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Ruling

Subject: GST and disbursements

Questions

Is travel loading part of the fees for services provided by you, for which GST is payable?

1. Are you required to include GST in an amount that you pay to your employee in respect of the travel (country/interstate) loading?

Answers

Yes, travel loading is part of the fees for services provided by you, for which GST is payable.

1. No, you are not required to include GST in an amount that you pay to your employee in respect of the travel (country/interstate) loading.

Relevant facts and circumstances

You are an entity and you are registered for GST.

You are carrying on a services enterprise.

You paid an amount to your employee for the travel to attend court hearing.

You do not require your employee to vouch expenses or refund unexpended amounts to you.

Under the Workers Compensation Acts 1987, costs for services include professional fees and regulated disbursements.

Regulated disbursements are provided in Part 3 of Schedule 6 of the Workers Compensation Regulation 2010. Country/interstate loadings (including travel and accommodation expenses) are dealt with under Item 1 in the table.

Regulation 16 of the Motor Accidents Compensation Regulation 2005 states that GST can be added to costs when any GST is payable in respect of the service to which the cost relates (there are some costs that would not attract GST and therefore it would not be added in relation to those items).

In certain states and territory workers compensation matters the insurer was required to pay the workers costs in relation to a statutory workers compensation claim.

The insurance company in this matter, determined that travel loading is a service for which GST is payable.

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 Subsection 9-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(2)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

Reasons for decision

1. Is travel loading part of the fees for services provided by you, for which GST is payable?

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act provides that 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.

In your case, you are carrying on a services enterprise, the supply of your services is for consideration, it is made by you in the course of an enterprise that you carried on, the supply is connected with Australia and you are registered for GST.

Hence, the supply of the services by you is a taxable supply under section 9-5 of the GST Act and GST is payable under subsection 7-1(1) of the GST Act.

From the facts provided, under the Workers Compensation Acts, costs for services include professional fees and regulated disbursements. Travel loading is one of the regulated disbursements.

As such, we need to consider what constitutes disbursements. We refer to Taxation Ruling TR 97/6 Income tax: tax treatment of solicitors' disbursements/recoupments (TR 97/6) for guidance.

Paragraphs 11 to 16 of TR 97/6 discusses the tax treatment of disbursements incurred by solicitor in respect of which recoupment may be sought from clients.

Disbursements

11. Disbursements are particular outgoings recognised in the legal profession as being necessarily incurred in performing professional services for a client. It is our understanding that disbursements describe a range of costs which are, essentially, payments made on behalf of a client for which the client is not directly liable. Typical disbursements include payments for court fees, counsel fees, fees for the registration of documents, and charges for postage, telephone calls, travel and other out of pocket expenses. Further, it is our understanding that payments for which the client is primarily liable, such as stamp duty and payments into court as security are not disbursements. (Emphasis added).

12. It is our view that the incurring of disbursements is an ordinary and necessary incident of rendering a professional service and that, subject to paragraph 14, disbursements are outgoings generally deductible to under subsection 51(1) of the Income Tax Assessment Act 1936 ('ITAA') in the year of income in which they are incurred (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47). They are incurred when the person comes under a presently existing liability to make payment, either immediately or in the future (FC of T v. James Flood Pty Ltd (1953) 88 CLR 492; (1953) 10 ATD 240; 5 AITR 579) (see Examples 1, 6, 7 and 8 of this Ruling).

13. Some may also incur expenses that are not, strictly speaking, disbursements within the meaning of that term as it is recognised in the legal profession, but which nevertheless are incurred in the derivation of their income and which would satisfy the requirements of subsection 51(1) such as, for example, expenses incurred in performing services of a non-legal nature for a client.

14. In each case deductibility can only be determined by reference to the particular facts, and especially by reference to the terms of any contract or arrangement between the person and the third party payee and the person and client.

Recoupments

15. The ability to recover expense payments from a client may result from agreement or convention. It is our understanding that disbursements incurred are generally recovered by being included in the bill of costs they render to the client. In these circumstances, the payment and recoupment of disbursements is part of the normal outgoings and revenue flow of a practice. (Emphasis added).

16. As part of the ordinary revenue flow of a practice it is our view that amounts recouping disbursements should be treated no differently, for tax purposes, from fees for professional services rendered. Similarly, where disbursements are recouped otherwise than through the bill of costs they are considered to be assessable, in accordance with the principles in paragraph 18, at the time the entitlement arises.

In your case, the travel loading is one of the items identified as disbursements in paragraph 11 of TR 97/6. It is necessarily incurred in performing professional services for a client.

You are able to recoup the travel loading from the insurance company. Hence, it will be treated as part of the normal revenue flow of your legal service practice according to paragraph 15 of TR 97/6.

The GST treatment of disbursements in GSTR 2000/37 is consistent with the income tax treatment of disbursements as explained in Taxation Ruling TR 97/6.

In GSTR 2000/37, paragraphs 48, 49 and 53 provide guidance on the treatment of disbursement for GST purposes. These paragraphs are cited below.

Agency relationship and disbursements

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 representatives and clients may not use the term agent or agency, it is clear that the clients have authorised the representative to act on their behalf in the particular matter. When they act as an agent for the client, the general law of agency applies so that they are 'standing in the shoes' of the client.

49. If a disbursement is and incurred in the capacity as a paying agent for a particular client, then no GST is payable by the on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services. However, if goods or services are supplied to the to enable them to perform services supplied to the client, GST is payable 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 overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied.

53. The following are examples of costs that 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 for the supply of the legal service for:

· telephone expenses;

· postage expenses;

· photocopying expenses;

· courier expenses;

· word processing expenses; and

· travel expenses of the employer and staff.

In your case, travel expenses of a staff will be one of the costs that you incur in carrying on the business of providing a legal service to the client. GST is payable on any subsequent payment by the insurance company to you for the supply of legal services.

As such, the travel loading forms part of the fees for services provided by you, for which GST is payable. Accordingly, you are required to remit to the ATO the GST paid to you by the insurance company in relation to travel loading.

2. Are you required to include GST in an amount that you pay to your employee in respect of the travel loading?

As discussed above, GST is payable on taxable supplies under subsection 7-1(1) of the GST Act.

Hence, we need to consider, whether your employee is making a taxable supply to you.

One of the requirements of making a taxable supply is whether the supply is made in the course or furtherance of an enterprise that your employee carries on.

Subsection 9-20(1) of the GST Act provides the definition of enterprise for GST purposes. This definition includes an activity or series of activities done in a form of a business; or in the form of an adventure or concern in the nature of trade.

Subsection 9-20(2) of the GST Act explains that an enterprise does not include an activity or series of activities done as an employee or in connection with earning withholding payments covered by subsection 9-20(4) of the GST Act.

Withholding payments covered by subsection 9-20(4) of the GST Act include 'payment to employee'.

Therefore, any supply made by an employee in the course of their duties as an employee is not considered to be made in the course or furtherance of an enterprise that the employee carries on.

In your case, as your employed person is not carrying on an enterprise under subsection 9-20(2) of the GST Act when carrying out duties as an employee, the supply that the employee makes to you is not a taxable supply.

Hence, when you make a payment to your employee in respect of the travel loading, in the course of your employee duties, it is not consideration for a taxable supply that your employee made. As such, no GST is payable under subsection 7-1(1) of the GST Act.

Consequently, no GST is included in the amount paid to your employee. You are not required to include GST in an amount that you pay your employee in respect of the travel (country/interstate) loading.

Please note that the ATO cannot comment on the quantum of the payment that you are required to make to your employee when you pay an amount to your employee in respect of travel expenses, as this is not governed by GST law.

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