Private ruling: GST and supply of consulting services
Date of advice: 2 October 2018
Published: November 2018

Ruling: Q1: Is the settlement sum payable under the Deed of Settlement consideration payable in connection with, in response to, or for the inducement of a supply made the consultants under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the settlement sum payable under the Deed of Settlement is consideration for a supply made by the consultants under paragraph 9-15(2A)(b) of the GST Act. | Q2: If the settlement sum is consideration for a supply, is the supply made by the consultants a GST-free supply under item 2, 3 or 4 in the table in subsection 38-190(1) of the GST Act? | A2: Yes, the supply made by the consultants to the non-resident individuals is a GST-free supply under item 2 in the table in subsection 38-190(1) of the GST Act.


Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-15 | A New Tax System (Goods and Services Tax) Act 1999 section 38-190

Reasons for decision: Summary: Goods and Services Tax Ruling GSTR 2001/4: Consequences of court orders and out-of-court settlements explains the circumstance in which a payment represents consideration for a supply resulting from court orders and out-of-court settlements. GSTR 2001/4, at paragraphs 97 to 99, answers the question: Can a settlement or court awarded payment be consideration? 97. Subsection 9-15(2A) makes it clear that the fact that a payment is made in compliance either with a court order, or with a settlement relating to proceedings before a court will not, without more, prevent it from being consideration for a supply. 98. Subsection 9-15(2A) states: (2A) It does not matter: (a) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or (b) whether the payment, act or forbearance was in compliance with a settlement relating to proceedings before a court, or before a tribunal or other body that has the power to make orders. 99. This provision negates any argument that the characterisation of a payment according to section 9-15 either as consideration for a supply or otherwise could be affected by the payment being made in compliance with a court order or settlement relating to proceedings before a court. It can be seen from the above that an out of court settlement is consideration. A sufficient nexus between a payment made under a court order or out-of-court settlement and a supply must exist to create the 'supply for consideration' relationship. GSTR 2001/4 describes three broad categories of supplies that may be related to an out-of-court settlement. They are: ● earlier supplies ● current supplies, and ● discontinuance supplies. Earlier supplies are supplies that occur before a dispute arises. A current supply is one that may be created by the terms of the settlement. Discontinuance supplies usually result from the terms of a settlement, and generally ensure no further legal action in relation to the dispute, provided the terms are complied with. Regarding to earlier supplies, GSTR 2001/4 provides the following at paragraphs 46, 47, 101 to 104: | Detailed Reasoning - Earlier supply: 45. Each and every supply is subject to GST provided the supply satisfies the requirements of a taxable supply. The GST Act does not prescribe any sequencing or hierarchy of supplies for taxing purposes. GST becomes payable on the relevant supply 46. In these circumstances, where the subject of the dispute is an earlier transaction, in which a supply was made involving the parties; that supply is referred to as an ‘earlier supply’. Example – Earlier supply 47. 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 101. Where the only supply (other than a 'discontinuance' supply) in relation to a court order or out-of-court settlement is an earlier supply and a sufficient nexus exists between the payment made under that order or settlement and the earlier supply, the payment will be consideration for that supply. Example - payment for an earlier supply 102. In the Widget Company example at paragraph 47, the out-of-court settlement reached with the retailer provides for the retailer to make payment in full to Widget for the toys. The supply of the toys is an earlier supply and there is a sufficient nexus between it and the payment. The payment is consideration for that supply. 103. A payment made under a court order or out-of-court settlement may also result in an effective reduction in the price of an earlier supply, perhaps to nil. Where this happens, an adjustment event may be required (refer paragraphs 126 to 136 on GST consequences). Example - reduction in the price of an earlier supply 104. The retailer paid Widget Company the full price for the toys, but subsequently discovered they were cheaper toys than it believed it was purchasing. The dispute was settled with Widget agreeing that the price charged was excessive for the toys. The terms of the settlement provided for Widget to pay back to the retailer an amount that reflects the price difference between the two products. The payment will be a reduction in the consideration for the supply. Discontinuance supplies may be characterised as: ● 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. In relation to the terms of settlement, paragraph 108 of GSTR 2001/4 advises: 108. …‘No Liability’ clauses are commonly included in settlement agreements and we do not consider their inclusion to alter the substance of the original dispute, or the reason payment is made. Therefore, where the primary reason for an out-of-court settlement is in satisfaction for an earlier supply, as explained in GSTR 2001/4, there is no necessity to examine the other categories of supplies, even though one of the terms of settlement may be indicative of a discontinuance supply. The subject of the dispute which is, the construction of the Agreement, supply of the services and entitlement to payment as agreed by all parties in the Agreement, is an earlier supply because the Agreement and services occurred before the dispute arose. The dispute between the consultants and the Parties (NR1, NR2 and AusCo) in the Agreement over the construction of the Agreement, supply of services and entitlement to payment was subsequently resolved through an out-of-court settlement, with NR1 and NR2 agreeing to pay a settlement sum to the consultants for their supplies and entitlement of payment. The payment will terminate the Agreement and released all conceivable claims against each other in respect of the Agreement and the dispute. As