Edited version of your written advice

Authorisation Number: 1012828860891

Date of advice: 25 June 2015

Ruling

Subject: Goods and Services Tax (GST) and Court Order

Question 1

Can a payment under an order of a tribunal in respect of a damages claim be reclassified as a 'taxable supply' under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and subject to goods and services tax (GST)?

Answer

No. The payment under an order of a tribunal in respect of a damages claim cannot be reclassified as a 'taxable supply' under section 9-5 of the GST Act, and will not be subject to GST.

Relevant facts and circumstances

The parties

You are an Australian company registered for GST.

You entered into a contract with the applicant.

As a consequence of various events, the contract between you and the applicant came to an end.

Tribunal proceedings

The applicant then commenced proceedings against you seeking damages for breach of contract.

The orders

The application was upheld in part.

You were ordered to pay the applicant a sum of $xx,xxx by way of damages.

Ruling request

You lodged a request for a GST private ruling confirming whether the $xx,xxx that you have been ordered to pay in the dispute, be classified as a taxable supply rather than damages, in order to claim GST.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-15 and

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

Reasons for decision

Summary

The payment under an order of a tribunal in respect of a damages claim cannot be reclassified as a 'taxable supply' under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and will not be subject to goods and services tax (GST).

Detailed reasoning

Section 7-1 of the GST Act, provides that GST is payable on taxable supplies. For a supply to be a taxable supply, it must meet the requirements of section 9-5 of the GST Act, which states that:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course of 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.

(The asterisks indicate terms defined under section 195-1 of the GST Act).

The GST treatment of compensation for damages depends primarily on whether the payment represents consideration that has the relevant connection with a supply. Therefore, the starting point in determining the GST treatment of the payment is whether the first test above is satisfied; that is a supply for consideration.

Is there a supply made for consideration?

'Consideration' is defined in section 9-15 of the GST Act to include any payment in connection with, in response to, or for the inducement of a supply of anything. Subsection 9-15(2A) states:

It does not matter:

(a) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or

(b) whether the payment, act or forbearance was in compliance with a settlement relating to proceedings before a court, or before a tribunal or other body that has the power to make orders.

Goods and Services Tax Ruling GSTR 2001/4:Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) deals with the GST consequences of court orders and out of court settlements and discusses subsection 9-15(2A) as follows:

99. This provision negates any argument that the characterisation of a payment according to section 9-15 either as consideration for a supply or otherwise could be affected by the payment being made in compliance with a court order or settlement relating to proceedings before a court.

There must be a sufficient nexus between a payment made under an order of a court and a supply to create the 'supply for consideration' relationship. Our view on whether such a relationship exists is set out in GSTR 2001/4.

Where the subject of the claim is a supply

Paragraphs 101 to 109 of GSTR 2001/4 describes:

an 'earlier supply' (i.e. a supply that occurs before a dispute arises and is the subject of the dispute);

a 'current supply' (i.e. a supply that occurs as part of resolution of a dispute); and

a 'discontinuance supply' (e.g. a plaintiff releasing a defendant from all future claims)

and states that an earlier supply may be the subject of a dispute resolved by court order, a current supply may arise as a result of a court order, e.g. transferring assets to another entity pursuant to a court order (Para 68), but that there is no discontinuance supply in relation to a dispute resolved by court order because the court order settles the dispute without either party surrendering a right, entering into an obligation or releasing another party from obligations (Para 69).

Where the subject of the claim is not a supply

Paragraphs 71 to 73 of GSTR 2001/4 deal with the issue 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.

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 damages, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.

Further, paragraph 110 of GSTR 2001/4 explains that a payment made under a court order which is wholly in respect of a damages claim will not be consideration for a supply:

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.

You have advised that you were ordered to pay a sum of $xx,xxx by way of damages. The payment does not constitute consideration for a supply. This is because the claim for damages cannot be characterised as a supply under the GST legislation. As there is no supply in your case, it follows that there is no taxable supply.

Conclusion

The payment awarded to the applicant under an order of a tribunal is not consideration for a supply. Therefore, there is no taxable supply under the GST legislation. Accordingly, there were no GST consequences when the compensation payment was awarded under an order of the tribunal.