Edited version of private advice

Authorisation Number: 1052347917351

Date of advice: 14 January 2025

Ruling

Subject: Deductions

Issue 1 - income tax deduction

Question 1

Are the relevant Associates entitled to a tax deduction under sections 8-1 or 25-5 of the Income Tax Assessment Act 1997 for the amounts Entity C allocates and invoices them under the Costs Agreement?

Answer 1

Yes.

Issue 2 - GST and agency

Question 1

Does paragraph 111-5(1)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to treat a reimbursement by an Associate to Entity B under the Payment Agreement as consideration for an acquisition made by the Associate from Entity B?

Answer 1

No.

Question 2

Is the acquisition referred to in Question 1 not a creditable acquisition by the operation of subsection 111-5(3) of the GST Act?

Answer 2

N/A.

Question 3

Does section 153-50 of the GST Act apply to the arrangement between an Associate and Entity B under the Payment Agreement with the consequences as stated in paragraph 153-50(1)(c) and section 153-60 of the GST Act?

Answer 3

Yes, provided the Associate is registered for GST.

Question 4

If the answer to Question 3 is 'Yes', is an Associate taken to hold a tax invoice for the purposes of subsection 29-10(3) of the GST Act if they hold a copy of the tax invoice issued by Entity C to 'Entity B & Associates' under the Costs Agreement which identifies the fees and GST for the legal services provided to the Associate?

Answer 4

No.

Question 5

Are Entity B and the Associates entitled to an input tax credit under section 11-20 of the GST Act in respect of the legal services provided to them by Entity C, to the extent that the acquisitions are creditable acquisitions?

Answer 5

Entity B is entitled to an input tax credit under section 11-20 of the GST Act for the creditable acquisition of legal services that it is taken to make from Entity B as a principal under Subdivision 153-B of the GST Act.

An Associate is entitled to an input tax credit under section 11-20 of the GST Act for the creditable acquisition of legal services that they are taken to make from Entity B under Subdivision 153-B of the GST Act. To claim an input tax credit, the Associate must hold a tax invoice issued by Entity B.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 August 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity B, ABN: XX XXX XXX XXX, is registered for GST.

The following entities are Associates of Entity B:

•                Entity I, ABN: XX XXX XXX XXX

•                Entity II, ACN: XXX XXX XXX

•                Entity II as trustee for the X Trust, ABN: XX XXX XXX XXX

•                Entity II as trustee for the XX Trust, ABN: XX XXX XXX XXX

•                Entity III: ABN: XX XXX XXX XXX

•                Entity IV, ABN: XX XXX XXX XXX

•                Entity V, ABN: XX XXX XXX XXX

•                Entity VI, ABN: XX XXX XXX XXX

•                Entity VII, ABN: XX XXX XXX XXX

•                Entity VIII, ABN: XX XXX XXX XXX

•                Entity IX, ABN: XX XXX XXX XXX

All the Associates, except for the following entities, are registered for GST:

•                Entity II, ACN: XXX XXX XXX

•                Entity II as trustee for the X Trust, ABN: XX XXX XXX XXX

•                Entity III: ABN: XX XXX XXX XXX

•                Entity IX, ABN: XX XXX XXX XXX

Entity B is the main operating company.

Costs agreement

In XXXX, Entity B and the Associates entered in the Costs Agreement with Entity C, ABN XX XXX XXX, a firm that provides legal and taxation services. The agreement has been periodically revised. For the purpose of this private ruling, the amended version dated XX XXX XXXX, effective from XX XXX XXXX, was provided.

Under the Costs Agreement, Entity C will provide legal and taxation services to the entities listed in Schedule X to the Costs Agreement, (that is, Entity B and the Associates) and charge professional fees, disbursements, and internal expenses fees. Entity B and each Associate have individually signed the Costs Agreement.

