In 2001, the Australian Taxation Office came out with a ruling GSTR 2001/4 on the consequences of Goods & Services Tax (GST Ruling) on the court orders and out of court settlements. The GST Ruling has examined the concept of ‘supply’ and the ‘nexus’ that must exist between the payment and supply in order to establish the relationship of supply for consideration. As the statutory definition of ‘supply’ under section 9-10 of a New Tax System (Goods and Services Tax) Act 1999 (Act) is exhaustive in nature, the GST Ruling states that due to the broad definition under the Act, an out of court settlement could be linked to the ‘supply’ definition. The GST Ruling further emphasis on the applicability of GST on the payments made in fulfilment of the court orders.
The GST Ruling has also laid down three categories of the supply, namely: (a) earlier supply; (b) current supply; and (c) discontinuance supply.
‘Earlier supply’ exists where the dispute is related to an earlier transaction in which supply was made. ‘Current supply’ refers to supply that comes into the existence because of the terms created by the settlement. Whereas the subject of the dispute is a claim of damages, a ‘discontinuance supply’ is the only supply, in relation to an out-of-court settlement. In this case, the terms of payment under the settlement agreement would not not have a sufficient nexus with the discontinuance supply.
‘Current supply’ refers to supply that comes into the existence because of the terms created by the settlement. Whereas the subject of the dispute is a claim of damages, a ‘discontinuance supply’ is the only supply, in relation to an out-of-court settlement. In this case, the terms of payment under the settlement agreement would not not have a sufficient nexus with the discontinuance supply.
We often see disputes getting resolved without going to the court, or settled before a final determination, and as a result, a settlement agreement between the disputed parties comes into existence. In most of the cases, an act of settlement of the dispute will not be a taxable supply. However, the GST Ruling does provide that a ‘discontinuance supply’ may have a nexus with settlement agreement ‘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’.
The claim for damages is excluded from the purview of the taxable supply. The GST Ruling states that the subject of the dispute before the court and the payment under the court order or settlement agreement to resolve damages claim will not attract the definition of ‘consideration for a supply’.
In the event, the payment made in lieu of an out of court settlement or court order has a component that only relates partially to a supply, the payment will be treated as the sum of individual payments for the applicable items. Where a court order dissects and categories the payment into heads of claim, such will be accepted as representing the amount of these ‘individual payments’. Whereas in case of out of court settlement, the parties shall apportion the payments reasonably to each individual claim in the settlement agreement. If not, the parties will consequently end up with another legal dispute.
As we see that the ‘supply’ definition under the Act is exhaustive in nature and where the settlement agreement is hit by GST provisions, it is recommended to outline the terms of the GST payment in the settlement agreement and the party liable to bear the GST costs. It is practical to obtain a piece of legal advice on the implication of GST on settlement agreements or orders of the court.
If you ever find yourself in this situation, our specialised team of lawyers can assist you in negotiating and settling or mediating the terms of the dispute or help in filing appropriate legal proceedings concerning the dispute.
This is generalist information only and is not a substitute for legal advice specific to your circumstances. If you would like further information, please contact us.