Did you make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) by entering into a deed of settlement and release with the other parties?
No. You did not make a taxable supply under section 9-5 of the GST Act because the payment under the deed is not consideration for any supply you made. This ruling applies for the following period : XX/XX/20XX to XX/XX/20XX The scheme commenced on: XX/XX/20XX
You have held an active Australian Business Number since XX/XX/20XX and have been registered for GST since XX/XX/20XX. You initiated legal proceedings against the other parties, alleging a breach of duty. You entered into a Deed of Settlement and Release (the Deed) with the other parties. The Deed provided that the other parties would make a payment to you and rectify the alleged breach of duty. The Deed also provided that all proceedings related to the alleged breach of duty would be mutually discontinued, and the parties would mutually release each other from liability.
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
Under section 9-5 of the GST Act, a supply is taxable if: (a) it is made for consideration; (b) it is made in the course or furtherance of an enterprise; (c) it is connected with the indirect tax zone; and (d) the supplier is registered or required to be registered. However, a supply is not taxable to the extent that it is GST-free or input taxed. GST Consequences of Settlements The GST consequences of out-of-court settlements are addressed in Goods and Services Tax Ruling GSTR 2001/4 Goods and services tax: GST consequences of court orders and out-of-court settlements . To determine whether the works or payment obligation agreed to by the other parties in favour of you is consideration for a supply, three criteria must be met (GSTR 2001/4, paragraph 21): • There must be a supply; • There must be a payment; • There must be a sufficient nexus between the supply and the payment. Supply Section 9-10 of the GST Act defines supply broadly to include goods, services, rights, obligations, and other forms of supply. This includes entering into or being released from an obligation to do, refrain from doing, or tolerate something.
Paragraphs 45 to 55 of GSTR 2001/4 categorises supplies in settlements as: • Earlier supply: arising from a prior transaction; • Current supply: created by the terms of settlement; • Discontinuance supply: arising from the release or surrender of legal rights. The dispute arose from alleged breaches of duty by the other parties. The payment provided by the Deed is not consideration for an earlier supply as it has no relationship with any supply. It is not a retrospective payment or adjustment. Accordingly, the payment is properly characterised as compensation for loss, and not as consideration for an earlier supply within the meaning of GSTR 2001/4. The Deed also does not create a current supply. While it includes an agreement to rectify the alleged breaches of duty, this obligation is a separate clause and is not linked to the monetary payment. There is no indication that the payment was made in exchange for the rectification. The Deed does not assign any value to, or adjustment of payment arising from, the rectification works, nor does it apportion payment across multiple obligations. The only other potential supply is a discontinuance supply. Discontinuance Supply
A discontinuance supply may arise where a party: • Surrenders a right to pursue legal action; • Agrees to refrain from further legal action; • Releases another party from obligations. GSTR 2001/4 explains at paragraphs 51, 106, and 107 that such supplies are typically procedural and do not attract separate consideration unless there is overwhelming evidence that the payment was made solely for the discontinuance: 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. ... 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. The Deed includes mutual releases and the discontinuance of proceedings, but these are not the subject of the settlement. The payment does not relate to any supply, nor is it made to induce any act or forbearance by you. The payment is not attributed to the discontinuance, nor is there any indication that it was made to induce or secure the release of claims. We consider that the payment is not a discontinuance supply as the discontinuance is merely part of the legal machinery necessary to finalise the dispute. Nature of the Payment and Consideration Section 9-15 of the GST Act defines consideration to include any payment, act, or forbearance made in connection with, in response to, or to induce a supply. There must be a sufficient nexus between the payment and a supply for a payment to be consideration.
The payment made under the Deed is properly characterised as damages. It compensates you for the loss suffered and is not linked to any supply made by you. The payment is contingent on the outcome of litigation and reflects the resolution of the underlying claim, rather than being made in exchange for any goods, services, rights, or obligations. GSTR 2001/4 at paragraphs 73 and 111 further clarifies: 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. ... 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.
As the payment is not consideration for an earlier supply, a current supply, or a discontinuance supply, it does not give rise to a taxable supply under section 9-5 of the GST Act. Conclusion The receipt of the payment is not consideration for any supply. You have not made a taxable supply under section 9-5 of the GST Act