Often when a Plaintiff is preparing to issue proceedings or settle its claim with a Defendant little thought if any is given to the GST treatment of any payment following a Court award or an out of Court settlement.In many of these situations however the availability of funds is strictly limited and the Plaintiff’s liability to account for GST might be the difference between providing a service which results in an economic recovery and providing a service which does not.

In order for GST to be payable from a Court award or the proceeds of an out of Court settlement, the payment must be in consideration for a supply or an adjustment to consideration for an earlier supply.  In order for the ‘supply’ to qualify there must be some element of reciprocity to link the payment to the supply.

Where a payment is made as an award of damages for loss suffered by the Plaintiff, that payment will generally not attract GST.

Where the payment is in respect of a debt arising from unpaid goods or services from a person who is in the business of supplying them, that payment will generally attract GST.

If the creditor/supplier accounts for GST on an invoice, then the GST component will probably already be accounted for.  If they account for GST on a cash basis, they will then need to account for GST on that payment when it is made.  From the analysis in the leading case of Chatham Islands Enterprise Trust v The CIR (1999) it is apparent that each case will depend upon its facts.

If you are intending to issue proceedings or negotiating the settlement of your claim with the other parties, you should give the GST implications of any payment early consideration.