Private ruling: Goods and services tax (GST) and legal services
Published: September 2014

Ruling: Q1: Is GST payable on your supply of services to your client? | A1: GST is payable on part of the price for your supply of services to your client. | Q2: Are you entitled to input tax credits in relation to associated expenses you incur? | A2: You are entitled to input tax credits in relation to some of the associated expenses you incur.

Relevant facts and circumstances: You are an individual. You are registered for GST You are a solicitor. You are just based in Australia. You are an Australian resident. You act for a client who is currently a non-resident and not domiciled in Australia for tax purposes, although an Australian citizen. The proceedings relate to breach of a fixed term contract of employment which was entered into in Australia. The relevant services were performed in Australia. After repudiation of the contract by their employer and its termination by your client, your client moved to overseas where they were able to gain employment to progress their career. Your client has commenced legal proceedings in an Australian court for breach of contract against their former employer. You have engaged a barrister in relation to this court case. The barrister gives you advice and you pass this on to your client. The barrister prepared a statement of claim on behalf of your client. The barrister is representing your client in court. You are liable to pay the barrister for their associated fees. You have also engaged a solicitor/agent. This entity retained a process server to serve the statement of claim on your client's former employer. You are liable to pay this other solicitor/agent for their associated fees. The barrister and other solicitor/agent are registered for GST and perform all of their services in this case in Australia. You incur associated legal stationery costs and fees for searches done, for example, an ASIC search on the company that employed your client. Your client will attend court for the entire time that the barrister represents your client in court. Your client will not be physically in Australia when other services are performed for their benefit, other than possibly being in Australia for the purpose of visiting family.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 38-190

Reasons for decision: Summary: Your supply of legal services to your client is partly GST-free under section 38-190 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act), which deals with supplies of services consumed overseas. | Detailed Reasoning - Detailed reasoning: GST is payable by you where you make a taxable supply. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (* Denotes a term defined in section 195-1 of the GST Act) Goods and Services Tax Ruling GSTR 2000/37 discusses agency and disbursements made by a solicitor. Paragraphs 48 to 53 of GSTR 2000/37 state: 48. Agents may incur expenses on a client matter both as an agent of the client and as a principal in the ordinary course of providing their services to the client. For example, in most cases, even though agreements between solicitors and clients may not use the term agent or agency, it is clear that the clients have authorised the solicitors to act on their behalf in the particular matter. When the solicitor acts as an agent for the client, the general law of agency applies so that the solicitor is 'standing in the shoes' of the client. 49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor. 50. The following are examples of common fees and charges, for which a client is liable, that may be paid for by a solicitor as a paying agent of the client. If the solicitor makes the payment, GST is not payable on the subsequent reimbursement by the client to the solicitor for: • application fees; • registration fees; • court fees; • barrister's fees when the barrister is engaged by the client; • incorporation fees; • most fees in connection with registering and maintaining the status of particular legal relationships such as companies, partnerships, societies or associations; • fines, penalties, stamp duty and taxes; and • probate fees. 51. The following are examples of common disbursements that, depending upon the contractual arrangements between the client and the solicitor, can be incurred by a solicitor and then reimbursed by a client as part of the consideration payable for legal services provided to the client by the solicitor. If the following disbursements are incurred by a solicitor, GST is payable on the subsequent reimbursement by the client to the solicitor: • search fees; • municipal search fee (eg rates; zoning; permits); • birth/death/marriage certificate fees; • barrister's fees when the barrister is engaged by the solicitor; • witness fees; • fees for recording court proceedings; • service of document fees; • fees for expert report or attendance in court; and • fees to obtain court transcript. 52. The above GST treatment of disbursements is consistent with the income tax treatment of disbursements as explained in Taxation Ruling TR 97/6. 