GST on settlements and judgments – A practical guide
DOES GST APPLY TO SETTLEMENTS OR JUDGMENTS OF COURT LITIGATED CLAIMS?
When parties enter into Terms of Settlement for a litigated claim, it is not in itself a taxable supply which attracts GST.
Usually, claims that are subject to litigation involve a claim for:
- services provided and invoices rendered for those services, which remain unpaid; and
- damages for loss of profit or damage to reputation of the business.
Settlement of a damages claim for loss of profits is not a taxable supply that attracts GST being payable.
If part of the settlement relates to settlement of the damages claimed, GST is not payable.
Where the settlement relates to settlement of invoices previously rendered which remain unpaid, settlement of that component of the claim will attract GST that is payable.
Further, legal costs will not attract GST, where the party claiming the legal costs is registered for GST purposes, ie. has an Australian Business Number.
In any settlement agreement, the parties should specify whether the settlement sum is inclusive or exclusive of GST. If exclusive of GST, the settlement terms should also specify which party is to pay the GST component, if so assessed to be paid by the Australian Taxation Office.
Settlement negotiations should always take into account the GST liability, and what component of the claim is GST to be payable, being on:
- A damages claim for loss of profits – no GST payable;
- Earlier taxable supply claims ie. previous invoices issued which remain unpaid – GST payable;
- Legal costs – no GST payable if party claiming legal costs is registered for GST. A costs order is essentially the same as a payment of damages.
Court judgments have been considered to be not a taxable supply, and hence no GST is payable. Often, plaintiffs to Court proceedings seek orders that the defendants indemnify the plaintiff for any GST payable arising from the Court judgment. The Court has refused to provide such a GST indemnity in favour of the plaintiff, on the basis that the payment of money to a judgment creditor does not of itself constitute a supply.
Please contact SRM Lawyers to answer any enquiry you have relating to GST and its operation relating to Court litigation, settlement and judgments.