The AAT has affirmed the Commissioner’s ruling regarding whether a legal settlement was a taxable supply.
- The taxpayer was a financial services business established in 2010 by an individual after his termination from another financial planning firm.
- As part of the individual’s employment contract with his ex-employers, he had agreed to not canvass, solicit, or compete for custom of any of the clients for a 12 months period.
- In 2011, the individual’s ex-employers commenced legal proceedings against the taxpayer and the individual for breach of contract.
- The matter was subsequently settled by mediation and the terms of settlement involved the taxpayer and the individual paying his ex-employer an amount of $200,000.
- The taxpayer then sought from the Commissioner a private ruling on whether the payment of $200,000 was consideration for a taxable GST supply.
The Commissioner ruled that the payment was not for a taxable supply and the taxpayer’s objection was subsequently disallowed. Broadly, the taxpayer argued that the payment was [for] a supply by way of either surrender of contractual rights (under s 9-10(2)(e) of the GST Act); release from restraint (under s 9-10(2)(g); or surrender of right to sue (under s 9-10(2)(e) or s 9-10(2)(g)).
The AAT disagreed with the taxpayer and held that the payment was not [for] a surrender of contractual rights, a release from restraint, nor a surrender of right to sue. Therefore, it held the taxpayer was not entitled to claim GST in relation to the legal settlement and affirmed the Commissioner’s decision.
(AAT Case [2014] AATA 301, Re Lighthouse Financial Advisers (Townsville) Pty Ltd and FCT, AAT, Ref No 2013/5469, Molloy DP, 15 May 2014.)
[LTN 94, 19/5/14]
Catchwords from [2014] AATA 301
TAXATION – GST – Supply – Settlement of legal matter – Whether settlement involved taxable supply – Whether payment was consideration for release from restraint clause –Whether payment made in consideration of surrender of right to sue – Objection decision affirmed