53. The following are examples of costs that a solicitor may incur in carrying on the business of providing a legal service to the client. GST is payable on any subsequent payment by the client to the solicitor for the supply of the legal service for: • telephone expenses; • postage expenses; • photocopying expenses; • courier expenses; • word processing expenses; and • travel expenses of the solicitor and staff. However, despite paragraphs 48 to 53 of GSTR 2000/37, a supply of legal services that are supplied or provided to a non-resident may be GST-free under section 38-190 of the GST Act. You engaged the barrister to perform services and you are liable to pay the barrister their fees. Therefore, in accordance with paragraph 51 of GSTR 2000/37, the supply made by the barrister is made to you and you on-supply these services to your client. You engaged the other solicitor/agent to perform services and you are liable to pay the other solicitor/agent their fees. Therefore, in accordance with paragraph 51 of GSTR 2000/37, the supply made by the other solicitor/agent is made to you and you on-supply these services to your client. You acquire stationery and search services. Your on-charge for these expenses forms part of the consideration for your supply of legal services to your client. You meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because: • you supply legal services for consideration • you supply these services in the course or furtherance of an enterprise that you carry on • these supplies are connected with Australia, and • you are registered for GST. There are no provisions of the GST Act under which your supplies of services are input taxed. Therefore, what remains to be determined is whether you are making a GST-free supply. Item 2 in the table in subsection 38-190(1) of the GST Act (item 2) provides that a supply of something other than goods or real property is GST-free if made to a non-resident who is not in Australia when the thing supplied is done and: (a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or (b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered for GST. However, subsection 38-190(3) of the GST Act provides that a supply covered by item 2 is not GST-free if: (a) it is a supply under an agreement entered into with a non-resident, and (b) the supply is provided to another entity in Australia. Item 3 in the table in subsection 38-190(1) of the GST Act (item 3) provides that a supply of something other than goods or real property is GST-free if the supply: (a) is made to a recipient who is not in Australia when the thing supplied is done, and (b) the effective use or enjoyment of which takes place outside Australia; other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia. Subsection 38-190(4) of the GST Act provides that a supply is taken, for the purposes of item 3, to be a supply made to a recipient who is not in Australia if: (a) it is a supply under an agreement with an Australia resident, and (b) the supply is provided to another entity outside Australia. Where a supply to a non-resident is not GST-free under item 2, it will not be GST-free under item 3. Paragraph 31 of GSTR 2004/7 provides the Australian Taxation Office view on the meaning of not in Australia for the purposes of item 2 and item 3. It states: 31. The requirement that the non-resident in item 2, or the recipient in item 3, is not in Australia when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done. Paragraphs 35, 202 and 214 to 217 of Goods and Services Tax Ruling GSTR 2004/7 provide guidance on determining whether the recipient of a supply is in Australia for the purposes of item 2 and item 3. They state: 35. A non-resident individual is in Australia if that individual is physically in Australia. If a non-resident individual is physically in Australia and in contact (other than contact which is only of a minor nature) with the supplier, that presence is in relation to the supply. 202. In the case of supplies made to an individual, we consider that the physical location of the individual establishes whether that individual is in Australia when the thing supplied is done. 214. A non-resident individual may be physically in Australia when the thing supplied is done, but that presence in Australia may be unrelated to the supply. For example, the non-resident is in Australia on holidays only. 215. If that individual is in Australia only on matters unrelated to the supply, we consider that the individual recipient is in Australia but not 'in relation to the supply'. We recognise that the physical presence in Australia of the non-resident individual at the relevant time is merely coincidental. 216. Thus, if a non-resident individual is, for example, in Australia on holidays and has no contact with the supplier, we consider that the presence of the non-resident individual in Australia when the thing supplied is done is not in relation to the supply. 217. If a non-resident individual recipient of a supply is physically in Australia and in contact with the supplier (other than contact which is only of a minor nature), we consider that presence is in relation to the supply. The extent to which an individual's presence in Australia is in relation to the supply must be determined on a reasonable basis having regard to the period of the individual's involvement with the supply while in Australia. This is discussed further in 'Part IV - apportionment'. Paragraph 41 of Goods and Services Tax Ruling GSTR 2007/2 discusses the concept of providing a supply to an entity. It states: 41. A supply is made to a recipient and provided to another entity if in the performance of a service (or in the doing of some thing) the actual flow of that supply is to an entity that is not the recipient entity with which the supplier made the agreement for the supply. That is, while the contractual flow of the supply is to the recipient entity, the actual flow of the supply is to another entity. Your client is a non-resident individual. Your client will be physically in Australia when the barrister is representing them in court. This presence will be related to the on-supply that you make of these barrister's services to your client and your client will be involved with your on-supply of these services. Therefore, your client will be in Australia in relation to your on-supply of these barrister's services. Hence, your supply of these services is not GST-free under item 2. There are no provisions in the GST Act under which your supply of these services is GST-free. Therefore, your supply of these services is taxable because all of the requirements of section 9-5 of the GST Act are met. Your supply of services to your client other than the service of