Edited version of private advice

Authorisation Number: 1052299873599

Date of advice: 13 September 2024

Ruling

Subject: GST and claim for loss income

Question

Is the payment in settlement of your claim for consequential loss arising from an incident, consideration for a supply you make under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the payment in settlement of your claim for consequential loss arising from the incident is not consideration for a supply that you make under section 9-5 of the GST Act.

Relevant facts and circumstances

You are the owner of a motor vehicle (MV).

You carry on an enterprise that involves providing services in the indirect tax zone for consideration.

You are registered for goods and services tax.

You entered into an agreement to provide services.

Your MV was damaged in an accident whilst you were providing you services under the agreement. You made a claim for payment for the loss suffered by you from not being able to complete the agreement as a result of the accident in which your MV was damaged.

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

Reasons for decision

Section 9-40 provides that GST is payable on taxable supplies. Section 9-5 provides that you make a taxable supply if:

a)    you make the supply for consideration

b)    the supply is made in the course or furtherance of an enterprise that you carry on

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.

All the requirements in section 9-5 must be satisfied for there to be a taxable supply.

You are registered for GST and carry on an enterprise that involves making supplies of services in the indirect tax zone for consideration. The issue that arises under section 9-5 is whether any payment you receive in settlement of your claim is consideration for a supply made by you such that paragraph 9-5(a) is satisfied.

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 how a payment that is made in compliance with a court order or out of court settlement should be treated for the purposes of the GST Act. The GST consequences of court orders and out of court settlement will depend on a number of matters, including whether a payment made under the order or settlement constitutes consideration for a supply and, if so, whether the supply is in the nature of a taxable, input taxed, or GST-free supply.

In considering the GST consequences of court orders and out of court settlements, GSTR 2001/4 focusses on the 'supply for consideration' requirement of a taxable supply (paragraph 9-5(a)).

Paragraph 21 of GSTR 2001/4 provides that for there to be a supply for consideration, the following 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 payment.

Supply

The term supply is defined in section 9-10 to include any form of supply whatsoever and includes, amongst other things, a supply of goods, a supply of services, an entry into or release from an obligation to do anything or to tolerate an act or situation or any combination of the matters referred to in subsection 9-10(2).

GSTR 2001/4 explains that a supply related to an out of court settlement may have occurred prior to the settlement (and in fact has 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 or the subject of the dispute may not be a supply at all. Paragraph 44 of GSTR 2001/4 provides that supplies related to an out-of-court settlement fall within one of the following three categories:

•         earlier supply

•         current supply, and

•         discontinuance supply.

An earlier supply arises where the subject of the dispute in an earlier transaction in which a supply was made involving the parties. Paragraph 47 of GSTR 2001/4 provides an example of an earlier supply which involves a dispute between Widget Company and a retailer over payment for a supply of toys. It was 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.

A current supply is one that may be created by the terms of the court order or out-of-court settlement. Paragraph 49 of GSTR 2001/4 gives an example of a current supply which involves an agreement entered into between the parties to settle a dispute.

A discontinuance supply may be characterised as: 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.

However, the subject of a dispute may not be a supply at all (paragraph 43 of GSTR 2001/4).

Paragraph 71 of GSTR 2001/4 sets out examples of disputes arising over incidents that do not relate to a supply including 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. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy.

Paragraph 73 of GSTR 2001/4 also provides that the most common form of remedy is a claim for damages arising out of 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.

A sufficient nexus between a payment made under a court order or out of court settlement and a supply must exist to create the 'supply for consideration' relationship.

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.

Conclusion

Based on the information you provided, the payment in settlement of your claim are for the loss and damage you suffered as a result of the incident. As the loss and damage suffered by you is not itself a supply made by you, the payment to be made to you to resolve your damages claim is not, in the absence of an earlier or current supply, consideration for a supply under section 9-10.

As an essential requirement for a taxable supply (you make the supply for consideration) is not satisfied you will not be making a taxable a supply on which GST is payable on settlement of your claim for the consequential loss.