one Is the payment under the Agreement (the Payment) consideration for Party 1 entry into obligations (Obligations) for the benefit of Party 2?
No. Question two Is the supply made by Party 1 to Party 2 in consideration of the Payment a GST-free supply under item 2(b) of the table in subsection 38-190(1)? Answer No. Question three Is the acquisition of the Obligations by Party 2 from Party 1 in consideration of the Payment a creditable cquisition under section 11-5? Answer No. This ruling applies for the following : 30 January 20YY to 29 January 20YY The scheme commenced on: 30 January 20YY
Party 1 is a company operating a shop under a franchising agreement and is registered for GST Party 2 is a company incorporated in another country and is not registered for GST in Australia. The Parties signed a franchising agreement (Franchise Agreement) whereby Party 1 resold Party 2 branded products at the Property on XX month XXX year XXXX. The Property was leased to another entity by Party 1. The Parties signed a Memorandum of Understanding (MoU) on XX month XXX year XXXX to facilitate the proposed entry into the lease over the Property by a new third party lessee and the termination of the franchising agreement. The terms related to the financial proposal included the words "consideration for the lease transfer and buyout" of a sum of $XXX "excluding GST if applicable" The Parties agreed, subject to the successful completion of the transfer of the lease, to settle and waive any claims, actions, and/or demands related to or arising from the execution and termination of the Franchising Agreement.
A commercial dispute subsequently arose between the Parties with intimation of legal action, including but not limited to seeking injunctive relief, damages, and the recovery of legal costs incurred. The arrangements under the MoU were not followed through. Subsequently, the Parties entered into a Private Agreement (Agreement) "to reach a settlement agreement" (Clause X) that contained obligations including: (a) commitment of Party 1 to ensure continuity in managing the Property until a lease agreement with a third party is signed; (b) the surrender of the current lease; (c) Party 2 agreeing to pay to Party 1 an amount of $XXX as 'key money'; (d) Certain rent payments to be borne by Party 2 and the new third party lessee; (e) both Parties agreeing to the early and mutual surrender of the franchising agreement, along with releasing each other from any disputes, claims, actions or demands arising from or in connection with the franchising agreement. In the Recitals, the document describes the agreement as a "settlement agreement" and states:
By concluding and properly executing this Agreement, the Parties, within their respective spheres of responsibility, declare their intention to settle (and indeed do settle) all disputes that have arisen, as outlined in the Recitals, and, more broadly, any possible and potential disputes connected to the Franchise Agreement and the relationships between them arising from its execution. With regards to the lease agreement between the new third party lessee and Party 2, Party 1 agreed to: • terminate the existing lease arrangement; • terminate all employment relationships with the staff; • provide Party 2 with a statement that no amount and/or claim may be asserted against Party 2 with respect to certain payments to staff and suppliers Party 1 issued a tax invoice to Party 2 in respect of the Payment. The document shows a 10% GST amount. However, the Notes on the tax invoice confirm that GST was not applied. A payment of $XXX was made by Party 2 to Party 1 on XX month XXX year XXX. The amount paid did not include any amount on account of GST
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 9-15 A New Tax System (Goods and Services Tax) Act 1999 Section 9-17 A New Tax System (Goods and Services Tax) Act 1999 Section 11-5
Consideration 'for a supply or acquisition' is defined in section 195 as any consideration within the meaning given by sections 9-15 and 9-17, which is 'in connection with the supply or acquisition'. Section 9-17 provides that certain payments and other things are not consideration and includes the right or option to acquire things. As the Payment is not excluded under section 9-17, we must examine whether there is a sufficient nexus between the Payment and the supply. Of relevance in this case, is whether the Payment is made in the context of an out-of-court-settlement. 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.
Paragraph 13 explains that matters in dispute may be resolved either by the judgement of a court, or by agreement between the parties - referred to as an out-of-court settlement. Out-of-court settlements will include any form of dispute resolution in which the terms of the resolution are agreed between the parties, rather than imposed by the court. An example of this is where they enter into an agreement settling their differences before court action commences. The facts of the case support the conclusion that the Payment was made in the context of an out-of-court settlement. We now need to determine whether the Payment under the Private Agreement is consideration for a supply. Paragraph 19 of GSTR 2001/4 states: "... a supply for consideration will not be a taxable supply unless the other requirements set out in section 9.5 are also satisfied. For example, many settlements will not result in a taxable supply because the entity making the supply will not be doing so in the course or furtherance of an enterprise." 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) 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 instructs that supplies related to an out-of-court settlement fall within three categories of supply, namely: • earlier supply • current supply, or • discontinuance supply It further explains that the existence of a particular supply in relation to a given settlement will not necessarily mean a sufficient nexus exists between the supply and a payment made under the settlement. Earlier 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. An example is provided at paragraph 47 of GSTR 2001/4 as follows:
Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is 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. Current Supply A current supply is a new supply that is created by virtue of the settlement. An example is also provided at paragraph 49 of GSTR 2001/4, as follows: A dispute arises over a claim by Beaut Enterprises Pty Ltd that Plagiariser Pty Ltd is using their trade name. Negotiations between the parties follow, resulting in Beaut entering into an agreement with Plagiariser that allows Plagiariser to use its trade name in the future. This would constitute the supply of a right under the agreement between Beaut and Plagiariser that amounts to a 'current' supply . We do not consider that the settlement relates to an earlier supply. Neither has a new supply been created as a consequence of the terms of the Private Agreement. 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 provide 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. Consideration In determining whether the Payment satisfies the requirements of subsection 9-15(1), the test is whether there is a sufficient nexus between a discontinuance supply and the payment made exists to create the 'supply for consideration' relationship. 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. 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. Paragraph 111 states further: 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.
It is the Commissioner's view, the Payment made under the agreement relates to damages. As such, a sufficient nexus does not exist between a discontinuance supply and the Payment and it is, therefore, not a supply for consideration. Section 9-5 provides that 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 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. As discussed above, the Payment is considered to be an out-of-court settlement where a sufficient nexus did not exist between a discontinuance supply and the Payment made. Accordingly, all the elements of section 9-5 have not been satisfied and the Payment is not a taxable supply. Therefore, there is no requirement to examine whether the supply is GST-free under subsection 38-190(1). Section 11-5 provides that you make a creditable acquisition if:
(a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and you are 8registered, or *required to be registered. (d) In view of the decisions above, all the elements of section 9-5 have not been satisfied and the Payment was not a taxable supply. Therefore, all of the elements of section 11-5 have not been met and the Payment will not be a creditable acquisition under section 11-5.