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20 Jul 11 No GST supply when judgment debt for converted scaffolding paid - Reglon

The Federal Court (Emmett J) has held that the taxpayer made no taxable supply for GST purposes when it received the amount of $1,478,125 in full satisfaction of a judgment obtained by it against a third party for the conversion of scaffolding owned by it.

The taxpayer hired the scaffolding to a company who allowed it to be intermingled with scaffolding owned by another company. Thereafter, the taxpayer's scaffolding could not be separately identified and differentiated from the scaffolding of the other company. Subsequently, a creditor of the other company appointed a receiver and manager of the other company's assets and, after the other company went into liquidation, the creditor took possession of the other company's assets and the scaffolding of the taxpayer.

In proceedings before the Supreme Court of New South Wales, the taxpayer claimed an order that the creditor (Citadel) deliver up the taxpayer’s scaffolding or, in the alternative, an order that Citadel pay to the taxpayer damages for conversion of its scaffolding. The Supreme Court entered judgment in favour of the taxpayer for conversion of the taxpayer’s scaffolding. After Citadel unsuccessfully appealed, the judgment sum of $1,478,125 plus interest was paid to the taxpayer.

In assessing the taxpayer, the Commissioner made a debit adjustment of the sum of $134,375. The sum of $134,475 was one-eleventh of the sum of $1,478,125. The taxpayer objected against the assessment. The Commissioner disallowed the objection and the taxpayer appealed to the Federal Court.

After describing the facts and analysing the law relating to actions in detinue and for conversion, Emmett J held that the effect of the payment in full by Citadel of the judgment in conversion was to vest in Citadel the ownership of the taxpayer’s scaffolding. However, the question for determination was whether the taxpayer had made a supply as a result. Emmett J held not, saying at para 32:

"The payment made in satisfaction of that judgment resulted in ownership of the scaffolding vesting in Citadel. That is, the transfer of ownership to Citadel, and the extinguishment of the Taxpayer’s ownership by operation of law, occurred without assent and was triggered by the payment of the judgment sum by Citadel. That payment did not depend upon any action of the Taxpayer. I do not consider that, in those circumstances, the Taxpayer may be said to have made a supply. There was no taxable supply by the Taxpayer."

Emmett J allowed the taxpayer's appeal and set aside the Commissioner's objection decision: Reglon Pty Limited v FCT [2011] FCA 805 (Federal Court, Emmett J, 5 July 2011).


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