Edited version of private advice

Authorisation Number: 1051919164314

Date of advice: 7 January 2022

Ruling

Subject: GST - settlement sum

Question 1

Was the Settlement Sum paid by entity B consideration for a taxable supply under section 9-5 of the GST Act?

Answer

No, the Settlement Sum paid by entity B was not consideration for a taxable supply under section 9-5 of the GST Act.

Question 2

Did entity B make a creditable acquisition in respect of the Settlement Sum paid to entity A pursuant to section 11-5 of the GST Act?

Answer

Yes, entity B did make a creditable acquisition in respect of the Settlement Sum paid to entity A pursuant to section 11-5 of the GST Act.

Relevant facts and circumstances

Services Agreement

Entity B is an Australian holding company.

Entity C was a wholly owned subsidiary of Entity B.

Entity B and Entity C were members of a GST Group of which Entity B was the nominated representative of the GST Group. Entity B and Entity C are no longer members of the same GST Group.

Entity C retained the services of Entity A to provide services (Services agreement).

Dispute and Settlement

There was a dispute between the parties. It was settled via a Settlement Deed where Entity B paid an amount to Entity A.

Reasons for decision

Question 1

A supply is a taxable supply under section 9-5, if amongst other things, the supply is made for consideration. The term 'consideration' is defined in section 195-1 as follows:

consideration, for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition.

Under section 9-15, consideration includes any payment in connection with a supply of anything and any payment in response to or for the inducement of a supply of anything.

The requirement in paragraph 9-5(a) that a supply is made for consideration, means that it will not be sufficient merely that there is a supply and a payment. The supply must be made for consideration.

The Commissioner considers the character of the Settlement Sum to be that of damages and as such was not consideration for a supply made to you.

Therefore, the Settlement Sum was not consideration for a taxable supply under section 9-5.

Question 2

Section 11-5 sets out the requirements for a creditable acquisition.

An entity makes a creditable acquisition if:

a)    it acquires anything solely or partly for a creditable purpose

b)    the supply of the thing to the entity is a taxable supply

c)    it provides, or is liable to provide, consideration for the supply, and

d)    it is registered or required to be registered for GST.

Entity A's assessed net amount for the xxxx tax period includes an amount of excess GST. Under section 142-10, excess GST that was passed on to entity B is taken to have always been payable and on a taxable supply until entity A reimburses entity B for the passed-on GST.

Note 3 of section 142-10 states that "while this section applies, paragraph 11-5(b) (about taxable supplies) is satisfied for the corresponding acquisition by the other entity."

Although Note 3 refers only to paragraph 11-5(b), read in context of Division 142 and the GST Act as a whole and the overall purpose of the GST Act, the inclusion of Note 3 is intended to protect the position of the recipient in respect of its entitlement to input tax credits and to preserve the scheme of the GST Act. As such, if there is a deemed taxable supply, there is a deemed creditable acquisition and by implication it would not have the intended result if the other elements in paragraphs (a) and (c) of section 11-5 were not also satisfied. To read Note 3 in any other way, or to limit it to only paragraph 11-5(b), would result in a construction of the section that does not respect the context and purpose of Division 142, and the GST Act as a whole.

Entity B was registered for GST at the time of payment of the Settlement Sum, so paragraph 11-5(d) is satisfied.

Therefore, provided Division 142-10 remains operative, a taxable supply is "deemed" to have been made and a corresponding creditable acquisition materialises for the recipient under section 11-5.

In this case entity B remains entitled to claim the input tax credit unless entity A reimburses the passed-on excess GST and becomes entitled to a refund from the Commissioner in accordance with subsection 142-15(3).

There is nothing in Division 142 that requires entity A reimburse entity B for the passed-on excess GST.