Compensation

If you receive a payment because another party has not met certain obligations or conditions, you need to determine whether GST is chargeable on that payment.

A payment that is compensatory in nature is not consideration for a supply. Therefore, GST is not chargeable on the payment. However, if the payment is consideration for goods or services that you have supplied, GST is chargeable on the payment, subject to the normal GST rules. If there is a written contract, you should examine the terms of the contract to determine the nature of the payment.

The following examples illustrate whether a payment is compensatory in nature or consideration for a supply, and whether GST is chargeable.

Example 1: Traffic fine recovered from customer

Car rental Company C was fined by the traffic police for illegal parking of a car hired by its customer, D. C recovers the fine from D, and no goods or services are supplied to D. As the payment is compensatory in nature, C does not need to charge GST on the amount recovered from D.

Example 2: Debt collection fees recovered from customer

Company G supplied goods to Company H who defaulted on the payment. G engaged a debt collector to help in recovering the debt. H eventually settled the debt, and also had to pay the debt collection fees, to G. As G did not supply any goods or services to H in return for recovering the debt collection fees, the payment is compensatory in nature and G does not need to charge GST on the amount recovered.

Example 3: Damage to sublet premises

Company S rents an office space from the landlord and sublets half the space to Company T. Under the lease agreement, S is allowed to sublet the office space to a third party but will be liable for any damage to office furniture or equipment. On one occasion, T’s employee accidentally damages one of the office projectors and S paid the landlord for the replacement of a new projector. S subsequently recovers the amount from T. As S does not provide any goods or services to T in return for the payment, the payment is compensatory in nature and no GST is charged on the amount recovered.

Example 4: Repair services supplied to tenant

Company X damages leased premises and fails to carry out repairs required under the lease. The landlord engages a contractor to repair the damage and recovers the repair costs from X. As the payment is consideration for repair services supplied to X, GST is chargeable on the amount recovered.

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