Private ruling: GST and an out of court settlement
Date of advice: 23 July 2018
Published: September 2018

Ruling: Q1: Is the payment received as the result of the out of court settlement between two entities subject to the goods and services tax (GST)? | A1: Yes .

Relevant facts and circumstances: You did some work for a client who paid you for the job. You invoiced the client and paid the GST on the sale. The subcontractor who worked for you did a terrible job and the client sued you for damages and you paid the client their money. You then took the subcontractor to court to try and claim some of the money; you were out of pocket. You and the subcontractor have entered into a Deed of Settlement in which you and the subcontractor agreed to release each other against any claim or allocation:

Relevant legislative provisions: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Detailed Reasoning - Supply: The definition of supply is very broad. In relation to an out of court settlement, a supply referred to under any of the paragraphs within subsection 9-10(2) could be related to an out of court settlement. The kinds of supplies that come in existence under these conditions of settlement may be described as: (a) surrendering a right to pursue further legal action (9-10(2)(e); (b) entering into an obligation to refrain from further legal action [(9-10(2)(g)]; (c) releasing another party from further obligations in relation to the dispute (9-10(2)(g)]. | Detailed Reasoning - Consideration: Consideration is defined in subsection 9-15(1) of the GST Act to include any payment, act or forbearance in connection with, in response to or for the inducement of a supply of anything. A clause of the Deed of Settlement provides you to release the subcontractor from the existing claim or allegation where the terms of the Deed of settlement are complied with. In this case, under sub-clause xx you will receive a settlement sum of $xx,xxx from the subcontractor. This payment from the subcontractor t is in connection with and for the inducement of: ● surrendering a right to pursue further legal action; or ● entering into an obligation to refrain from further legal action; or ● releasing another party from further obligations in relation to the dispute. In your situation you made a taxable supply when you surrendered your rights; entered into an obligation or released another party from further obligations. Therefore, we consider that the payment to you is the provision of consideration for a supply related to discontinuance of action. Consequently you made a taxable supply. The payment received is subject to GST.