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Edited version of your written advice
Authorisation Number: 1012854217884
Date of advice: 5 August 2015
Ruling
Subject: GST and input tax credits
Question
Are you entitled to claim input tax credits for the payment that you made in compliance with a court order?
Answer
No. You are not entitled to claim input tax credits for the payment that you made in compliance with a court order as the payment is not consideration for a supply.
Relevant facts and circumstances
You are registered for goods and services tax (GST).
A former employee took you to court for a dispute. The former employee won the case and, in compliance with the court order, you made a payment to reimburse the former employee for their legal costs.
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 9-15 and
A New Tax System (Goods and Services Tax) Act 1999 section 11-5.
Reasons for decision
Creditable acquisitions give rise to entitlement to input tax credits.
Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:
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.
(* denotes a term defined under section 195-1 of the GST Act)
For the purpose of section 11-5 of the GST Act, you make an acquisition if you are the recipient of a supply; and that supply must be a taxable supply. An entity does not make an acquisition merely by paying for a supply. Therefore, it must be determined first whether the payment that you made, in compliance with the court order is for a supply that you acquired.
Goods and Services Tax Ruling GSTR 2001/4 considers the GST consequences resulting from court orders and out-of-court settlements. It explains how a payment that is made in compliance with a court order or out-of-court settlement should be treated for GST purposes.
Paragraph 145 of GSTR 2001/4 provides that, when a dispute is finalised either by a court giving judgment or through negotiation of a settlement, the unsuccessful party in the action may be required to pay the costs or part of the costs incurred by the successful party in bringing or defending the claim. These costs, referred to as party costs, could include barrister's fees, solicitor's costs, fees for various expert reports and court costs.
According to paragraphs 148 and 149 of GSTR 2001/4, where the payment of costs is made under the court order or settlement, there is no supply for consideration from the successful party to the unsuccessful party. This is essentially paying compensation for costs or losses incurred in the dispute and will be treated in the same manner as damages. It does not matter that the payment of the costs order or settled amount is made by an entity other than the unsuccessful party.
You advised that you were ordered to make a payment to reimburse the legal costs incurred by the former employee. The payment that you made in compliance with the court order is not consideration for a supply that you acquired. Therefore, you are not entitled to claim input tax credits for the payment.