supply and discontinuance supply.

Paragraph 46 of GSTR 2001/4 explains that, where the subject of the dispute is an earlier transaction in which a supply was made involving the parties. That supply is referred to as an earlier supply.

Paragraph 47 of GSTR 2001/4 gives an example of an earlier supply.

47. Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settlement, with the retailer paying all monies owed. The supply of the toys, that is the subject of the dispute, is an earlier supply because it occurred before the dispute arose.

There are no identifiable earlier supplies or current supplies. The dispute arose over non-performance of a sale contract. The matter has been resolved through an out-of-court settlement.

Supplies related to discontinuance of action are discussed at paragraphs 50-55 of GSTR 2001/4.

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.

In your instance there are potential discontinuance supplies in the form of the agreement under a specified clause of the deed of settlement and release.

Payment

There has been a payment of a specified sum.

Nexus

It is necessary to examine whether there is a nexus between the payment and any discontinuance supplies.

Paragraphs 106,107 and 109 of GSTR 2001/4 state:

106. Where the only supply in relation to an out-of-court settlement is a 'discontinuance' supply, it will typically be because the subject of the dispute is a damages claim. In such a case the payment under the settlement would be in respect of that claim and not have a sufficient nexus with the discontinuance supply.

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.

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.

On the facts provided, there is no evidence that your claim was so lacking in substance that the payment could only have been made for the discontinuance supply. Therefore, there is no nexus between the payment and any discontinuance supply.

Paragraph 73 of GSTR 2001/4 states:

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.

As there is no nexus between the payment and any supply by you, we consider that the payment is for damages. As damages is not considered to be a supply the payment you received is not consideration for any supply whatsoever.

Therefore as you have not made a supply, you have not made a taxable supply pursuant to section 9-5 of the GST Act.