Edited version of private advice

Authorisation Number: 1052307802586

Date of advice: 19 September 2024

Ruling

Subject: GST and out-of-court settlement

Question 1

Is the out-of-court settlement sum payable to you by another entity consideration for a supply and therefore a taxable supply?

Answer 1

No. Your out-of-court settlement sum is not consideration for a supply. You have therefore not made a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You had an agreement with another entity to agist animals on their property.

You suffered loss and damage due to breaches by the other entity under the agreement.

You and the other entity agreed to settle the proceedings under a Deed.

The other entity agreed to pay a settlement sum to you.

Neither party made an admission of liability.

Each party released and discharged the other party from future claims in relation to the dispute.

Each party paid their own costs.

A notice of discontinuance was filed with the court.

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 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supply that you make.

Section 9-5 of the GST Act states"

You make a taxable supply if:

(a)           you make a 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 taxable to the extent that it is GST-free or input taxed.

Goods and Services Tax Ruling 2001/4 Goods and services tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) considers the GST consequences resulting from court orders and out-of-court settlements and whether a supply for consideration is made in the context of an out-of-court settlement. It provides that an out-of-court settlement will include any form of dispute in which the terms of the resolution are agreed between the parties rather than imposed by the court. Given this, the Deed between you and the other entity is an out-of-court settlement for the purposes of GSTR 2001/4.

We need to determine whether the payments made by the other entity under the Deed are consideration for a supply made by you, and if so, whether the supply is taxable under section 9-5 of the GST Act.

Under paragraph 21 of GSTR 2001/4, the following three fundamental criteria must be met for there to be a supply for consideration:

•                     there must be a supply

•                     there must be a payment, and

•                     there must be sufficient nexus between the supply and the payment for it to be a supply for consideration.

Supply

'Supply' is defined in subsection 9-10(1) of the GST Act 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 related to an out-of-court settlement fall within three categories of supply, namely:

•                     earlier supply

•                     current supply, or

•                     discontinuance 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.

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

We do not consider that the dispute between you and the other entity relates to an earlier supply. Neither has a new supply been created as a consequence of the terms of the Deed.

Discontinuance Supply

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

•                     surrendering a right to pursue further legal action

•                     entering into an obligation to refrain from further legal action

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

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

Consideration

Section 9-15 of the GST Act 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 payment received was in connection with, or in response to, or for the inducement of, the discontinuance supply. That is, you are giving up your right to further claims against the other entity.

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 payment received by you.

Paragraph 106 of GSTR 2001/4 states:

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.

Further to this, paragraph 109 of GSTR 2001/4 explains that:

109. A payment made under a settlement deed may have a nexus with a discontinuance supply, only if there is overwhelming evidence that the claim is so lacking in substance that the payment could only have been made for the discontinuance supply.

In view of the above, we consider the settlement sum you received is for damages and has no nexus with the discontinuance supply provided in the Deed.

Further to this, paragraph 111 of GSTR 2001/4 also provides that claims for damages are not supplies under 9-10 of the GST Act.

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 you is not consideration for the discontinuance supply. As a result, all the elements of section 9-5 of the GST Act have not been satisfied and you are not making a taxable supply as the Settlement sum is not consideration for any supply.