the settlement amount involves an earlier supply represented by the amount on the terms of the Deed of Settlement, we consider that the agreed settlement sum represents payment for an earlier supply. The agreed settlement sum accordingly satisfies the definition of consideration under paragraph 9-15(2A)(b) of the GST Act. | Detailed Reasoning - Question 2: GST is payable on a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act if: a) the supplier makes the supply for consideration; and b) the supply is made in the course or furtherance of the supplier’s enterprise; and c) the supply is connected with Australia; and d) the supplier is 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. All of the above must be satisfied for the consultants’ supply of services to be a taxable supply. From the information given, the supply of services made by the consultants satisfies paragraph 9-5(a) to 9-5(d) of the GST Act as ● the consultants in a partnership makes the supply of services for consideration; and ● the supply is made in the course of the partnership business carried on by the consultants; and ● the supply of services is connected with Australia as the supply is made through a partnership business that the consultants carry on in Australia; and ● the business partnership is registered for GST. There is no provision under the GST Act that makes the consultants’ supply of services input taxed. | Detailed Reasoning - GST-free supply: Relevant to the consultants’ supply of services is item 2 in the table in subsection 38-190(1) of GST Act (item 2). Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident that is not in Australia when the thing supplied is done, and: a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia; or b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered for GST. Only one of the paragraphs in item 2 needs to be satisfied. | Detailed Reasoning - Precondition of item 2 – non-resident is 'not in Australia': The precondition of item 2 is that the non-resident is ‘not in Australia in relation to the supply’. From the facts given: ● The parties in the Agreement were NR1, NR2 and AusCo. ● NR1 and NR2 were the only ones receiving advice from the consultants and the advices were for their personal use. ● Clause X in the Agreement is about direction to pay outstanding amounts and states that AusCo is a party to the Agreement solely to give acknowledgment in this clause. Under this clause if either NR1 or NR2 proposes to transfer all or any of their shares in AusCo, Ausco will use all reasonable endeavours to procure that NR1 and NR2 pay the consultants for their services at the time of the share transfer. ● AusCo and any stakeholders of AusCo did not receive any services from the consultants. From the above we consider the consultants made their services mainly to NR1 and NR2. Goods and Services Tax Ruling GSTR 2004/7 (available at ato.gov.au) provides guidance on when a non-resident is 'not in Australia' for the purposes of item 2. According to GSTR 2004/7 a non-resident individual must be physically in Australia to be ‘in Australia’. A non-resident individual is in Australia in relation to the supply if the non-resident individual is involved with the supply while in Australia. A non-resident individual is involved with the supply where the non-resident individual is in contact with the supplier while in Australia and that contact is not minor. Contact is minor if it is limited to contact of a simple administrative nature such as checking on the progress of the supply or a courtesy call on the supplier. If this is the only contact between the non-resident individual and the supplier we consider that the individual is not in Australia in relation to the supply. If a non-resident is in Australia for a purpose that is not related to the supply for example the individual is on holiday and has not contact with the supplier or only has minor contact, the non-resident individual is not considered to be involved with the supply and is therefore not in Australia in relation to the supply. We recognise that the physical presence in Australia of the non-resident individual at the relevant time is merely coincidental. From the information received, NR1 and NR2 are non-resident of Australia and were not in Australia in relation to the supply made by the consultants. NR1 and NR2 as directors of AusCo were in Australia to attend meeting of directors of AusCo and social events. Their contact with the consultants was limited to discussions regarding the progress of the proposed transaction. In this instance Nr1 and NR2 satisfy the requirement of ‘not in Australia in relation to the consultants’ supply’ for the purposes of item 2. The next step is to consider the paragraphs in item 2. | Detailed Reasoning - Paragraph (a) of item 2: From the fact given, the consultants’ supply of services satisfy paragraph (a) of item 2 as their supply of services was neither a supply of work physically performed on goods situated in Australia when the work was done, nor a supply directly connected with real property situated in Australia The consultants’ supply of services is GST-free under paragraph (a) of item 2 to the extent that it is not negated by subsection 38-190(3) of the GST Act. As paragraph (a) is satisfied there is no need to consider paragraph (b) of item 2. | Detailed Reasoning - Subsection 38-190(3) of the GST Act: Subsection 38-190(3) of the GST Act provides that without limiting subsection 38-190(2) or (2A), a supply covered by item 2 in that table is not GST-free if: a) it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and b) the supply is provided or the agreement requires it to be provided to another entity in Australia; and c) for a supply other than an input taxed supply – none of the following applies: i. the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it; ii. the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or iii. the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient’s acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense. From the facts given, subsection 38-190(3) of the GST Act does not apply to the consultants’ supply of services are they were not required to provide their supply to another entity in Australia. Their supply of services were made and provided to NR1 and NR2. The supply is therefore GST-free under item 2. Since the supply is GST-free under item 2 there is no need to consider item 3 and 4 in the table in subsection 38-190(1) of the GST Act.