the barrister representing your client in court is GST-free under item 2 because: • legal services are not goods or real property • your client will not be in Australia in relation to your supply of these services (if they are physically in Australia when these services are performed, this presence will be unrelated to the supply - that is, they would co-incidentally be in Australia to visit family) • these services are not work physically performed on goods situated in Australia when the work is done or directly connected with real property situated in Australia, and • you will not be providing these services to 'another entity' in Australia. Any services that you supply to your client that are GST-free under item 2 will not be taxable. Paragraph 16 of Goods and Services Tax Ruling GSTR 2001/8 discusses mixed supplies. It states: 16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. You make a mixed supply to your client. In accordance with paragraph 30B of GSTR 2001/8, the GST payable on your overall supply is 1/11 th of the part of the total price you charge that is reasonably apportionable to the taxable services. In regards to the charges you impose, only the charge you impose for the service of the barrister representing your client in court is subject to GST. | Summary: The supply of the barrister's services to you is partly GST-free under section 38-190 of the GST Act. The supply of the other solicitor's/agent's services to you is GST-free under section 38-190 of the GST Act. | Detailed Reasoning - Detailed reasoning: You are entitled to input tax credits on your creditable acquisitions. In accordance with section 11-5 of the GST Act, you make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose (b) the supply of the thing to you is a taxable supply (c) you provide or are liable to provide consideration for the supply, and (d) you are registered or required to be registered for GST. Section 11-15 of the GST Act defines creditable purpose. Subsection 11-15(1) of the GST Act states: You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. Subsection 11-15(2) of the GST Act states: However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be input taxed; or (b) the acquisition is of a private or domestic nature. You acquire legal services, stationery etc in carrying on your enterprise. These acquisitions do not relate to making supplies that would be input taxed and are not of a private or domestic nature. Hence, you acquire the things in question for a creditable purpose. Therefore, you meet the requirement of paragraph 11-5(a) of the GST Act. You provide consideration for the supplies made to you. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act. You are registered for GST. Therefore, you meet the requirement of paragraph 11-5(d) of the GST Act. Hence, what remains to be determined is whether taxable supplies are made to you. GST-free supplies under item 3 Paragraph 60 of GSTR 2004/7 provides guidance on determining whether a recipient is in Australia in relation to a supply where the recipient is a resident individual. It states: 60. A resident individual who is physically in Australia when the thing supplied is done is in Australia in relation to the supply. Paragraphs 100 to 107 of GSTR 2007/2 provide guidance on determining where effective use and enjoyment takes place. They state: 100. If a supply is provided (or is required to be provided) to a resident individual who is physically in Australia when the thing supplied is done, the supply is provided to that individual in Australia. The requirement in paragraph 38-190(3)(b) is satisfied and subsection 38-190(3) negates the GST-free status of the supply (assuming the other requirements of that provision are satisfied). 101. If a supply is provided (or is required to be provided) to a non-resident individual who is physically in Australia when the thing supplied is done, it is necessary to determine whether the presence of the non-resident individual in Australia is integral to, as distinct from being merely coincidental with, the provision of the supply. (We explain at paragraphs 105 to 115 when a non-resident individual's presence in Australia is integral to the provision of the supply.) 102. If a non-resident individual's presence in Australia is integral to, as distinct from being merely coincidental with, the provision of the supply, we consider that the supply is provided to that individual in Australia. As the supply is provided to the individual in Australia, effective use or enjoyment of the supply does not take place outside Australia. Paragraph (b) of item 3 is not satisfied and the supply is not GST-free under item 3. (See Flowchart 3, page 35.) 103. Conversely, if a non-resident individual's presence in Australia is not integral to the provision of the supply, we consider that the supply is not provided to that individual in Australia; it is provided to the non-resident individual outside Australia. As the supply is provided to the non-resident individual outside Australia, effective use or enjoyment of the supply takes place outside Australia. Paragraph (b) of item 3 is therefore satisfied and the supply is GST-free under item 3 if the other requirements of item 3 are satisfied. (See Flowchart 3, page 35.) 