Tax Updates: 17 July 2023

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at

GST on court awards and out-of-court settlements

Inland Revenue (IR) has finalised its interpretation statement on the issue, with the release of IS 23/07 titled, “GST – Court awards and out-of-court settlements”.

The basic premise is that payments are subject to GST if they are consideration for a supply made by the person receiving the award/settlement, which could be determined by applying the following guidance:

Identify a supply of goods or services. (If no supply exists, the payment is not consideration, so it is not subject to GST.)

  • A person using property without right is not a supply. However, a mandatory acquisition of property under the legislation can be a supply, as the transaction is accompanied by a legal transfer of ownership.
  • An agreement not to do something in the future can be a supply (that is, a choice in action, which is a service).
  • While a forbearance to sue can be a supply, a settlement payment is generally for something other than a forbearance to sue.
  • When identifying a supply, the supply does not need to be made to the person providing the consideration.

IS 23/07 replaces the 2002 guidance (IS3387), with the following differences identified:

Reciprocal obligations do not need to be legally enforceable.

  • References to the concept of a supply being active have been removed.
  • Not all awards or settlements based on restitution will be consideration for a supply.
  • Discussion of section 25 updated to reflect recent amendments (new taxable supply information rules).
  • New discussion of section 5(13) (payments received under a contract of insurance).
  • New discussion of Case N62 (payments in relation to leased property that was lost; and
  • Change in emphasis placed on unilateral action.

The interpretation statement is 33 pages in length, however, if you wish to avoid the detail, a useful 3-page fact statement accompanies the release of the IS. In addition to the guidance, and items pointed out above, I think the main considerations worthy of note are:

  • Compensation for a loss is not consideration for a supply because a person does not make a supply by suffering a loss.
  • Where one party terminates an ongoing supply contract without a right to terminate and without the agreement of the other party, a settlement sum in respect of this action will typically relate to a loss that the other party suffers as a result of the early termination. Therefore, the award is not consideration for a supply. In contrast, if the other party agrees to alter or terminate the contract in exchange for a payment, there is a supply by that other party of rights under the contract, and the payment is consideration for the supply.
  • It is important to take note of the potential application of section 5(13), and to determine, therefore, whether a payment your client has received, may possibly have come from the other parties insurer. In this regard, a special case is where an insurer makes a payment arising from a court award or out-of-court settlement. Where a registered person receives an amount from an insurer (which does not need to be the registered persons’ insurer), the amount is deemed to be consideration for a supply made by the registered person. This applies to payments that would not otherwise be regarded as consideration for a supply, for example, an award of compensation for a loss.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.

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