Under a Scope of Work clause to the Costs Agreement, many legal services listed, relate to the Australian Taxation Office (ATO) audit activity or managing tax obligations. The services include providing ongoing legal advice regarding the ATO audit or representing Entity B and the Associates. These interactions include meetings, advising and representing in response to requests for information, interviews, and formal notices, responding to position papers, attending and preparing for settlement negotiations, preparing for and representing on objections, and preparing for litigation.

A billing arrangement clause of the Costs Agreement provides that:

•                Entity C will issue a tax invoice to 'Entity B & Associates' on a monthly basis (or sometimes more frequently) depending on the nature of the work, for the total of all professional fees, disbursements, and internal expenses incurred in respect of all entities listed in Schedule X (i.e. Entity B and the Associates).

•                each invoice will contain a breakdown of Entity C's fees and GST, identifying the amounts incurred by any of the parties listed in Schedule X of the Costs Agreement.

•                all tax invoices are due and payable XX days from the date of the tax invoice.

•                Entity C will determine the basis on which a party incurs professional fees.

•                payment by Entity B of the invoiced amount will be in good discharge of the obligation of each entity listed in Schedule X to the extent that the payment relates to the amount that Entity C identifies is incurred by that entity.

A general business terms clause to the Costs Agreement states:

Your Rights

Any of the individuals and other entities identified in Schedule X have a right to:

(a) negotiate a costs agreement with us;

(aa) negotiate the method of billing (e.g. task based or time based);

(b) receive a bill and to request and receive an itemised bill.

On XX XXX XXXX, Entity B and the Associates executed the Addendum Costs Disclosure and Costs Agreement, effective as of XX XXX XXXX.

A clause of the Addendum to the Costs Agreement inserted a new paragraph authorising Entity B to procure services from Entity C on behalf of the individuals and entities listed in Schedule X of the Costs Agreement. Additionally, it provides that each entity named in Schedule X may choose to procure services directly from Entity C.

A clause of the Addendum to the Costs Agreement provides that the parties agree that the following entities should be treated as having never been parties to the Payment Agreement from its commencement and all reference to them as parties to the Costs Agreement:

•                Entity II

•                Entity III

•                Entity IX.

Entity II as trustee for the X Trust is also not registered for GST. It was confirmed that the entity should be excluded from the section 153-50 of the GST agreement, pursuant to the clause of the Addendum to the Payment Agreement.

Payment agreement

Entity B and the Associates entered into the Payment Agreement commencing XX XXX XXXX, under which:

•                the Associates, as principals, engaged Entity B as their agent, to retain Entity C on their behalf for Entity C to act as their legal adviser;

•                Entity B as the agent will make payments of invoices issued by Entity C in respect of the legal services provided to the Associates from XX XXX XXXX; and

•                the Associates agreed to reimburse Entity B for the amount of the Entity C invoice attributable to each of them.

A particular clause of the Payment Agreement provides that the Associate 'appoints Entity B as agent for payment' and states that:

Each Client severally appoints Entity B as its agent with full authority for Entity B to pay any Entity C invoice that may be issued from time to time by Entity C and addressed to Entity B.

The Payment Agreement provide that:

•                Entity B will give a copy of the invoice to each Associate within X business days.

•                Entity B will promptly consult with the Associates in respect of an Entity C invoice to satisfy itself that the Entity C invoice is for work reasonably performed.

•                Entity B will pay the invoice and seek reimbursement from the Associate.

•                Each Associate is obliged to reimburse Entity B in respect of their respective apportioned amounts.

Additionally, the Payment Agreement provides that the parties agree that Entity B must not apply any mark up or premium in respect of its appointment as agent for the Associates, or in respect of any amount due under an Entity C invoice.

On XX XXX XXXX, Entity B and the Associates executed the Addendum to the Payment Agreement, effective from XX XXX XXXX.

A particular paragraph of the Addendum to the Payment Agreement provides that the parties amend the Payment Agreement to give effect to the parties mutual intention that the Payment Agreement and the Costs Agreement comprise an arrangement which is, for the purpose of section 153-50 of the GST Act, an arrangement between various principals and an intermediary (Entity B) that satisfies each of the requirements in paragraphs 153-50(1)(a) to 153-50(1)(e) of the GST Act.

