Edited version of private advice

Authorisation Number: 1052135626567

Date of advice: 3 July 2023

Ruling

Subject: Input tax credit entitlement for an out-of-court-settlement payment

Question 1

Did Entity A (you) make a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) upon payment of the settlement sum to Entities B and C, under the settlement deed (Deed) as described in the facts?

Answer

Yes, you made a creditable acquisition under section 11-5 of the GST Act upon payment of the settlement sum to Entities B and C under the Deed as described in the facts.

This private ruling applies from:

3 July 2023

Relevant facts and circumstances

You are an Australian company that has legal rights.

You carry on an enterprise of granting to others the rights.

You are registered for GST.

You are 100% owned by entity D.

You entered into Agreement 1 with Entities B and C (collectively the Entities) that gave the Entities rights.

The director of the Entities is an individual.

Entity B is registered for GST.

Entity C is registered for GST.

Entity D and others (Sellers) entered into Agreement 2 with entity E and others (Buyers).

The rights were part of the assets in Agreement 2.

In order to fulfil the Sellers' obligations under Agreement 2, you were required to buy back the rights.

Entities B and C and others and you and others engaged in negotiations over Agreement 3 under which the Entities would surrender their rights in exchange for payment.

Court proceedings were initiated.

Entities B and C and you agreed to settle the proceedings under the Deed.

The undissected settlement sum was paid by you to Entities B and C.

You have not claimed an input tax credit in respect of this amount.

You made written attempts to request a tax invoice.

No response was received.

Your acquisition of the surrender of Entities B and C's rights are made wholly for a creditable purpose.

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 9-10(2)

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Subsection 29-70(1B)

Reasons for Decision

Unless otherwise stated, all references are to the GST Act.

Summary

The terms of the Deed:

• created a current supply, being the surrender of the Entities' rights when Agreement 1 was terminated
• provided for the undissected payment of the settlement sum by you, and
• together with the terms of Agreement 3, indicate it is reasonable to conclude there is a nexus between the current supply of the surrender of the rights and the settlement sum. The settlement sum was paid in settlement of any amounts due and payable under Agreement 3, which provides that those amounts were for the Entities' surrender of their rights.

On the facts available and in the absence of evidence to the contrary, all the requirements for a creditable acquisition were met, including that there was a taxable supply of the surrender of the rights made to you.

As such, the settlement sum paid by you was consideration for a creditable acquisition under section 11-5 for which you were entitled to an input tax credit.

Having regard to the facts and circumstances, including that you made a creditable acquisition and reasonable attempts to obtain a tax invoice, and in the absence of evidence to the contrary, the discretion under subsection 29-70(1B) will be exercised to treat the Deed as a tax invoice for the Entities' supply of the surrender of the rights.

Detailed reasoning

Issue 1

Question 1

Creditable acquisition

Under section 11-20 you are entitled to an input tax credit for any creditable acquisition you make.

Section 11-5 provides that you make a creditable acquisition if:

•           you acquire anything solely or partly for a creditable purpose

•           the supply of the thing to you is a taxable supply

•           you provide, or are liable to provide, consideration for the supply, and

•           you are registered, or required to be registered for GST.

You make an acquisition for a creditable purpose to the extent that you acquire a thing in carrying on your enterprise, unless the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature.

On the facts provided, you paid the settlement sum to the Entities, you were registered for GST and any acquisition made by you under the Deed was made in the course of carrying on your enterprise and solely for a creditable purpose.

At issue under section 11-5 are:

• whether the settlement gives rise to a supply and corresponding acquisition for which the settlement sum is consideration, and
• if so, whether that supply was a taxable supply made to you.

The Entities would have made a taxable supply to you under section 9-5 if:

• they made the supply for consideration
• the supply was made in the course or furtherance of an enterprise that they carried on
• the supply was connected with the indirect tax zone, and
• they were registered or required to be registered for GST.

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

GSTR 2001/4

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) focuses on the first requirement of a taxable supply, that is, whether there is a 'supply for consideration' in relation to an out-of-court settlement. It outlines three categories of supplies related to out-of-court settlements:

• an earlier supply
• a current supply, and
• a discontinuance supply.

