Lighthouse Financial Advisers (Townsville) Pty Ltd and Commissioner of Taxation
[2014] AATA 301
[2014] AATA 301
Division TAXATION APPEALS DIVISION File Number
2013/5469
Re
Lighthouse Financial Advisers (Townsville) Pty Ltd
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President I R Molloy
Date 15 May 2014 Place Brisbane The Tribunal affirms the objection decision.
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Deputy President I R Molloy
CATCHWORDS
TAXATION – GST – Supply – Settlement of legal matter – Whether settlement involved taxable supply – Whether payment was consideration for release from restraint clause –Whether payment made in consideration of surrender of right to sue – Objection decision affirmed
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-5, 9-10, 9-15
SECONDARY MATERIALS
Goods and Services Tax Ruling (GSTR) 2001/4
REASONS FOR DECISION
Deputy President I R Molloy
15 May 2014
Michael Christian Hogue was employed under an agreement dated 8 August 2005 as a senior financial planner by DFS No 1 Pty Ltd as trustee of the DFS Hybrid Trust carrying on business as Dalle Cort Financial Services. The agreement included a term that
Mr Hogue, or any person under his control, would not canvass, solicit, or compete for the custom of any of Dalle Cort’s clients for twelve months following the termination of his employment.
Following termination of his employment in September 2010, Mr Hogue established his own financial services business with the applicant, Lighthouse, a company he controlled. On 9 May 2011 Dalle Cort and a second plaintiff (described as Dalle Cort’s principal and registered owner of its business) commenced a proceeding in the Townsville District Court against Mr Hogue and Lighthouse.
The statement of claim included allegations that, in breach of contract, Mr Hogue, either directly or through Lighthouse, had provided and continued to provide, financial planning services to 25 named clients of Dalle Cort, and had competed and continued to compete for the custom of those and other Dalle Cort clients.
It was alleged that in consequence the plaintiffs had suffered loss and damage including $122,745.32 in annual revenue from the named clients. Alternatively it was claimed that the second plaintiff had been deprived of the opportunity to sell its goodwill in respect of the 25 clients to a third party at a price of 3.3 times the annual revenue they generated, a total of $405,059.55.
The claims were expressed to be for damages against Mr Hogue for breach of contract, and for damages against Lighthouse for procuring or inducing breach of contract. There was an alternative claim for an account of profits made by Mr Hogue and/or Lighthouse as a result of the alleged breach of contract.
On 28 March 2012, following a mediation, the parties signed terms of settlement by which the defendants agreed to pay the plaintiffs $200,000 within 60 days. It was agreed that, upon performance, the parties would consent to the filing of a notice of discontinuance.
The settlement sum was paid by Lighthouse which, through its tax agent, then applied to the Commissioner for a private ruling. The question Lighthouse posed was:
Is the payment of $200,000 as settlement of a legal matter [consideration for] a taxable supply for GST whereby [Lighthouse] would be entitled to claim GST.
A statement of facts accompanied the application. The Commissioner was also supplied with a copy of the claim and statement of claim, the terms of settlement, and Mr Hogue’s employment agreement.
The Commissioner’s ruling was that the payment was not for a taxable supply and an objection was disallowed. This application is brought from the objection decision.
Issues
Lighthouse contends that there was a taxable supply in that:
·Dalle Cort surrendered its contractual rights to the parcel of fees generated by the 25 clients who signed over their financial planning interests to Lighthouse during the restraint period;
·Dalle Cort released Mr Hogue from the restraint clause in his employment agreement; or
·the payment was made in consideration of the surrender of the right to sue
Mr Hogue and/or Lighthouse.Surrender of contractual rights to the parcel of fees
The A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act), s 9-5, provides, relevantly:
You make a taxable supply if:
(a) you make the supply for * consideration.
Under s 9-10(1) of the GST Act, supply is defined broadly as “any form of supply whatsoever”. Under s 9-10(2), without limiting sub-section (1), supply includes, relevantly:
(e) a creation, grant, transfer, assignment or surrender of any right;
…
(g) an entry into, or release from, an obligation:
(i) to do anything; or
(ii) to refrain from an act; or
(iii) to tolerate an act or situation;
(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).
Lighthouse contends there was a supply by way of surrender under s 9-10(2)(e) of the GST Act because:
The substance of the settlement was that Dalle Cort surrendered its contractual rights to the ‘parcel of fees’ generated by the 25 clients that signed their financial planning interests to the Applicant ‘prior to the end of the restraint period’ in Mr Hogue’s employment contract.
As I have said, the claim against Mr Hogue was for breach of contract, and against Lighthouse it was in tort for procuring or inducing breach of contract. A measure of the damage sustained was said to be the loss of fees which would have been derived from the 25 clients who left Dalle Cort to go to Lighthouse.