In a particular paragraph of the Addendum to the Payment Agreement, the parties agree that the Payment Agreement and the Costs Agreement comprise an arrangement that satisfies the requirements in:

a.              subparagraphs 153-50(1)(a)(iii), and (iv) of the GST Act in consequence of the role of Entity B:

i                 acquiring legal services on behalf of and for the benefit of the Associates from Entity C pursuant to a particular clause of the Addendum to the Costs Agreement; and

ii                facilitation of those acquisitions by paying for them as provided for under a particular clauser in the General Terms of Business under the Costs Agreement and under a particular clause of the Payment Agreement;

b.              paragraph 153-50(1)(b) of the GST Act in consequence of the supply of legal services from Entity C under the Costs Agreement;

c.              paragraph 153-50(1)(c) of the GST Act in consequence of:

i                 Entity B being treated as making the acquisition of legal services from Entity C, a third party, pursuant to a particular clause of the Addendum to the Costs Agreement and paying for those acquisitions under particular clauses of the Payment Agreement and General Terms of Business under the Costs Agreement;

ii                the Associates will be treated as making acquisitions from Entity B as the intermediary, as required by the Addendum to the Payment Agreement.

d.              paragraph 153-50(1)(d) of the GST Act, is not applicable as the Payment Agreement does not contemplate or apply to the making of supplies by Entity B as the intermediary to third parties.

A particular paragraph of the Addendum to the Payment Agreement provides that all parties to the agreement must be registered for GST in compliance with paragraph 153-50(1)(e) of the GST Act.

Under a particular paragraph of the Addendum to the Payment Agreement, the parties agree that the following entities are treated as if they were never parties to the Payment Agreement from its commencement. All references to these entities as parties to the Payment Agreement, including in the Schedule to the Payment Agreement, are to be considered null, void and without effect:

•                Entity II

•                Entity III

•                Entity IX.

A particular paragraph of the Addendum to the Payment Agreement provides that if any party decides to cease to be registered for GST under the GST Act, they shall automatically cease to be a party to the Payment Agreement. As Entity II as trustee for the X Trust is also not registered for GST, it was confirmed that the entity should be excluded from the section 153-50 of the GST agreement.

Under a particular paragraph of the Addendum to the Payment Agreement, the parties may admit a new member to join the agreement under the condition that the member is registered for GST under the GST Act.

Entity B and Entity I are currently being audited by the ATO in respect of legal expenses and input tax credits claimed in income years prior to XX XXX XXXX.

Assumptions

For the purposes of this ruling, it is assumed that:

•                legal expenses incurred are otherwise deductible under sections 8-1 and 25-5 of the ITAA 1997 by Entity B and the Associates in the relevant income year.

•                the apportionment of legal expenses invoiced by Entity C to each Associate is reasonable in accordance with the principles.

•                all legal expenditure will be for legal services Entity C invoices to 'Entity B & Associates' under the Costs Agreement.

•                all legal expenditure will be for legal services directed towards either:

o        resolving or managing tax issues for a relevant Associate arising out of the ATO audit action, or

o        ensuring a relevant Associate complies with its obligations under Commonwealth laws that relate to the tax obligations of an entity within the Entity B Group.

•                all tax invoices that Entity C issues to 'Entity B & Associates' under the Costs Agreement will accurately describe the relevant legal services performed for each Associate and accurately attribute itemised amounts to each Associate.

•                Entity C will only itemise amounts it charges to an Associate where the relevant legal services relate to that Associate.

•                where the relevant legal services are invoiced to multiple Associates, Entity C will correctly attribute the amounts it charges between the relevant Associate based on the extent to which the legal services relate to each Associate.

In addition, the following are the assumptions relevant to the GST Questions 1 to 5:

•                the legal services supplied by Entity C to Entity B and the Associates are taxable supplies.

•                the acquisitions of legal services by Entity B and the Associates from Entity C are creditable acquisitions.

