Unfortunately, many companies and their legal counsel have been, or are currently involved in, settling disputes with customers or suppliers. The rise of these disputes are a sign of tougher economic times.
It is understandable that GST is often not front of mind when parties negotiate and enter into a settlement. However, where GST is payable on a settlement sum and the settlement deed does not contemplate for an additional amount to be paid on account of GST, 1/11th of the settlement sum could be at risk.
Whilst liquidated damages, such as those arising from a breach of contract, may not give rise to a GST liability, some settlements do give rise to GST as they are viewed by the Commissioner as relating to:
- an earlier supply – in which the settlement is consideration for the earlier supply or an adjustment to the price previously paid for the earlier supply
- a current supply – arising from the terms of the settlement.
We have seen settlement deeds which are silent on GST, leaving the victor with a GST liability and no ability to recover it from the other party. In other instances, parties may hope to rely on a standard GST clause to resolve any issues, but these may not cover the full range of scenarios that parties might find themselves in. The GST position of each party should be considered and agreed upfront and appropriate contractual clauses be put in place to ensure that no party is out of pocket on account of GST.
You don’t want to be settling one dispute only to find yourself in another!