Private ruling: Court orders and negotiated settlements
Date of advice: 27 March 2026
Published: 9 June 2026
Ruling period: 1 July 20XX to 30 September 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do X and Y (the Defendants or Directors) make a taxable supply to Z (the Plaintiff) for receipt of funds by the Plaintiff as a result of a court order and subsequent settlement agreement under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No.

Relevant facts and circumstances: The Company is in the business of supplying hardware solutions for residential and commercial property renovations. The Company is registered for GST. The Company has three shareholders: • X holding a% of the shares • Y holding b% of the shares • Z holding c% of the shares X and Y are also directors of the Company. In 20YY, Z (the Plaintiff) commenced proceedings in the X Court against the two directors X and Y (together, the Defendants or Directors), alleging business misconduct. The Directors engaged lawyers to defend their case. In 20YY, the X Court held that X and Y were successful in defending the claim against business misconduct. Consequently, a costs order was issued ordering the Plaintiff to reimburse the Defendants for their legal fees on an indemnity basis, amounting to approximately $xxx. The Plaintiff engaged their solicitor to negotiate a reduction of this amount, and the parties agreed to a final settlement amount of $xxx. In 20YY, the Plaintiff paid $xxx into the trust account of the Defendant's solicitor. As there were outstanding solicitor fees, the solicitors retained $xxx and transferred the remaining $xxx to the Company's bank account. Apart from their role as Directors for the Company, the Directors also operate a partnership. The partnership is registered for GST. However, X and Y are not individually registered for GST.

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

Reasons for decision: Summary: The Directors do not make a taxable supply to the Plaintiff as the payment of legal costs as a result of a court order and subsequent settlement through negotiation does not constitute a 'supply' for GST purposes. | Detailed Reasoning - Detailed reasoning: Section 9-5 of the GST Act 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 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. (denotes a term defined in section 195-1 of the GST Act). We need to consider whether X and Y (together, the Defendants or Directors) make a supply to Z (the Plaintiff) for the payment of legal costs as a result of a court order and subsequent settlement agreement, whether the supply is the course or furtherance of the Director's enterprise and if the Directors are required to be registered for GST under paragraphs 9-5(a), 9-5(b) and 9-5(d) of the GST Act respectively. 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) explains whether the payment of costs under a court order or settlement constitutes consideration for a supply. Specifically, paragraphs 145 to 149 of GSTR 2001/4 states: 145. When a dispute is finalised, either by a court giving judgement or through negotiation of a settlement, the unsuccessful party in the action may be required to pay the costs or part of the costs that have been incurred by the successful party in bringing or defending the claim. These costs, referred to as party/party costs, could include, barrister's fees, solicitor costs, fees for various expert reports and court costs. 146. In any legal action the parties concerned are required to pay their legal advisers the solicitor client costs incurred and the supply of these legal services will attract GST and be GST inclusive sums to the extent that they are not GST-free. Both parties to a dispute, as recipients of a supply of legal representation respectively, may be entitled to an input tax credit for a creditable or partly creditable acquisition of these services. 147. For the purposes of this Ruling, we are concerned with the subsequent stage when the successful party is able to recover costs wholly or partly through a court order for costs or by negotiation of an amount in a settlement. 148. As we have seen for a supply to be a taxable supply the conditions under section 9-5 of the GST Act must be met. In the instance of the payment of costs under the court order or settlement there is no supply for consideration from the successful party to the unsuccessful party. This is essentially paying compensation for costs or losses incurred in the dispute and will be treated in the same manner as damages under paragraphs 110 and 111. 149. Accordingly, the payment of court ordered costs or costs negotiated in a settlement in the circumstances described will not be consideration for an earlier or current supply. It does not matter that the payment of the costs order or settled amount is made by an entity other than the unsuccessful party. Consistent with the application of paragraphs 145 to 149 of GSTR 2001/4, the Defendants do not make a 'supply' to the Plaintiff for the payment of legal costs as a result of a court order and subsequent settlement agreement. Therefore, paragraph 9-5(a) of the GST Act is not satisfied and the Defendants do not make a taxable supply to the Plaintiff under section 9-5 of the GST Act. Consequently, we do not need to consider whether the remaining requirements under section 9-5 of the GST Act are satisfied and the payment of legal costs as a result of a court order and subsequent negotiated settlement agreement by the Plaintiff is not subject to GST.