Edited version of your private ruling

Authorisation Number: 1051607889664

Ruling

Subject: GST and settlement amount under a Settlement Deed

Question

Are you entitled to claim input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 on the Settlement Amount made under the Settlement Deed?

Decision

No. You are not entitled to claim input tax credits on any GST included in the Settlement Amount made under the Settlement Deed.

Relevant facts and circumstances

In the course of carrying on your enterprise you make input taxed supplies.

A third party claimed that loan repayments that you have received from a particular borrower of a loan that you have made to, should've been made to the third party and not you.

You disputed this claim made by the third party.

You entered into an out of court settlement (Settlement Deed) to settle this dispute.

You paid a Settlement Amount under the Settlement Deed for a discontinuance supply.

Relevant legislative provisions

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

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides:

You are entitled to the input tax credit for any * creditable acquisition that you make.

(terms marked with asterisks (*) defined in section 195-1 of the GST Act)

Therefore in order to decide whether you are entitled to claim any input tax credits on the Settlement Amount it must be decided whether you made a creditable acquisition of anything under the Settlement Deed.

A creditable acquisition is defined in section 11-5 of the GST Act as follows:

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.

The following is a discussion of the requirements in section 11-5 of the GST Act.

Acquisition

Goods and services tax ruling Goods and Services Tax: supplies (GSTR 2006/9) states:

53.   The meaning of 'acquisition' in section 11-10 is the corollary of the meaning of supply in section 9-10. Subsection 11-10(1) provides that, 'An acquisition is any form of acquisition whatsoever'. Subsection 11-10(2) refers to the thing acquired, such as goods, services or a right, and the means by which the thing is acquired, such as its receipt or acceptance.

54.   To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.

55.   The supplier and the recipient have to be different entities because an entity cannot make a supply to itself.20 Also, the recipient has to be identified, as you cannot make a supply to the world at large.21 However, a supply can be made for no consideration.

What needs to be determined is whether a supply has been made to you (that is: whether you were the recipient of a supply) under the Settlement Deed for which the Settlement Amount paid by you was the consideration.

The Commissioner's views are presented in goods and services tax ruling Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4).

What is a 'supply'?

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

23.   'Supply' is defined in subsection 9-10(1) as 'any form of supply whatsoever'. In the UK the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve'.6 Similarly, the definition of 'supply' in the Macquarie Dictionary is 'to furnish or provide (something wanting or requisite: to supply electricity to a community)'. The term refers to things passing from one party to another.

....

'Supplies' related to an out-of-court settlement

42.   The statutory definition of 'supply' is very broad. In the context of an out-of-court settlement, a supply referred to under any of the paragraphs within subsection 9-10(2) could be related to an out-of-court settlement.

43.   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), or it may be created by the terms of the settlement itself. There may be more than one supply that is related to a settlement. In addition, the subject of the dispute may not be a supply at all (refer paragraph 71).

44.   For the purposes of this Ruling, supplies that are related to an out-of-court settlement fall within the three categories of supply described below. This characterisation assists in the subsequent analysis of consideration for a supply, which commences at paragraph 100. The existence of a particular supply in relation to a given settlement will not necessarily mean a sufficient nexus exists between that supply and a payment made under the settlement.

Earlier supply

45.   Each and every supply is subject to GST provided the supply satisfies the requirements of a taxable supply26. The GST Act does not prescribe any sequencing or hierarchy of supplies for taxing purposes. GST becomes payable on the relevant supply.

46.   In these circumstances, where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to in this ruling as an 'earlier supply'.

.....

Current supply

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'.

.....

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.

The supply made under the Settlement Deed in this case was a discontinuance supply.

Creditable purpose

Where an acquisition relates to making of an input taxed supply the acquisition is not considered for a creditable purpose. Given that the reason for entering into the Settlement Deed was as a result of making an input taxed supply of a loan it is the Commissioner's view that the acquisition of the discontinuance supply is directly related to making this supply. As such you have not made the acquisition of the discontinuance supply made under the Settlement Deed for a creditable purpose.

Taxable supply

A taxable supply is defined in section 9-5 of the GST Act as follows:

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 the indirect tax zone; 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.

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;

(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.

Considering the circumstances under which the Settlement Deed has been entered into and the terms and conditions of the Settlement Deed, it is our view that where the following requirements are satisfied, the discontinuance supply made under the Settlement Deed is a taxable supply. The requirements are:

·        the supplier made the supply to you in the course or furtherance of an enterprise that they carried on,

·        the supplier was or was required to be registered for GST at the time of making the supply.

Tax invoice

Where the supply made under the Settlement Deed is a taxable supply a tax invoice is required to be issued within 28 days of the recipient/s of the supply making a request.

Consideration

You were liable to pay the Settlement Amount

Registration

You are registered for GST.

Conclusion

As you have not acquired the discontinuance supply under the Settlement Deed for a creditable purpose, the acquisition of this supply by you is not a creditable acquisition. Accordingly you are entitled to claim any input tax credits of any GST included in the price of the discontinuance supply made under the Settlement Deed.