•                the apportionment of GST in Entity C's invoices under the Costs Agreement and the Apportioned Amount under the Payment Agreement is reasonable following the principle in Ronpibon Tin.

•                each Associate will receive a copy of a tax invoice issued by Entity C that will contain all the information required by subsection 29-70(1) of the GST Act.

•                Division 57 of the GST Act - resident agents acting for non-residents - does not apply to the circumstances of the parties.

Relevant legislative provisions

Income Tax Assessment Act

Income Tax Assessment Act 1997, section 8-1

Income Tax Assessment Act 1997, section 25-5

GST Act

A New Tax System (Goods and Services Tax) Act 1999, section 9-5

A New Tax System (Goods and Services Tax) Act 1999, section 11-20

A New Tax System (Goods and Services Tax) Act 1999, subsection 29-10(3)

A New Tax System (Goods and Services Tax) Act 1999, subsection 29-70(1)

A New Tax System (Goods and Services Tax) Act 1999, section 111-5

A New Tax System (Goods and Services Tax) Act 1999, section 111-15

A New Tax System (Goods and Services Tax) Act 1999, section 153-50

A New Tax System (Goods and Services Tax) Act 1999, section 153-60

Reasons for decision

Issue 1 - income tax deduction

Question 1

Are the relevant Associates entitled to a tax deduction under sections 8-1 or 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997)for the amounts Entity C allocates and invoices them under the Costs Disclosure and Costs Agreement (the Costs Agreement)?

Summary

Given our assumptions, all legal expenditure will be deductible under section 25-5 of the ITAA 1997 because the expenditure relates either to managing the relevant Associate's tax affairs or for complying with obligations under Commonwealth laws that relate to tax affairs.

Considering the terms of the Payment Agreement and the Costs Agreement, we accept that Entity B incurs the legal expenditure on behalf of the relevant Associates.

It follows that the relevant Associate, rather than Entity B, is primarily liable for the legal expenditure, and may claim the deduction.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows deductions for losses and outgoings which meet either of the two 'positive' limbs and do not trigger any of the four 'negative' limbs. Subsection 8-1(1) allows deductions to the extent they are incurred in gaining or producing assessable income (or carrying on a business for that purpose). Subsection 8-1(2) denies deductions to the extent that the loss or outgoing is capital, private or domestic, incurred in producing exempt or non-assessable non-exempt income, or is denied by a specific provision.

Section 25-5 of the ITAA 1997 allows deductions for certain tax compliance expenditure. Subsection 25-5(1) allows deductions to the extent that the entity incurred expenditure for:

•                managing their tax affairs, or

•                complying with an obligation imposed on them by a Commonwealth law, insofar as it relates to the tax affairs of an entity.

Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions TR 97/7, provides that expenses are incurred when the amount is actually paid or the entity is committed to paying them. Paragraphs 5 and 6 of TR 97/7 provide that you generally incur an outgoing (for the purposes of section 8-1 of the ITAA 1997) if you owe a present money debt that you cannot escape. You need not have actually paid any money if you are definitively committed and completely subjected to paying it, but it must be a presently existing liability to pay a pecuniary sum.

Taxation Determination TD 2012/2 Income tax: when is the shortfall interest charge incurred for the purposes of paragraph 25-5(1)(c) of the Income Tax Assessment Act 1997? (TD 2012/2) at paragraphs 10 to 12 states the same principles apply to expenditure incurred under subsection 25-5(1) of the ITAA 1997.

Subsections 25-5(2) and (3) of the ITAA 1997 deny deductions for:

•                tax

•                PAYG withholding or PAYG instalments

•                expenses for borrowing money to pay tax or PAYG withholding/instalments

•                expenditure for a matter relating to the commission (or possible commission) of an offence

•                fees or commissions about Commonwealth laws relating to tax not provided by a recognised tax adviser

•                amounts specifically made non-deductible by another provision.