Relevant facts: The consultants are business advisors and partners in a business partnership which is registered for the goods and services tax (GST) | The consultants entered into a Consulting Services Agreement (Agreement) with two individuals (NR1 and NR2) and an Australian company (AusCo). | In the Agreement the consultants agreed to provide strategic advice and guidance to NR1 and NR2 in relation to the sale or other disposal of all or any part of their shares held in the Australian company AusCo to a third party for value (Transaction). | AusCo was a party to the Agreement solely to confirm that, upon a transfer of all or any shares held by NR1 and NR2, it would use reasonable endeavours to procure that NR1 and NR2 pay the consultants for the services provided at the time of the share transfer. | The consultants would receive a Success Fee and reimbursement of all pre-approved expenses they incur in the course of providing the services or any additional services under the Agreement. NR1 and NR2 were personally liable to provide the Success Fee (if payable) to the consultants. | NR1 and NR2 are domiciled outside Australia and are not residents of Australia. They are neither registered for GST nor required to be registered for the Australian GST. | The only payment received by the consultants in respect of the Agreement is the settlement sum agreed in the Deed of Settlement. The settlement sum will be accounted for by the Partnership. | The consultants did not provide their services to AusCo and to any other stakeholders of AusCo. Further there were no workshops held during the term of the Agreement. | During the term of the Agreement, the only advice which was offered under the Agreement was to NR1 and NR2 in verbal and written form. The advice was related solely to their personal objective of selling their shares in AusCo. The written comments were designed for their personal use and were not provided to any other parties. | The vast majority of communication with NR1 and NR2 in respect of the matters under the Agreement was via Skype and email. The consultants did have a few brief social catch-ups with NR1 in Australia and once overseas as they both have known NR1 for more than a decade. No guidance or advice was provided in these social catch-ups. | Any contact with the consultants in Australia was limited to discussions regarding the progress of the proposed Transaction and was not integral to the performance of services. | NR1 infrequently travelled to Australia for meetings of the board of directors of AusCo and for social occasions. Neither NR1 nor NR2 was at any time in Australia in relation to the services outlined in the Agreement. | The consultants had interactions with NR1 and NR2’s accountants and lawyers with respect to the Agreement, Deed of Settlement and associated matters. No other interactions occurred. | NR1 and NR2 each disposed of their shares in AusCo. | A dispute has arisen between the consultants and the other parties in the Agreement (NR1,NR2 and AusCo) in relation to the construction of the Agreement, including the consultant’s entitlement to payment and whether relevant services have been rendered by the consultants (the Dispute). | A Deed of Settlement was entered among the consultants, NR1, NR2 and AusCo. The parties have agreed to settle the Dispute on the terms set out in the Deed of Settlement, and in doing so release all conceivable claims against each other in respect of the Agreement and the Dispute. | Further Clause 5(a) in the Deed of Settlement provides that the Agreement is terminated and is of no further force or effect in support of the releases specified in the Deed of Settlement. | Under the Deed of Settlement, NR1 and NR2 must pay a fixed sum to the consultants (settlement sum). | Reasons for decision: Note : Where the term ‘Australia’ is used in this document, it is referring to the ‘indirect tax zone’ as defined in section 195-1 of the GST Act.