A current supply is a new supply that is created by the terms of the settlement.

Paragraphs 71 to 73 of GSTR 2001/4 refers to disputes over damages claims where the substance of the dispute, being the damage, loss or injury, cannot 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.

Paragraphs 110 and 111 of GSTR 2001/4 further provide that if a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, it will be treated as payment of the damages claim and will not be consideration for a supply at all. This is regardless of whether there is an identifiable discontinuance supply under the settlement.

Is there a supply?

'Supply' is defined in subsection 9-10(2) to include:

• a creation, grant, transfer, assignment or surrender of any right, or
• an entry into, or release from obligation

-       to do anything

-       to refrain from an act, or

-       to tolerate an act or situation.

The Deed provided for the termination of Agreement 1, creating a current supply of the surrender of the Entities' rights at this time. This meets the statutory definition of a supply under subsection 9-10(2).

The Deed also contains discontinuance supplies of the kind described in paragraphs 51 to 55 of GSTR 2001/4. The Deed includes releases with parties surrendering rights to discontinue further legal action and releasing other parties from obligations. These discontinuance actions are supplies for GST purposes.

Is there consideration?

Under subsection 9-15(1) consideration includes any payment in connection with or in response to or for the inducement of a supply of anything.

Section 9-15(2A) makes it clear that a payment made in compliance with a court order or with a settlement relating to proceedings before a court will not prevent it from being consideration for a supply.

Subsection 9-15(1) covers the undissected settlement sum paid by you to the Entities, pursuant to the Deed.

Which supply has a nexus with the settlement sum?

A sufficient nexus between the settlement sum and a supply must exist to create the 'supply for consideration' under paragraph 9-5(a). The test is an objective one.

Paragraph 96 of GSTR 2001/4 explains in determining whether a sufficient nexus exists between a supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised by looking at all the transactions entered into and the circumstances in which the transactions are made.

The Deed provides that the settlement sum is paid in full and final settlement of all amounts due and payable under Agreement 3. Amounts payable under Agreement 3 were for the Entities' surrender of their rights. These were surrendered pursuant to the Deed by it providing for the termination of Agreement 1 and thereby creating the current supply of the Entities' surrender of their rights.

Having regard for this and the true character of the transaction, it is reasonable to conclude there is a nexus between the current supply of the Entities' surrender of their rights and the settlement sum.

Discontinuance supplies

The Deed contains discontinuance actions that are supplies for GST purposes.

Generally, the terms of settlement in finalising a dispute will ensure no further legal action in relation to that dispute. As in this instance, this takes the form of the parties mutually releasing each other from all claims arising from or in relation to the subject matter of the proceedings and from further claims and obligations in relation to the dispute.

Paragraph 54 of GSTR 2001/4 advises that these conditions of settlement can create supplies for GST purposes including:

•         surrendering a right to pursue further legal action

•         entering into an obligation to refrain from further legal action, or

•         releasing another party from further obligations in relation to the dispute.

Paragraph 107 of GSTR 2001/4 explains that 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. The supply is in the nature of a term of the settlement rather than the subject of it. This means that a discontinuance supply will not be a taxable supply in these circumstances.

Under the terms of the Deed the discontinuance supplies do not have a separately ascribed value and are merely an inherent part of the legal machinery to add finality to the disputes. Therefore, none of the settlement sum has a nexus with the discontinuance supplies.

Other requirements of section 9-5

Although the Deed gives rise to a supply for consideration, for that supply to be a taxable supply made to you, the other requirements of section 9-5 must also be met:

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number advises at paragraph 140 that carrying on an enterprise includes doing anything in the course of the termination of the enterprise. Therefore, the supply of the surrender of the rights are made by the Entities in the course of carrying on their enterprises. This supply, that is not GST-free or input taxed, occurred in Australia when the Entities were registered for GST.

It is reasonable, on the facts available and in the absence of evidence to the contrary, to conclude that a taxable supply of the surrender of the rights was made by the Entities to you.

As a taxable supply was made to you, all the requirements of a creditable acquisition under section 11-5 were met by you upon payment of the settlement sum.