Tax
Developments in the role of GST in the quantification of damages
When we consider the difficult areas of goods and services tax (GST), recurrent themes are "supply" and "consideration". One of the many places in which these two areas of difficulty intersect is the quantification of compensation for loss.
The principles for quantification are relatively easy to state. However, partly because of factual complexity and partly because of a lack of clarity in this area, we continue to see the strange treatment of GST becoming a substantive issue in the final stages of the settlement of disputes.
However, running an entire appeal to clarify the GST treatment after settlement had already taken place, takes this to a whole new level. This is what happened in the recent decision of the Victorian Supreme Court, Millington v Waste Wise Environment Pty Ltd [2015] VSC 167.
The decision of Croft J in this case revisits some of the important principles from earlier cases and provides new guidance on important aspects -- not just for future judicial dispositions of damages disputes but also for practitioners as we seek to structure settlement deeds so that finely balanced negotiations do not fall over because of GST issues.
The facts giving rise to the initial dispute were common enough -- Mr Millington was driving a vehicle that collided with a garbage truck operated by Waste Wise due to Mr Millington's failure to stop at a red light. The accident caused significant damage to the garbage truck and in the Melbourne Magistrate's Court, an award of damages was made in Waste Wise's favour. It was the detail of that award which gave rise to the appeal:
- Millington was ordered to pay $49,628.18 to Waste Wise. This amount was calculated to be the GST exclusive amount of the loss and damage suffered by Waste Wise (of $45,459.92) plus GST;
- Waste Wise was ordered to repay $4168.26 to Millington some months later. This of course represented the amount of GST added to the GST exclusive compensation. It was established that Waste Wise was registered for GST purposes and would be entitled to an input tax credit for the acquisitions it made in making good its loss. This aspect of the order seems to have been intended to allow Waste Wise to pay the GST inclusive amount to its service providers, obtain the input tax credit and then pay that amount back to Mr Millington.
On appeal, it was argued that these orders:
- represented a failure to properly apply the "compensatory principle" because Millington should never have been required to pay the GST inclusive amount to Waste Wise; and
- breached the "once-and-for-all" rule for damages as a result of the additional step requiring Waste Wise to pay an amount back to Millington after the input tax credit had been obtained.
There are numerous fascinating elements to this case -- the fact that Waste Wise took no part in the proceedings, the role of the amicus curiae in clarifying the issues for the court and the fact that the court entertained the appeal at all following resolution of the dispute between the parties.
From a GST perspective, what is important is the interaction of the principles of the GST law with the general legal concepts about the process of settling disputes.
Conclusion
It remains critically important to prepare evidence at the initial stages of a dispute regarding the GST status of amounts expended in making good a loss and the GST consequences of amounts received as compensation for that loss.
This evidence, combined with clear and concise explanations of the operation of the GST law will assist the court in making the appropriate orders with the requisite degree of certainty without having to resort to complex multi-staged orders. Such evidence will also prove to be essential on appeal -- should you and your client be unlucky enough to need it.
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