Private ruling: GST and litigation funding
Date of advice: 22 January 2020
Published: June 2018

Ruling: Q1: Is your provision of litigation funding to recipients in the form of meeting the costs of litigation and/or provision of a guarantee to meet the costs of litigation, an input taxed financial supply under Item 2 or Item 7 of the table in sub-regulation 40-5.09(3)? | A1: Yes, your provision of litigation funding to recipients in the form of meeting the costs of litigation and/or provision of a guarantee to meet the costs of litigation is an input taxed financial supply and therefore there is no GST payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply. | Q2: Is your provision of litigation funding to non-resident recipients GST-free under Items 2 or 3 in the table in subsection 38-190(1)? | A2: Yes, your provision of litigation funding to non-resident recipients is a GST-free supply. | Q3: Does your performance of various obligations imposed under the terms of the funding agreement constitute taxable supplies for GST purposes? | A3: No, your performance of various obligations imposed under the terms of the funding agreement do not constitute taxable supplies.

Relevant facts and circumstances: You are carrying on an enterprise. You are registered for GST purposes. You provide commercial litigation funding to a range of clients. You also provide litigation funding to non-residents who do not have a presence in Australia and for the purposes of funding court proceedings outside Australia

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(1) | A New Tax System (Goods and Services Tax) Act 1999 section 40-5 | Regulation 40-5.08 of the A New Tax System (Goods and Services Tax) Regulations 1999

Reasons for decision: Summary: Unless otherwise stated, all legislative references in this Ruling are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 9-40 provides that you must pay GST on any taxable supply that you make. This means that where it is established that you are making a taxable supply of litigation funding to a recipient, then you are liable to pay GST on that supply. Under section 9-5, you will make a taxable supply if you make the supply for consideration, the supply is made in the course or furtherance of an enterprise that you carry on, the supply is connected with the indirect tax zone and you are registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. You are carrying on an enterprise and are registered for GST. The remaining elements of section 9-5 of the GST Act are discussed as follows: The supply You provide litigation funding to successful applicants for funding litigation proceedings and the arrangement is entered into via a Funding Agreement. The Funding Agreement sets out the terms, conditions and various obligations between you as the funder and the recipient of the funding. At the time of entering into the Funding Agreement, you agree to provide funding to the recipient to pay for costs incurred in connection with the prosecution of the recipient’s litigation. For consideration The Funding Agreement stipulates that the recipient will reimburse you for the costs incurred when there is a successful settlement. That is, in consideration for the supply of your funding in regards to the litigation, the recipient agrees that you will be entitled to recover, out of any settlement amount (or the resolution sum), costs incurred including legal fees, disbursements you incurred and the agreed commission. The amounts payable to you under the funding agreement do not become payable unless and until the litigation is resolved and the amounts will not exceed the resolution sum. GST-free supply Items 2 and 3 of in the table in subsection 38-190(1) provides that supplies are GST-free where they are made to a non-resident outside the indirect tax zone when the thing supplied is done or where the supplies are used or enjoyed outside the indirect tax zone when the thing supplied is done. You stated that you provide litigation funding to non-residents who do not have a presence in Australia and for the purposes of funding court proceedings outside Australia. From the facts provided, it is accepted that your supplies of litigation funding are GST-free supplies if the funding is to recipients who are non-residents and the funding is for litigation proceedings outside Australia. Input taxed supply Section 40-5 of the GST Act provides that a financial supply is input taxed. As explained above in section 9-5, an input taxed supply is not a taxable supply and consequently GST is not payable on those supplies. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given by the regulations. Regulation 40-5.08 of the A New Tax System (Goods and Services Tax) Regulations 1999 describes when a supply maybe a financial supply. Something is a financial supply only if it is mentioned as a financial supply in regulation 40-5.09 or is an incidental financial supply under regulation 40-5.10. Goods and Services Tax Ruling GSTR 2002/2, outlines the view of what the Commissioner considers to be a financial supply. Goods and Services Tax Ruling GSTR 2006/1 Goods and services tax: guarantees and indemnities explains how indemnities are treated under the GST Act. An indemnity that holds a person harmless from any loss as a result of a transaction the person enters with a third party is mentioned as a financial supply in Regulation 40-5.09 in Item 7A. Paragraph 70 of GSTR 2006/1 provides that in an indemnity covered by Item 7A, the surety takes primary responsibility for an obligation arising in relation to a third party. That is, the creditor may recover directly from the surety, regardless of whether the principal defaults. In your circumstance, the arrangement is similar to an indemnity, whereby you as the surety, have a right of recovery for losses against the principal (the recipient of the funds), paragraphs 27 and 28 of GSTR 2006/1. The facts of your case indicate that you are providing an indemnity to the funding recipient to meet the recipient’s costs of legal fees, counsel and other representative fees, disbursement costs, costs you incurred for procuring a bank guarantee or security costs and your commission. As the arrangement under the Funding Agreement is that of an indemnity arrangement, your provision of funding to the recipient is a financial supply under regulation 40-5.09 in Item 7A. Obligations under the Funding Agreement From the facts provided, it is accepted that the performances of the obligations stipulated under the Funding Agreement, are the underlying rights to the indemnity arrangement and are ancillary or incidental to the underlying indemnity and forms part of the overall supply of that indemnity.