Private ruling: Goods and services tax (GST) and payments under a Deed of Release
Date of advice: 1 August 2016
Published: October 2016
Date scheme commenced: dd/mm/yy

Ruling: Q1: Is A making a taxable supply in return for the payment from B under or in connection to the Deed of Release that they have entered into? | A1: Yes, A is making a taxable supply in return for the payment from B under or in connection to the Deed of Release.

Relevant facts and circumstances: B and A are registered for GST. B carried on the business of manufacturing goods, which include selling and installing them at consumers' premises and supplying their parts. B carried on this business between dd/mm/yy and dd/mm/yy. B sold its business and assets to A and settlement took place on dd/mm/yy. Since the sale of its business to A, B had not been in the business of supplying the goods or its parts. A continued the business of manufacturing the goods which included supplying the goods, installing them at the customers' preferred premises and supplying their parts. C is a statutory body established by a State legislation and is responsible for goods in the relevant State. It monitors and enforces compliance with the applicable legislation. Following a campaign, C received complaints about the goods. The particular goods subject to the complaints received by C were manufactured by B whilst it was in the business and by A between dd/mm/yy and dd/mm/yy. C conducted an investigation which included testing the goods and verifying the allegations against the goods. B and A denied these allegations. On dd/mm/yy C issued a letter to A requiring A to publish a notice in newspapers around Australia. Without admitting liability, on dd/mm/yy A published a message in a form approved by C in various newspapers warning consumers about the issues associated with the goods and provided assistance to consumers regarding any concerns associated with the use of the goods. On dd/mm/yy C issued separate notices (Notices) of intention to issue a notice under the appropriate legislation against B and A. In the Notices, C alleged that it has been alerted to further complaints of the goods and that these goods are unsafe by reasons of their design and construction. B and A denied the allegations and challenged the claims outlined in the Notices. Following further discussions and without any admission of liability, the parties agreed to resolve the issue with the goods on the terms set out in the Deed of Undertaking which the parties entered into on dd/mm/yy. A day before entering into the Deed of Undertaking, B and A entered into a Deed of Release. No particular claim was ever brought by A against B and/or C. Similarly no particular claim was ever brought by B or C or the consumers regarding the issues relating to the goods. The two Deeds did not refer to or mention any damage suffered by A and/or the consumers. Deed of Release B and A entered into a Deed of Release on dd/mm/yy. The Deed of Release covered a number of issues between B and A including; • A making payment to B regarding the issues with the operation of the goods (disputes between B, A and C); • Settling the payments for a loan; • Settling the payments from shares buyout. Clause 3 of this Deed provides that if C issues a notice with obligations to B, A or both then A will be solely responsible for ensuring B and/or A complies with the obligations. If B and A agree with a negotiated outcome with C then A will be solely responsible for ensuring B and A comply with the terms of the negotiated outcome. The relevant obligations are defined as any course of action which B and/or A is required by C to undertake in respect of the goods. Negotiated outcome means any agreement which both B and A make with C in respect of a course of action to be undertaken by them, or either of them, in respect of the goods. Clause 4 states that: • B's contribution for the following must not exceed $$; • in relation to any obligationsl or negotiated outcome, B will pay A according to a formula agreed between them; • A will record A's compliance costs in a form that is acceptable to B and A's auditors and will provide a report on a periodical basis; and • if A continues to incur A's compliance costs after dd/mm/yy, A may in respect of such costs (unless otherwise agreed) continue to invoice B according to the formula agreed between them. Such invoices are payable within x days or as otherwise agreed. Clause 5 provides that A releases and discharges B from all claims if B complied with the terms of clause 4. Likewise B releases and discharges A from all claims if A complied with the terms of clause 3. Deed of Undertaking The Deed of Undertaking represents the agreement that has been reached by B, A and C in relation to issues with the goods. It has been agreed between C, B and A that the obligations imposed by the Deed of Undertaking will be performed by A. A copy of this Deed was provided. Taxpayer's Contention A and B believe the payments made by B to A under the Deed of Release are not considerations for supplies from A as the payments made by B relate solely to the claim for loss and damage suffered by A. A payment to settle a claim (or threatened claim) for loss and damage is generally not treated as consideration for a taxable supply. This is in accordance with the principles outlined in Goods and Services Tax Ruling GSTR 2001/4 Goods and services tax: GST consequences of court orders and out-of-court settlements .