107. Determining whether an individual's presence at a particular location is integral to the provision of the supply requires an examination of the facts and circumstances of the supply. However, some indicators that an individual's presence at a particular location is integral to the provision of the supply, and is not merely coincidental, include: • the need for the supply arises from the individual's presence at that location; or • the presence of the individual at that location is integral to the performance, receipt or delivery of the supply. Supply of barrister's advice to you Barrister's advice is supplied to you. You are the recipient of this supply. You are a resident individual who is physically in Australia. Therefore, the recipient of this supply is in Australia in relation to the supply. The barrister does not provide the advice to 'another entity' (someone other than the resident recipient with whom the barrister has an agreement to make its supply of advice) outside Australia. Instead, the barrister provides advice to you. Effective use and enjoyment of this supply takes place in Australia because the providee (you) is a resident individual who is physically in Australia. Therefore, the barrister's supply of advice to you is not GST-free under item 3. This supply is a taxable supply because all of the requirements of section 9-5 of the GST Act are met. Hence, you meet the requirement of paragraph 11-5(b) of the GST Act. As you meet all of the requirements of section 11-5 of the GST Act, you are entitled to an input tax credit on your purchase of the barrister's advice. Supply to you of the service of preparing the statement of claim The supply to you of the service of preparing the statement of claim is GST-free under item 3 because: • legal services are not goods or real property • the supply is made under an agreement with a resident, but the service is provided by the barrister to 'another entity' (your client)(we consider that these services are provided by the barrister to your client because the statement of claim is your client's statement of claim/the claim is made on your client's behalf) • your client is a non-resident individual • any presence of your client in Australia at the time this service is performed would not be integral to the provision of the supply of this service by the barrister to your client, and • this service is not work physically performed on goods situated in Australia when the work is done or directly connected with real property situated in Australia. Therefore, the barrister's supply of the service of preparing the statement of claim is not a taxable supply. Hence, you do not meet the requirement of paragraph 11-5(b) of the GST Act. As you do not meet all of the requirements of section 11-5 of the GST Act, you are not entitled to an input tax credit on your purchase of this service. Supply to you of the service of the barrister representing your client in court The supply to you of the service of the barrister representing your client in court is a supply made under an agreement with a resident - you. The supply is provided by the barrister to 'another entity' - your client. The supply to you of the service of the barrister representing your client in court is not GST-free under item 3 because: • your client is a non-resident individual, and • their presence in Australia at the time this service is performed is integral to the provision of this supply. There are no provisions in the GST Act under which the barrister's supply of the service of representing your client in court is GST-free. This supply is a taxable supply because all of the requirements of section 9-5 of the GST Act are met. Hence, you meet the requirement of paragraph 11-5(b) of the GST Act. As you meet all of the requirements of section 11-5 of the GST Act, you are entitled to an input tax credit on your purchase of the barrister's service of representing your client in court. The barrister makes a mixed supply to you. Supply of other solicitor's/agent's services to you The supply of the other solicitor's/agent's services to you is GST-free because: • legal services are not goods or real property • this supply is made under an agreement with a resident, but the services are provided to 'another entity' (your client) • your client is a non-resident individual • any presence of your client in Australia at the time these services are performed would not be integral to the provision of the supply by the solicitor/agent to your client, and • these services are not work physically performed on goods situated in Australia when the work is done or directly connected with real property situated in Australia. Therefore, the supply of the other solicitor's/agent's services to you is not a taxable supply. Hence, you do not meet the requirement of paragraph 11-5(b) of the GST Act. As you do not meet all of the requirements of section 11-5 of the GST Act, you are not entitled to an input tax credit on your purchase of these services. The on-charge of the process server's fees to you forms part of the consideration for the GST-free supply the other solicitor/agent makes to you. Supply of law stationery to you The supply of the law stationery to you is not GST-free. Where the law stationer is registered or required to be registered for GST, all of the requirements of section 9-5 of the GST Act would be met. Therefore, under such circumstances, the supply would be taxable. Hence, the requirement of paragraph 11-5(b) of the GST Act would be met. Therefore, where the supplier is registered or required to be registered for GST, you make a creditable acquisition because all of the requirements of section 11-5 of the GST Act would be met. Hence, under such circumstances, you are entitled to an input tax credit. Supply of search services to you The supply of the service to you of searching for relevant information such as searches of the ASIC database in respect of the company that employed your client is not GST-free. Where the search business owner is registered or required to be registered for GST, all of the requirements of section 9-5 of the GST Act would be met. Therefore, under such circumstances, the supply would be taxable. Hence, the requirement of paragraph 11-5(b) of the GST Act would be met. Therefore, where the supplier is registered or required to be registered for GST, you make a creditable acquisition because all of the requirements of section 11-5 of the GST Act would be met. Hence, under such circumstances, you are entitled to an input tax credit.