Take care to consider GST in settlement arrangements

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It is possible that out of court settlements may involve a taxable supply for which GST is payable.

Whether GST is payable depends on the subject matter of the proceedings or claim being settled and can be a complicated question. Although the act of settling would not ordinarily constitute a taxable supply, GST may still be payable if a payment is made in relation to an earlier taxable supply or if the settlement arrangements involve a new taxable supply.

GST is likely to apply to settlement of a dispute about non-payment for work done or goods purchased. It may also apply if a new taxable supply is made, for example, the arrangement involves the transfer or grant of a new right. However, there is unlikely to be a taxable supply in relation to settlement of claims relating to damages for negligence.

Settlements may also raise other GST implications. For example, they may impact on one party’s ability to claim input tax credits in respect of amounts reimbursed or adjustment events may occur.

GST implications should be considered before settlement agreements are finalised to ensure all financial implications are considered and appropriate GST clauses are included.

If you need help reviewing a settlement agreement or have any questions about GST generally, Crown Law can help.