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 7-1 | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-10 | A New Tax System (Goods and Services Tax) Act 1999 Division 38 | A New Tax System (Goods and Services Tax) Act 1999 Division 40

Reasons for decision: Summary: Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies. Section 9-5 of the GST Act states that 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. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Supply is broadly defined in section 9-10 of the GST Act to mean any form of supply whatsoever and includes: • a supply of goods; • a supply of services; • a creation, grant, transfer assignment or surrender of any right; • an entry into, or release from, an obligation: • to do anything; or • to refrain from an act; • or to tolerate an act or situation; • any combination of any 2 or more of the above. B and A entered into a Deed of Release. Clause 3 of this Deed specifies that A will solely be responsible for ensuring that B and/or A comply with the terms of the notice of obligations in respect of the goods. Furthermore, if B and A agree with a negotiated outcome with C then A will be solely responsible for ensuring both B and A comply with the terms of the negotiated outcome. Where A carries out clause 3, B will pay A an amount of money as calculated in accordance with clause 4. In return B and A agree to release and discharge each other from all potential claims that may be made against each other. We consider that by entering into the Deed of Release, A entered into an obligation to do particular things for B, being to carry out whatever activities necessary to ensure that B complies with the terms of the obligations issued by C or the terms of the negotiated outcome agreed with C. This amounts to a supply in accordance with section 9-10 of the GST Act. In addition, by agreeing to release and discharge each other from all potential claims that may be made against each other as outlined in clause 5, A and B have entered into a binding agreement to surrender a right. A surrender of any right is a supply under section 9-10 of the GST Act. The payment that B makes to A under clause 4 of the Deed of Release is consideration for A in making a supply to B. A is registered for GST and carries on a business of manufacturing the goods. The supply that A makes to B under the Deed of Release is made in connection with the business that A carries on. As the supply is made in Australia and indirect tax zone is defined by section 195-1 to mean Australia, the supply is connected with the indirect tax zone. Accordingly the supply that A makes to B under the Deed of Release is a taxable supply pursuant to section 9-5 of the GST Act. Division 38 and division 40 of the GST Act outline supplies that are GST-free and input taxed respectively. The supply that A makes to B does not fall within division 38 or division 40. This means the supply from A to B is not GST-free or input taxed. A and B made references to GSTR 2001/4 and submitted that the payments made by B to A under the Deed of Release are not consideration for supplies from A as the payments relate solely to the claim for loss and damage suffered by A. GSTR 2001/4 outlines the nexus requirement that must be satisfied to establish the 'supply for consideration' in the context of a court order and out-of-court settlement. Paragraph 13 of GSTR 2001/4 provides that Matters in dispute may be resolved either by the judgment of a court, or (at a time prior to the court delivering its judgment) by agreement between the parties. An agreement between the parties is referred to … as an out-of-court settlement. The facts show that the Deed of Release and Deed of Undertaking were entered into promptly when the issue arose and that no legal claim was ever brought by A against B. Furthermore, there is no indication that A sought legal services with the intention of commencing legal proceedings against B. Similarly, there has been no legal proceeding brought by B, A, C or the consumers regarding the issues relating to the goods. In addition, the Deed of Release between A and B did not outline damages suffered by A or the consumers due to issues with the goods and that the payments made by B to A are for damages suffered by A or the consumers. Based on the above, we consider that the supply provided by A to B under the Deed of Release did not result from out-of court settlements as there is no evidence of a dispute to bring to court for resolution. It is our view that the payment from B to A is consideration for a supply from A to B under the Deed of Release. And as all the requirements of section 9-5 of the GST Act are met, the supply from A to B under the Deed of Release is a taxable supply.