1 Is the out-of-court settlement received by AA Co pursuant to a Deed of Settlement executed on or about 28 March 2024 consideration for a supply?
1 No. Question 2 Does that out-of-court settlement give rise to an increasing adjustment pursuant to section 21-10 of the A New Tax System (Goods and Services Tax) Act 1999? Answer 2 No. This ruling applies for the following period: XX XXX XXXX to XX XXX XXXX The scheme commenced on: XX XXX XXXX
AA Co (AA) provides transport-related services in a region of Australia. AA entered into a written agreement to supply services to XY Co (XY). XY commenced legal proceedings (original proceedings) against AA by Claim and Statement of Claim seeking damages for breach of contract. AA filed an amended Defence and a Counterclaim with the court, seeking damages for wrongful termination and unpaid services. AA lodged a Proof of Debt in respect of its claim for damages for termination of contract for the amount of $X for loss of profits. XY was placed into administration, and it was replaced by VV Co (VV) as the recipient of the services that were supplied by AA. XY was called upon to transfer to VV various assets and the chose in action the subject of the original proceedings. Other legal proceedings were commenced, and other parties became involved (Other Parties). AA sought to amend its Proof of Debt. Before the consent of the liquidator of XY was obtained to do so, AA and the Other Parties concluded their negotiations to resolve the dispute and agreed to proceed with a settlement in the absence of XY and its liquidators. Accordingly, a Deed of Settlement was executed.
Under the terms of the Deed of Settlement: • VV paid a settlement sum of $Y to AA; • AA withdrew its proof of debt against XY relating to the damages for termination of contract; • AA and the Other Parties took all steps within their control to ensure that all proceedings; • the parties were released from all claims which they had in any way relation to any of the proceedings; and • AA covenanted that it would not bring or pursue a claim in respect of any matter which is the subject of the release, and provided an indemnity against any breach of that covenant. Prior to executing the Deed of Settlement, AA had written off debts owing by XY for unpaid services and made decreasing adjustments in respect of those write offs in accordance with section 21-5 of the GST Act.
A New Tax System (Goods and Services Tax) Act 1999 Division 9 A New Tax System (Goods and Services Tax) Act 1999 Division 21
A 'supply' for GST purposes is defined by subsection 9-10(1) of the GST Act to mean 'any form of supply whatsoever.' Without limiting that meaning, subsection 9-10(2) includes a number of specific acts in the meaning of 'supply'. For current purposes, the following included acts are relevant: (a) a creation, grant, transfer, assignment of surrender of any right (paragraph 9-10(2(e)); and (b) an entry into, or release from, an obligation to: (i) do anything; or (ii) refrain from an act; or (iii) tolerate an act of situation (paragraph 9-10(2)(g)). Our views on the GST consequences of out-of-court settlements are set out in Goods and Services Tax Ruling GSTR 2001/4 GST consequences of court orders and out-of-court settlements (GSTR 2001/4). As we note at paragraph 42 of GSTR 2001/4, it is our view that the statutory definition of 'supply' is very broad and that a supply referred to by any of the paragraphs to subsection 9-10(2) of the GST Act could be related to an out-of-court settlement.
Further, it is our view that there are three categories of supply related to out-of-court settlements, but that the existence of a particular supply in relation to a given out-of-court settlement will not necessarily mean a sufficient nexus exists between that supply and a payment made under the settlement (paragraph 44 of GSTR 2001/4). We discuss one of those categories of supply at paragraphs 50 to 55 of GSTR 2001/4 - a discontinuance supply. Specifically, at paragraph 54 of GSTR 2001/4, we state that a discontinuance supply may be characterised as: • surrendering a right to pursue further legal action (paragraph 9-10(2)(e) of the GST Act); or • entering into an obligation to refrain from further legal action (paragraph 9-10(2)(g)); or • releasing another party from further obligations in relation to the dispute (paragraph 9-10(2)(g)).
You submitted, and we accept, that AA made a supply pursuant to the Deed of Settlement, being a 'discontinuance supply'. You have also submitted that paragraph 111 of GSTR 2001/4 applies to the settlement entered into by AA, with the outcome that the settlement amount received by AA is not consideration for a supply at all, regardless of the fact AA can be said to have made a discontinuance supply. We agree with that submission. In particular, and in reference to paragraph 111, we agree that AA: • did not make any supply (termed 'earlier supply') to any of the other parties to the Deed of Settlement other than the discontinuance supply; • did not make any supply (termed 'current supply') created by the terms of the Deed of Settlement; and • received the settlement sum of $X as a damages payment and not as consideration for the discontinuance supply. It is also our view that: • the indemnity and covenant provided by AA under the terms of the Deed of Settlement were ancillary and 'part and parcel' of the discontinuance supply, similar to a 'no liability' clause (paragraph 108 of GSTR 2001/4); and that
• there is insufficient if not no evidence contained in the Deed of Settlement to indicate that the dispute which was the subject of AA's damages claim was so lacking in substance that the settlement payment could only have been made for the discontinuance supply (paragraph 109 of GSTR 2001/4). As such, in respect of Question 1, it is our view that there was an insufficient nexus between the settlement payment and the discontinuance supply. Accordingly, there was no taxable supply made by AA on the execution of the Deed of Settlement. In respect of Question 2, you submitted, and we accept, that AA did not recover from XY any amount of the written-off debts, and that the settlement payment was in respect of damages claimed by AA for termination of its contract. On that basis alone, there arises no obligation to make an increasing adjustment in respect of the settlement payment under section 21-10 of the GST Act. Furthermore, at paragraph 132 of GSTR 2001/4, we state that no adjustment is required in respect of a settlement payment made pursuant to an out-of-court settlement where, among other things, the payment is not consideration for a supply.
Thus, there is no increasing adjustment to be made by AA in respect of the settlement payment.