Edited version of private advice

Authorisation Number: 1052044703564

Date of advice: 15 November 2022

Ruling

Subject: GST and out of court settlement

Question 1

Is Entity A making a taxable supply to Entity B under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), pursuant to the Deed, for which the payment from Entity B is the consideration?

Answer

No, Entity A is not making a taxable supply to Entity B under section 9-5 of the GST Act pursuant to the Deed and therefore the payment is not consideration for any supply.

Question 2

If Entity A is making a taxable supply under section 9-5 of the GST Act, is Entity B entitled to an input tax credit under section 11-20 of the GST Act.

Answer

No, as Entity A is not making a taxable supply under section 9-5 of the GST Act, Entity B is not entitled to an input tax credit under section 11-20 of the GST Act.

Question 3

Is Entity A making a taxable supply to Entity B under section 9-5 of the GST Act, pursuant to the Nomination Deed dated 25 February 2021 (Nomination Deed), for which the payment from Entity B is the consideration?

Answer

Yes, Entity A is making a taxable supply to Entity B under section 9-5 of the GST Act, pursuant to the Nomination Deed for which the payment from Entity B is the consideration.

This ruling applies for the following period

1 July 20XX - 1 July 20XX

The scheme commences on:

XX XXX XXXX

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A entered into Put and Call Option Deeds for the acquisition of the Property.

Deed of Variations of the Put and Call Option Deeds were entered into.

Entity A Parties, entered into a Nomination Deed with Entity B and Entity C nominating another entity as the Nominee under the Put and Call Option Deeds.

Entity B did not successfully purchase the Property and the Contracts for Sale and Purchase of Land were terminated.

As Entity B did not purchase the Property, it was not developed. Consequently, the transfer of a unit valued at $X did not take place.

As the terms of the Nomination Deed were not satisfied and Entity B could not fulfil their obligations, a dispute arose between the Entity A Parties and Entity B in relation to the Nomination Deed.

On XX XXX XXXX, the Parties agreed to enter into a Settlement Deed - document provided.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Subsection 1

Section 9-5

Subsection 9-10(1)

Subsection 9-10(2)

Subparagraph 9-10(2)(e)

Subparagraph 9-10(2)(g)

Section 9-15

Section 9-40

Section 11-20

Reasons for decision

This is to explain how we reached our decision. This is not part of the private ruling.

Question 1

Is Entity A making a taxable supply to Entity B under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), pursuant to the Deed of Settlement and Release dated XX XXX XXXX (Deed of Settlement), for which the payment from Entity B is the consideration?

In this ruling,

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides that 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.

Of relevance in this case, is whether Entity A made a supply to Entity B for the $XX payment.

Whether a supply for consideration is made in the context of an out-of-court settlement is the subject of Goods and Services Tax: GST consequences of court orders and out-of-court settlements GSTR 2001/4.

Supply

'Supply' is defined in subsection 9-10(1) as 'any form of supply whatsoever'. The statutory definition of 'supply' is very broad. Essentially, a supply is something which passes from one entity to another, and may be one of goods, services or something else.

Paragraphs 44 to 49 of GSTR 2001/4 explain that supplies that are related to an out-of-court settlement fall within three categories of supply, namely:

•         earlier supply

•         current supply, and

•         discontinuance supply.

Earlier Supply

An earlier supply is one where the subject of the dispute is an earlier transaction in which a supply was made involving the parties. An example is provided at paragraph 47 of GSTR 2001/4 as follows:

Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settlement, with the retailer paying all monies owed. The supply of the toys, that is the subject of the dispute, is an earlier supply because it occurred before the dispute arose.

Current Supply

A current supply is a new supply that is created by virtue of the settlement. An example is also provided at paragraph 49 of GSTR 2001/4, as follows:

A dispute arises over a claim by Beaut Enterprises Pty Ltd that Plagiariser Pty Ltd is using their trade name. Negotiations between the parties follow, resulting in Beaut entering into an agreement with Plagiariser that allows Plagiariser to use its trade name in the future. This would constitute the supply of a right under the agreement between Beaut and Plagiariser that amounts to a 'current' supply.

