Private ruling: Goods and services tax (GST) and out-of-court settlement
Published: September 2013

Ruling: Q1: Have you made a taxable supply in return for the certain payment? | A1: You have made two taxable supplies in return for the certain payment.

Relevant facts and circumstances: You are registered for GST. You carry on a certain sort of business. An individual (the individual) was an employee of yours for a certain period. After the individual resigned from this job they started their own certain sort of business through their company (this business was the same sort of business as the business you carry on). The company is registered for GST and the individual is the director of the company. You commenced proceedings in the court for breach of restraint of trade ('the Proceedings') to stop the company from trading. The court made the following Court Orders on a certain date: · The Defendant (the individual) kept a separate record of transactions entered into by them with people or entities who had been customers of the Plaintiff (you) during the Defendant's employment with the Plaintiff. · The Defendant kept a separate record of any communications they have with any dealer who referred business to the Plaintiff during the period of the Defendant's employment with the Plaintiff. · Until the earlier of a certain date, trial or earlier order, the Defendant by themself, their servants or agents or otherwise howsoever is restrained from o soliciting, canvassing approaching or accepting approaches from any person or entity who was at any time within the certain period prior to a certain date a dealer who referred customers to the Plaintiff during the Defendant's period of employment with the Plaintiff; o soliciting, canvassing, approaching or accepting approaches from any person or entity who was at any time within the certain period prior to a certain date a customer of the Plaintiff with the purpose of establishing a relationship with them or obtaining their custom. · The parties make disclosure by a certain date. · The request for Trial be dispensed with and the matter be listed for trial commencing on a certain date. · Each party have liberty to apply on a certain period of time written notice to the other party. · That the costs of and incidental to the application be the Plaintiff's costs in the cause. The individual, the company and you agreed to settle the whole of the dispute including the Proceedings under a Deed of Settlement on a certain date. The individual and the company signed the Deed on a certain date. The individual is referred to as the defendant in the Deed of Settlement. The Deed of Settlement was signed in Australia. The terms of settlement were as follows: Agreement The parties have reached the following agreement in full and final settlement of the dispute: That the defendant pay to the plaintiff a certain sum of money ('the Settlement monies') within a certain period of time of execution of this Deed ('the payment'). That contemporaneously with the payment referred to in a certain clause, the parties shall consent to an order that the Orders made on a certain date in a certain court be set aside. That contemporaneously with the payment referred to in a certain clause, the parties shall sign all necessary documents and take all steps required to: · effect the setting aside of the Order referred to in a certain clause; and · effect a discontinuance of the proceeding ('the proceeding'). That subject to the payment the parties acknowledge and agree that the facts and matters pleaded by the plaintiff's statement of claim in the Proceeding are, by this settlement, compromised and further: · the parties release, discharge and indemnify the other with respect to any and all causes of actions, claims or proceedings which either party may presently have against the other which relate to the matters involved in the Proceeding, including any claims against the company, now or in the future arising out of or in connection with the facts and matters pleaded in the Proceeding; · this settlement may be pleaded as a bar to any action, suit or proceeding commenced by either party against the other, or against the company, in respect of any of the matters referred to in this settlement. That subject to the payment the parties acknowledge and agree that the terms set out under the heading 'Termination of Employment 'in a certain paragraph of the letter of offer of employment to the defendant dated a certain date shall not apply and be of no force or effect and as such the defendant is not either on their own accord or on behalf of any other person or entity, restrained from or to: · approach any employee, contractor or agent of yours and/or a certain entity for the purposes of enticing that person away from you and/or a certain entity; · solicit, canvas, approach or accept any approach from any person or entity who was at any time within a certain period of time prior to the last day of our client's employment or retainer with you and/or a certain entity, a customer, supplier, distributor, licensee, director, employee, contractor or agent of or to you and/or a certain entity, with the purpose of establishing a relationship with or obtaining the custom of that person or entity; · interfere, or seek to interfere directly or indirectly with the relationship between you and/or a certain entity and its customers, suppliers, distributors, licenses, directors, employees, contractors or agent at any time up to and including that certain period and anywhere within a certain region. Release, Discharge and Indemnity Subject to the terms of this Deed, the parties hereby release, discharge and indemnify each other with respect to any and all causes of actions, claims or proceedings which either party may presently have against the other but for the execution of this document which relates to the matters involved in the dispute. Costs Each party shall bear its own costs of the Proceedings and of the preparation and execution of this deed. Goods and Services Tax The parties agree that the Defendant and the company will indemnity the Plaintiff in the event that any GST is payable in respect of the Settlement Monies. You consider that the settlement amount was an un-dissected sum that reflected, amongst other things, both the previous and anticipated future detriments incurred and to be incurred by you following the release from the relevant restraint of trade agreement.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 subparagraph 9-10(2)(g)(i) | A New Tax System (Goods and Services Tax) Act 1999 subparagraph 9-10(2)(g)(ii) | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 9-70 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-75(1)

