Edited version of private advice

Authorisation Number: 1051923350922

Date of advice: 16 November 2021

Ruling

Subject: GST on out of court settlement

Question

Is the receipt of money under the Deed of Settlement and Release (the Deed) as settlement of a legal matter, consideration for a taxable supply under section 9-5 of the GST Act whereby the Taxpayer will be liable to remit GST?

Answer

No.

The scheme commences on:

16 November 20XX

Relevant facts and circumstances

The Former Advisor was employed by the Taxpayer under an agreement.

The employment agreement included several restraints that the Former Advisor was to agree to abide by.

The Former Advisor resigned. The Former Adviser was to commence employment with another accounting firm.

The Former Advisor and the Taxpayer subsequently became involved in a dispute regarding a breach of the employment agreement.

The Taxpayer, and the Former Advisor and their new employer agreed to resolve that allegation pursuant to the terms of the Deed.

The key settlement terms of the Deed were as follows:

•         The Former Advisor and/or their new employer agreed to pay the Taxpayer $XXX (the Settlement Sum).

•         Schedule A to the deed shows that this was calculated as XX% of the recent annual fees of the clients who had moved from the Taxpayer's firm to the Former Advisor's new firm.

•         It was agreed that additional amounts would thereafter be payable by the Former Advisor and/or their new employer to the Taxpayer if any more clients moved to the Former Advisor's new firm. These would be calculated at XX% of the recent annual fees.

•         The Taxpayer agreed that it will transfer the relevant client files to the Former Advisor's new firm following the amounts being paid to the Taxpayer.

The Settlement Sum was received by the Taxpayer.

Relevant legislative provisions

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

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

Reasons for decision

All legislative references in this private ruling are to the A New Tax System (Goods and Services Tax) Act 1999.

Detailed reasoning

Under section 9-5 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 for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Subsection 9-10(1) defines a supply as any form of supply whatsoever. Subsection 9-10(2) further includes any of this:

(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;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Section 9-15 defines consideration to include:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the * recipient of the supply.

Relevant to your facts, section 9-15 (2A) states that 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.

As there were no supplies made and the requirements in section 9-5 and 9-10 were not met, it follows that GST will not be payable on the consideration (Section 9-15) by the Taxpayer.

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) explains the circumstances in which, because there is a link or nexus between a payment (or act or forbearance) and a supply, the payment represents consideration for a supply.

Paragraph 13 of GSTR 2001/4 states that matters in dispute may be resolved either by the judgment of a court, or (at a time prior to the court delivering its judgment) by agreement between the parties. An agreement between the parties is referred to in this Ruling as an out-of-court settlement. Out-of-court settlements will include any form of dispute resolution in which the terms of the resolution are agreed between the parties, rather than imposed by the court. Some examples of this are:

(i) the parties obtain a consent order, the draft of which has been agreed to in a settlement deed;

(ii) they agree to have the action struck out without a consent order;

(iii) they enter into an agreement settling their differences before court action commences.

Paragraph 13(iii) in GSTR 2001/4 applies to the Taxpayer having entered into the Deed as an agreement settling the dispute with the Former Advisor.

Paragraph 21 states that for there to be a supply for consideration, three fundamental 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.

Paragraph 36 states that under the GST Act, there will be no GST on a supply unless it is a taxable supply. Whether the supply would be a taxable supply would then depend on the requirements of section 9-5 being met in relation to that supply.

Paragraph 73 states that 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 the amount received by the Taxpayer was for the damages arising out of the breach of the employment agreement this does not constitute a supply under section 9-10 of the GST Act. It follows that GST does not apply to the consideration paid to the Taxpayer.