Private ruling: Goods and services tax - taxable supplies
Published: March 2015
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to input tax credits in relation to your payments to another entity? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are an individual. You are registered for GST. You entered into a commercial lease agreement with another entity (the lessor) for a specified period. The monthly rental was $xxx. The rent and other fees you paid to the lessor were charged to you with GST included. Due to cash flow issues you were unable to pay the rent from about the midpoint your tenancy and you vacated the premises at this time. Some months after vacating the premises you entered into a settlement deed with the lessor (the agreement), whereby you agreed to pay a certain amount. You paid the full amount in xx instalments. The lessor has advised you that there is no GST payable on the payments as they are for damages.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-10 | section 11-5 | section 11-20

Reasons for decision: Summary: Under section 11-20 of the GST Act, you are entitled to input tax credits for any creditable acquisition that you make. Under section 11-5 of the GST Act, you make a creditable acquisition if: • you acquire anything solely or partly for a creditable purpose • the supply of the thing to you is a taxable supply • you provide, or are required to provide, consideration for the supply; and • your are registered, or required to be registered. In order for you to provide, or be required, consideration for a supply, three fundamental criteria must be met: 1. there must be a supply 2. there must be a payment and 3. there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration. Supply is defined by section 9-10 of the GST Act as: 1. A supply is any form of supply, whatsoever. 2. Without limiting subsection (1), supply includes any of these: … (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act (iii) to tolerate an act or situation In Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4), the Commissioner explains how a payment (or act or forbearance) that is made in compliance with a court order or out-of-court settlement should be treated for the purposes of the GST Act. As explained in paragraph 17 of GSTR 2001/4, the GST consequences of a court order or out-of-court settlement will depend on a number of matters including whether a payment made under the order or settlement constitutes consideration for a supply and if so whether the supply is in the nature of a taxable, input taxed or GST-free supply. Paragraphs 45 to 50 of GSTR 2001/4 identify three types of supply in relation to out-of-court settlements, being earlier supplies, current supplies and supplies related to discontinuance of action. Approximately half way through your lease, you were unable to pay the agreed rental. You vacated the premises at that time. As a result of you vacating the premises prior to the expiration of your lease, the lessor had warrants executed against the property as a result of judgments and lodged a further claim for judgment. As explained in paragraphs 61 to 67 of GSTR 2001/4, the extinguishment of a judgment debt by its payment does not constitute a supply by the judgment creditor for GST purposes. Therefore, to the extent that your payment relates to the judgment debts, it is not payment for a supply. Paragraphs 50 to 54 of GSTR 2001/4 explain that generally a settlement agreement will contain terms designed to ensure that no further legal action ensues. These conditions often take the form of the plaintiff releasing a defendant from some or all of the existing or further claims and obligations in relation to the dispute. These conditions of settlement are called discontinuance supplies and take the following forms: 1. Surrendering a right to pursue further legal action. 2. Entering into an obligation to refrain from further legal action. 3. Releasing another party from further obligations in relation to the dispute. Where a sufficient nexus is established between a settlement payment and a supply in relation to a court order or out of court settlement, the payment is consideration for that supply. Paragraph 71 of GSTR 2001/4, explains that disputes often arise over incidents that do not relate to a supply. Examples of such cases include claims for damages arising out of termination or breach of contract. Paragraph 73 of GSTR 2001/4 explains that the most common form of remedy is a claim for damages arising out of the termination or breach of a contract. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act. You vacated the premises approximately half way through your lease period. Consequently, you were not supplied with a commercial leasehold interest in the premises from that time. Accordingly, the payment of the full amount does not relate to an earlier supply or a current supply. Therefore, if there was a supply to which your payment relates, it would be a discontinuance supply. Paragraph 106 of GSTR 2001/4 explains that where the only supply in relation to an out-of-court settlement is a 'discontinuance' supply, it will typically be because the subject of the dispute is a damages claim. In such a case, the payment under the settlement would be in respect of that claim and not have a sufficient nexus with the discontinuance supply. However, as explained in paragraph 109 of GSTR 2001/4, 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. On the facts supplied, your payment of $xxxx was not made for a discontinuance supply. It follows that your payment of the full amount was not made in return for any supply to you. Consequently, you have not met all of the criteria of section 11-5 of the GST Act. Accordingly, you did not make a creditable acquisition. Therefore, you are not entitled to input tax credits in relation to your payments to the lessor, totalling $xxxx.