Reasons for decision: Summary: The certain payment was consideration for your supplies, being an entry into an obligation to consent to the setting aside of a court order and your release of the individual from certain obligations. You made taxable supplies in return for the certain payment because · you made the supplies for consideration · the supplies were made in the course or furtherance of an enterprise you carry on · the supplies were connected with Australia · you are registered for GST, and · the supplies are not GST-free or input taxed. | Detailed Reasoning - Detailed reasoning: GST is payable by you on your taxable supplies. You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 GST Act, which states: 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 Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Denotes a term defined in section 195-1 of the GST Act) Goods and Services Tax Ruling GSTR 2001/4 provides guidance on court and out-of-court settlements. You, the individual and the company were parties to an out-of-court settlement. Paragraphs 48 and 49 of GSTR 2001/4 discuss current supplies. They state: 48. A new supply may be created by the terms of the settlement. In this Ruling, such a supply is referred to as a 'current supply'. Example - Current supply 49. 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 . Paragraphs 50 to 55 and 109 of GSTR 2001/4 discuss discontinuance supplies. They state: Supply related to discontinuance of action 50. Even where there is no earlier or current supply, the very wide range of things that can constitute a 'supply' means that one or more new supplies will probably crystallise on an out-of-court settlement being reached. 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. 53. Where court proceedings have commenced, the filing of a notice of discontinuance pursuant to the relevant court rules may also be required to ensure the court is advised that a particular action will not proceed. 54. We consider that these conditions of settlement can create supplies for GST purposes. The supplies may be characterised as: (i) surrendering a right to pursue further legal action [paragraph 9-10(2)(e)]; or (ii) entering into an obligation to refrain from further legal action [paragraph 9-10(2)(g)]; or (iii) releasing another party from further obligations in relation to the dispute [paragraph 9-10(2)(g)]. 55. In this Ruling, we refer to supplies of these kinds as 'discontinuance supplies'. However, whether a discontinuance supply would be a taxable supply would then depend on the requirements of section 9-5 being met in relation to that supply. 109. We consider that a payment made under a settlement deed may have a nexus with a discontinuance supply 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. Subparagraph 9-10(2)(g)(i) of the GST Act defines supply to include an entry into an obligation to do anything. Subparagraph 9-10(2)(g)(ii) of the GST Act defines supply to include a release from an obligation to refrain from an act. Pursuant to a clause in the Deed of Settlement, you entered into an obligation to consent to an order that the Orders made on a certain date in a certain court be set aside. You thereby supplied an obligation to the individual. We consider that you supplied this obligation to the individual because they were the defendant as per the Court Order and Deed of Settlement. Your supply of this obligation is a current supply because it is a supply that was created by the terms of the settlement. A clause of the Deed of Settlement released the individual from the obligations imposed by certain terms of the employment agreement, which required the individual to refrain from certain acts. This release was a supply to the individual because they previously had the relevant obligations to refrain from certain acts and you released them from those obligations. This release is a current supply because it is a supply that was created by the terms of the settlement. The certain payment is consideration for the two current supplies that you made. The claim which was the subject of the dispute in your case was not so lacking in substance that the settlement payment could only have been made for the discontinuance supply. The supplies you made in return for the certain payment were taxable supplies because: · these supplies were made for consideration · the supplies were made in the course or furtherance of an enterprise that you carry on · the supplies were connected with Australia · you are registered for GST, and · there are no provisions in the GST Act under which the supplies are GST-free or input taxed. Therefore, GST is payable by you on the certain payment. The entire payment is subject to GST. The Deed of Settlement states 'The parties agree that the Defendant and the company will indemnity the Plaintiff in the event that any GST is payable in respect of the Settlement Monies'. It is presumed from this that you will charge the Defendant and/or the company GST on top of the certain amount already paid. Therefore, as the entire payment is subject to GST, your GST liability is equal to 10% multiplied by the amount already paid.