Edited version of private advice

Authorisation Number: 1052341915059

Date of advice: 10 December 2024

Ruling

Subject: GST - out of court settlement

Question 1

Did you make a supply under section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to the Terms of Settlement and Release (Settlement Deed)?

Answer

Yes.

Question 2

Did you make a taxable supply under section 9-5 of the GST Act in relation to the Settlement Deed?

Answer

No.

This ruling applies for the following periods:

1 July 2024 to 30 June 2028

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

You are a pension fund. You are not a resident of Australia for Australian income tax purposes and are not registered for GST.

You entered into a loan arrangement (the Loan Arrangement) with company X.

Company X is an Australian private company and is registered for GST.

Company X breached its repayment obligations to you under the Loan Arrangement. As a result, in consideration for you not to immediately enforce your rights against Company X, Company X provided additional security to you.

One form of security provided by Company X to you was the granting of rights over a commission fee that would become payable by Company A to Company X pursuant to a written mandate letter between Company A and Company X.

You, Company X and Company A entered into a Deed of Irrevocable Payment Direction (Payment Direction Deed) whereby, among other things, Company X directed Company A to pay all amounts due to Company X under the terms of the Mandate Letter, to you, including the Commission.

Company X identified and referred Trust B an Investments Discretionary Trust to Company A and Company A and Trust B entered into a Property Services Agreement.

Company A initiated proceedings in the Supreme Court against Trust B.

Trust B issued a counterclaim against Company A alleging it was not liable to pay the commission fee to Company A. Due to allegations raised in Trust B defence and the counterclaim allegations, issues arose to the liability of Company A to pay Company X the commission to you.

The parties (You, Company A and Trust B) reached an out of court settlement in relation to the supreme court proceedings, resulting in the following outcome:

•         it was agreed that Trust B would pay Company A an amount and

•         under the Terms of Settlement and Release Deed (Deed) between Company A and you it was agreed that Company A would pay you an amount within 7 days of Company A receiving the Trust B Settlement Amount

Clause 3 of The Deed states:

Upon payment of the Settlement Sum, each Party "unconditionally and irrevocably release and forever discharge each other Party from and against all Claims which they now or at any time hereafter may have, wherever and whenever arising, whether known or unknown at the time of execution, whether or not presently in contemplation of the Parties, in connection with any Claim, the Proceedings or their subject matter".

In turn, "Claim" is defined in clause 1.1 of the Settlement Deed to include:

"any claim, demand, complaint, cause of action, cross-claim (or counter-claim), action, suit or proceeding, whether present or contingent, which the Parties have or may have had in relation to the Proceeding (either directly or indirectly), but for the execution of this Agreement, other than in respect of enforcing the terms of this Agreement".

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)(g)

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Question 1:

Did you make a supply under section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to the Terms of Settlement and Release (Settlement Deed)? Yes.

Section 9-5 of the GST Act states:

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 Australia; and

(d)  you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Asterisked items are defined in section 195-1 of the GST Act)

The GST consequences of a court order or an out-of-court settlement will depend on whether the payment made under an order or settlement constitutes consideration for a supply and, if so, whether the supply is in the nature of a taxable supply.

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) sets out the Commissioner's view on the GST consequences of court orders and out-of-court settlements. It analyses, amongst other things, the concept of supply and the nexus that must exist between a payment and a supply in order to establish the relationship of a supply for consideration.

Paragraph 21 of GSTR 2001/4 relevantly states:

21. A 'supply for consideration' is the first step towards there being a taxable supply. However, for there to be a supply for consideration, three fundamental criteria must be met:

(i)    there must be a supply...;

(ii) there must be a payment...; and

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

Essentially, a supply is something which passes from one entity to another. The supply may be one of particular goods, services or something else.

The term 'supply' is defined in section 9-10 of the GST Act as follows:

(1)  A supply is any form of supply whatsoever.

(2)  Without limiting subsection (1), supply includes any of these:

...

(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.

The definition of supply is broad and with respect to an out-of-court settlement could include any of the supplies referred to in subsection 9-10(2) of the GST Act.

GSTR 2001/4 explains that supplies related to out-of-court settlements fall within one of the following three categories:

•         earlier supply

•         current supply, or

•         discontinuance supply.

Paragraph 46 of GSTR 2001/4 provides that an 'earlier supply' is a supply that occurred before the dispute arose, and which is the subject of the dispute.

According to paragraph 48 of GSTR 2001/4, a 'current supply' is one that may be created by the terms of the settlement.

Paragraphs 51 and 54 of GSTR 2001/4 characterise a 'discontinuance supply' as:

•         surrendering a right to pursue further legal action (paragraph 9-10(2)(e) of the GST Act)

•         entering into an obligation to refrain from further legal action (paragraph 9-10(2)(g) of the GST Act), or

•         releasing another party from further obligations in relation to the dispute (paragraph 9-10(2)(g) of the GST Act).

In this case, Company A and you agreed to resolve the dispute on the terms of the settlement and release deed. In the full and final settlement of the proceeding, Company A agreed to pay a settlement sum to you.

On the facts provided, there are no supplies which would come within the scope of an earlier or current supply. Rather, the dispute was finalised pursuant to the Deed when each Party "unconditionally and irrevocably release and forever discharge each other Party from and against all Claims which they now or at any time hereafter may have, wherever and whenever arising, whether known or unknown at the time of execution, whether or not presently in contemplation of the Parties, in connection with any Claim, the Proceedings or their subject matter." Therefore, the only supply arising from the settlement of the dispute is in the nature of a discontinuance supply.

Question 2

Did XXXXX make a taxable supply under section 9-5 of the GST Act in relation to the Settlement Deed? No.

Whether a discontinuance supply is a taxable supply will depend on the requirements of section 9-5 being met in relation to that supply. The first requirement in section 9-5 of the GST Act is that the supply is made for consideration.

Therefore, it is necessary to establish whether there is a nexus between the settlement payment by Company A to you as provided for under the terms of the settlement and a discontinuance supply.

With regard to a discontinuance supply, paragraphs 106 to 109 of GSTR 2001/4 state:

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.

Further, the distinction between a damages claim and a discontinuance supply is explained at paragraphs 110 and 111 of GSTR 2001/4 which state:

110. With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the aggrieved party. If a payment made under a court order is wholly in respect of such a claim, the payment will not be consideration for a supply.

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.

In this case, there is no earlier or current supply. It is considered that the payment to be made under the Settlement deed by Company A is more in the nature of payment for damages rather than consideration for a discontinuance supply. That is, the payment was to settle the claim that you had made against Company A relating to the Commission (Third Party Claim). Prior to the settlement deed, you and Company A had no dealings other than being parties to the Payment Direction Deed. Therefore, the payment does not have sufficient nexus with a discontinuance supply.

As such, in accordance with paragraph 111 of GSTR 2001/4, the settlement is not consideration for a supply and paragraph 9-5(a) of the GST Act is not satisfied.

Consequently, GST is not payable on receipt of the settlement payment as a result of the out-of-court settlement.