Private ruling: GST and representatives of incapacitated entities
Date of advice: 31 August 2018
Published: October 2018

Ruling: Q1: Are you liable for GST pursuant to Division 58 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to supplies made prior to your appointment as Liquidator? | A1: No | Q2: Are you liable for GST pursuant to Division 58 of the GST Act in relation to the Settlement Deed entered into between you, the Incapacitated Entity (IE) and the Debtors? | A2: No

Relevant facts and circumstances: Company A was registered for GST effective from xx/xx/xxxx accounting for GST on a non-cash (accrual) basis and reporting quarterly. During the period xx/xxxx to xx/xxxx, Company A made numerous taxable supplies (Initial Supplies) to Company B and Company C (the Debtors). Company A issued tax invoices to the Debtors in respect to the supplies made to the Debtors during the period xx/xxxx to xx/xxxx. Company A did not receive payment in relation to those invoices during that period. It is your understanding and belief that Company A reported the Initial Supplies in BAS lodged with the ATO for the relevant periods. Individual A (You) were appointed as Liquidator of Company A on xx/xx/xxxx. In your role as appointed Liquidator of Company A you took control and possession of the books and records of Company A. The books and records of Company A disclosed that the Debtors owed amounts totalling $x,xxx,xxx.xx as at the date of your appointment. The amount outstanding was in regard to tax invoices for supplies made by Company A during the period xx/xxxx to xx/xxxx. On xx/xx/xxxx a Settlement Agreement was entered into between Company A, you (in your role as Liquidator) and the Debtors. Under the Settlement Agreement: ● It is claimed that in regard to the invoices issued by Company A to the Debtors, an amount unpaid/outstanding was $x,xxx,xxx.xx (Unpaid Debt). ● The Debtors contend that the amount due and owing to Company A is $xxx,xxx.xx. ● The Debtors also claim that Company A is indebted to the Debtors for an amount of $xx,xxx.xx. ● The Debtors will pay an amount of $xx,xxx.xx (inclusive of GST) (Settlement Sum) to Company A in full and final settlement of the Unpaid Debt. ● The parties to the Settlement Agreement agree that the Settlement Sum is deemed to have been paid by each of the Debtors in their same proportion as their liability to Company A for the Unpaid Debt. ● You (as Liquidator) and Company A (Company A Parties) agree to release the Debtors from all and any claims (as defined in the Settlement Agreement). ● The Debtors agree to release the Company A Parties from all and any claims.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Paragraph 9-10(2)(e) | Paragraph 9-10(2)(g) | Subsection 9-15(1) | Division 58 | Section 58-5 | Paragraph 58-10(1)(a) | Paragraph 58-10(1)(c) | Section 195-1

Reasons for decision: Detailed Reasoning - Are you liable for GST pursuant to Division 58 in relation to supplies (Initial Supplies) made prior to your appointment as Liquidator?: In this case, the Initial Supplies were made during the period xx/xxxx to xx/xxxx which is a period prior to your appointment on xx/ xx/xxxx as Liquidator. ATO Interpretive Decision ATO ID 2012/7 provides that where a supply was made by an IE prior to the appointment of the representative, the making of the supply clearly does ‘not fall within the representative's responsibility or authority for managing the incapacitated entity's affairs’, at the time the supply was made. As such, you are not liable for GST pursuant to Division 58 in relation to the GST payable on the Initial Supplies. | Detailed Reasoning - Question 2: Are you liable for GST pursuant to Division 58 in relation to the Settlement Deed entered into between you, the Incapacitated Entity (IE) and the Debtors? Section 9-5 provides 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 the indirect tax zone; and (d) you are 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. It is common ground that for the purposes of GST, the entering into the Settlement Agreement is a ‘supply’ falling within the scope of paragraphs 9-10(2)(e) and 9-10(2)(g). Goods and Services Tax Ruling: Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) discusses the GST consequences resulting from court orders and out-of-court settlements. Paragraph 44 provides that for the purposes of GSTR 2001/4, supplies that are related to an out-of-court settlement fall within three categories or classifications of supply: ● an earlier supply ● a current supply ● a discontinuance supply Where the subject of a dispute is an earlier transaction where a supply was made involving the parties to the settlement, that supply is referred to as an ‘earlier supply’ (paragraph 46 of GSTR 2001/4). In this case we agree that the terms of the Settlement Agreement are properly classified as a ‘discontinuance supply’ as discussed in paragraphs 51 to 55 of GSTR 2001/4. Paragraph 55 of GSTR 2001/4 states that ‘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’. One of the requirements of a taxable supply is that the supply is made for ‘consideration’. The meaning of the term ‘consideration’ is provided in subsection 9-15(1) as including: (a) any payment, or any act or forbearance, in connection with a supply of anything; and (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. Furthermore, it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply. Paragraph 75 of GSTR 2001/4 discusses that the term ‘in connection with’ in the meaning of ‘consideration’ requires that there must be a sufficient nexus between a particular supply and the particular payment (consideration) for there to be a supply for consideration. In this case the Settlement Agreement provides that the Debtors will pay the Settlement Sum to Company A in full and final settlement of the Unpaid Debt. The Unpaid Debt relates to amounts outstanding in respect to invoices issued by Company A for supplies (the Initial Supplies) prior to your appointment as Liquidator. Therefore, we consider the primary purpose of the Settlement Agreement is the recovery of the Unpaid Debt for the Initial Supplies (or ‘earlier supplies) made by Company A. Paragraph 101 of GSTR 2001/4 states: 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. Given the above, we consider that the payment of the ‘Settlement Sum’ to be consideration for those earlier supplies or ‘Initial Supplies’ and not for the discontinuance supply. As such, we consider that whilst the terms of the Settlement Agreement constitute a supply, the supply is not made for ‘consideration’. As all of the criteria of section 9-5 have not been satisfied, the ‘discontinuance supply’ is not a taxable supply as defined in section 9-5 and you do not have a liability for GST pursuant to Division 58.

Reasons for decision: Note: In this reasoning, unless otherwise stated, | ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au | Under section 58-5, any supply, acquisition or importation made by an entity in the capacity of a representative of another entity, that is an incapacitated entity (IE) is a supply, acquisition or importation by the other (incapacitated) entity. | Paragraph 58-10(1)(a) provides that a representative of an IE is liable to pay any GST on taxable supplies that the IE would normally be liable to pay to the extent that the making of the supply to which the GST relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs. | Paragraph 58-10(1)(c) provides that a representative of an IE has any adjustment that the IE would have, to the extent that the making of the supply to which the adjustment relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs. | “Incapacitated entity” is defined in section 195-1 to include: | (b) an entity that is in liquidation… | (c) an entity that has a representative | “Representative” is defined in section 195-1 to include: | In this case you were appointed as liquidator of Company A on xx/xx/xxxx. Accordingly, you meet the definition of representative and Company A meets the definition of an incapacitated entity.