That was not to say Dalle Cort had any contractual rights in respect of those fees. It was not asserting any contractual rights as described by Lighthouse. It is not clear how
Dalle Cort could have asserted the contractual rights which Lighthouse says were surrendered.
Lighthouse relies on the statement of facts which accompanied the application for a private ruling, in particular:
Dallecort [sic] sued Hogue/Lighthouse based on the value of recurring or trail fees that Hogue acquired from Dallecort prior to the end of the restraint period in his employment contract. This was a result of 25 clients of Dallecort signing their financial planning interests across to Hogue/Lighthouse prior to the end of the restraint period in his employment contract.
Both parties participated in mediation and reached a settlement on 28-3-2012 where Hogue/Lighthouse paid Dallecort $200,000. The mediation was reached in consideration of the estimated capital value of the 25 clients that had signed across from Dallecort to Hogue/Lighthouse.
This is no more than an indication that settlement was reached having regard to the loss Dalle Cort had sustained as a result of 25 clients shifting to Mr Hogue and Lighthouse.
It is consistent with the plaintiffs’ pleading as to the measure of their loss.
Reliance is also placed on certain responses to the Commissioner’s requests for further information. The Commissioner was told that Lighthouse (through Mr Hogue) believed the settlement sum constitutes the price paid for the purchase of fees, and that the agreed figure “is based on the annual revenue of the parcel of fees”. However these are only expressions of opinion and are incorrect in so far as they seek to characterise the payment as the price paid for the purchase of fees or for the surrender of a contractual right in respect of fees.
I do not accept that the “substance” of the settlement was the surrender of contractual rights as Lighthouse contends or that this was the underlying supply for the payment of the settlement sum.
Release from the restraint
Lighthouse submits that there was a taxable supply in that Dalle Cort released Mr Hogue from the restraint clause in his employment contract and that this constituted a supply under s 9-10(2)(g) of the GST Act.
I have referred to the relief sought in the District Court proceeding. Dalle Cort was not seeking to restrain Mr Hogue from breaching the restraint clause in his contract of employment. There is no mention of the restraint in the terms of settlement.
Moreover, the restraint was for twelve months from September 2010, and had already expired when the terms of settlement were signed on 28 March 2012.
In my view the consideration was not in respect of a release of Mr Hogue as contended.
Surrender of right to sue
Lighthouse contends that the payment was made in consideration of the surrender of the right to sue Mr Hogue and/or Lighthouse, constituting a taxable supply falling within
s 9-10(2)(e) or s 9-10(2)(g) the GST Act.
Under s 9-10(2)(e) of the GST Act a supply may be by way of surrender of a right, and under s 9-10(2)(g) a supply may be by entry into an obligation to refrain from further legal action.
In respect of out-of-court settlements, such supplies are described in GSTR 2001/4 as “discontinuance” supplies. The Commissioner accepts that the settlement agreement between the parties does contain a discontinuance supply.
Whether a discontinuance supply is a taxable supply depends on the requirements of
s 9-5 of the GST Act being met in relation to that supply. Under s 9-5(a) a supply is a taxable supply if, among other things, the supply is made “for consideration”.
Section 9-15 of the GST Act provides that a payment will be consideration for a supply if the payment is “in connection with” a supply and “in response to” or “for the inducement” of a supply. There must be sufficient nexus between the supply and the payment.
The claims against Mr Hogue and Lighthouse were for breach of contract and tort respectively. The plaintiffs sought damages and, alternatively, in respect of the breach of contract, claimed an account of profits. The latter remedy, whether or not it would have been available, does not alter the nature of the claims.
Lighthouse says that the settlement sum was based on the revenue which would have been generated by the 25 clients who transferred their business from Dalle Cort. This was one measure of the plaintiffs’ claims against the defendants for breach of contract and in tort. It is these claims which were the subject of the settlement agreement for which the settlement sum was paid.
The terms of settlement also provided for release of the defendants from other claims (known or unknown) which the plaintiffs might have against them and, upon payment of the settlement sum within a certain time, for the parties to consent to the filing of a notice of discontinuance.
These, or similar terms, are not unusual where litigation is settled. They are, at least in this case, included in order to bring about finality rather than as the subject of the settlement. They do not give rise to an additional payment and they should not be ascribed a separate value.
The payment was not made in consideration of the surrender of the right to sue
Mr Hogue and/or Lighthouse as Lighthouse contends.
Conclusion
The objection decision is affirmed.
I certify that the preceding 34 (thirty -four) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Molloy
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Associate
Dated 15 May 2014
Heard on the papers
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Taxation Law
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Standing
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Unconscionable Conduct
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