Discontinuance Supply

A discontinuance supply is one that is created because the terms of the settlement exhibit the following characteristics:

(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)].

Paragraphs 51 and 52 of GSTR 2001/4 explain further:

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 the 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.

Paragraphs 71 and 73 of GSTR 2001/4 provides guidance 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.

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

Consideration

Section 9-15 provides that a payment will be consideration for a supply if the payment is 'in connection with' a supply and 'in response to' or 'for the inducement' of a supply. Thus, there must be sufficient nexus between a particular supply and a particular payment, which is provided for that supply, for there to be a supply for consideration.

Sufficient Nexus

In this case, a sufficient nexus will be established if the compensation paid was in connection with, or in response to, or for the inducement of, the discontinuance supply. That is, Entity A giving up their right to further claims against Entity B.

It is the Commissioners view, as expressed in paragraphs 106 to 109 of GSTR 2001/4, that sufficient nexus does not exist between a discontinuance supply and the compensation received by the aggrieved party, in this case, Entity A. These paragraphs state as follows:

106. Where the only supply in relation to an out-of-court settlement is a 'discontinuance' supply, it will typically be because the subject of the dispute is a damages claim. In such a case, the payment under the settlement would be in respect of that claim and not have a sufficient nexus with the discontinuance supply.

107. In most instances, a 'discontinuance' supply will not have a separately ascribed value and will merely be an inherent part of the legal machinery to add finality to a dispute which does not give rise to additional payment in its own right. They are in the nature of a term or condition of the settlement, rather than being the subject of the settlement.

108. We do not consider that the inclusion of a 'no liability' clause in a settlement deed alters this position. 'No liability' clauses are commonly included in settlement agreements and we do not consider their inclusion to alter the substance of the original dispute, or the reason payment is made.

109. We consider that a payment made under a settlement deed may have a nexus with a discontinuance supply only if there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply.

GSTR 2001/4 explains further at paragraph 110, that disputes over a damages claim will not constitute 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.

Paragraph 111 states further:

111.If a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement.

Therefore, the receipt of the Settlement sum by Entity A from Entity B is not a consideration for the discontinuance supply. As a result, all the elements of section 9-5 have not been satisfied and Entity A is not making a taxable supply to Entity B as for the Settlement sum, it is not consideration for any supply.

Question 2

If Entity A is making a taxable supply under section 9-5 of the GST Act, is Entity B entitled to an input tax credit under section 11-20 of the GST Act.

It has been established in Question 1 that Entity A is not making a taxable supply to Entity B as the Settlement sum is not consideration for any supply. Consequently, Entity B is not entitled to an input tax credit pursuant to section 11-20.

Question 3

Is Entity A making a taxable supply to Entity B under section 9-5 of the GST Act, pursuant to the Nomination Deed, for which the payment from Entity B is the consideration?

We need to establish whether all elements of a taxable supply under section 9-5 have been satisfied.

Supply for consideration

'Supply' is defined in subsection 9-10(1) as 'any form of supply whatsoever'. Subsection 9-10(2) provides a non-exhaustive list of activities or occurrences that are included in the meaning of supply. Subparagraph 9-10(2)(g) includes the following supply:

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.

Pursuant to the Nomination Deed, Entity A entered into an obligation to nominate Entity B as buyer under the Put and Call Option Deeds and to assign its right in the DA Consent and the plans on the terms set out in the Nomination Deed.

Consequently, Entity A made a supply to Entity B at the time the Nomination Deed was concluded.

Consideration is defined in section 195-1 to mean 'any consideration, within the meaning given by sections 9-15 and 9-7, in connection with the supply.

Section 9-15 further provides that a payment will be consideration for a supply if the payment is 'in connection with' a supply and 'in response to' or 'for the inducement' of a supply. Thus, there must be sufficient nexus between a particular supply and a particular payment, which is provided for that supply, for there to be a supply for consideration.

Conclusion

As Entity A made a supply for consideration of $XX, in the furtherance of its enterprise of property development, in Australia and is registered for GST, Entity A is making a taxable supply under section 9-5 to Entity B pursuant to the Nomination Deed. Further, the supply is neither GST-free or input taxed.