Subsection 25-5(4) of the ITAA 1997 disallows deductions for capital expenditure, but the subsection says expenditure is not taken to be capital expenditure merely because the tax affairs relate to matters of a capital nature.

Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues (TR 2011/6) addresses whether something is 'capital expenditure'. At paragraph 64, TR 2011/6 says that the term is not defined but is determined on the facts of each case considering the principles established in case law. Paragraph 66 of TR 2011/6 references Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 to outline relevant matters which include:

•                the character of the advantage sought (any lasting qualities, and recurrence, are relevant factors in characterising that advantage)

•                the manner in which it is to be used, relied upon, or enjoyed (recurrence is a relevant factor in examining the manner)

•                the means adopted to obtain it, by providing a periodical reward or outlay.

Paragraph 68 of TR 2011/6 states that expenditure which produces some asset or advantage of a lasting character will be capital expenditure.

We have assumed that all legal expenditure covered by the Costs Agreement is for legal services directed towards resolving tax issues for the relevant Associate that relate to or arising out of ATO audit action, or ensuring compliance with its obligations under Commonwealth laws that relate to Entity B Group tax obligations.

On that assumption, all legal expenditure will be deductible under subsection 25-5(1) of the ITAA 1997 as follows:

•                all legal expenditure for services arising out of ATO audit action would be incurred as costs of managing the relevant Associate's tax affairs, and deductible under paragraph 25-5(1)(a),

•                any expenditure that relates to obligations under Commonwealth laws that relate to tax obligations would be deductible under paragraph 25-5(1)(b).

It is possible that legal expenditure would not be deductible under this provision if the relevant legal services fell outside the scope of our assumptions.

We do not characterise the legal expenditure as 'capital' expenditure. The legal expenditure is not acquired for the purpose of achieving a lasting advantage. Legal or other professional services relating to ATO audits help an Associate manage interactions with a limited duration (such as requests for information, negotiations, responding to position papers, settlements, objections etc). The benefits of the legal advice are mainly temporary and relate to determining specific liabilities that relate to finite periods. While legal advice might have an incidental effect of helping an Associate plan their future tax affairs, the focus is on the amounts under review. Legal expenditure during an ongoing audit would also generally be relied upon or enjoyed only in respect of a specific service or interaction (e.g., legal advice about an ATO position paper, or legal representation at a negotiation). The legal advice is also obtained through regular monthly payments. Since the tests in TR 2011/6 generally point against it having a capital character, the legal expenditure will not be disallowed under subsection 25-5(4) of the ITAA 1997.

None of the other exceptions in section 25-5 of the ITAA 1997 are relevant.

It follows that the legal expenditure is fully deductible under section 25-5 of the ITAA 1997, and we do not need to consider whether it would qualify for a deduction under section 8-1 of the ITAA 1997.

Taxation Ruling TR 2004/5Income tax: taxation treatment of volume rebates paid to a retailer association (TR 2004/5) at paragraph 54 states when an agent incurs a liability on a principal's behalf, and the liability would be deductible, the principal is entitled to the deduction rather than the agent.

Whether an entity is primarily liable for a payment, or merely incurs a liability as an agent depends on the terms of any relevant agreements and contractual relationships: see Taxation Ruling TR 97/6 Income tax: tax treatment of solicitors' disbursements/recoupments (TR 97/6) at paragraph 23, and TR 2004/5 at paragraphs 34 to 39.

Here, the documents show that Entity B is paying Entity C on behalf of the relevant Associates. While simply using the label 'agent' in a contract, is not decisive in our view, the substantive rights and obligations created under the Payment Agreement and the Costs Agreement are consistent with Entity B paying Entity C as an agent for the Associates. The Associates have authorised Entity B to engage Entity C and pay invoices on their behalf, and have agreed to reimburse Entity B. The Costs Agreement is between Entity C and the Entity B Group collectively, with the invoices attributing amounts to each Associate. The Associate is primarily liable, rather than Entity B.

As the Associate is primarily liable, the entity entitled to any deduction is the Associate, rather than Entity B.

Since we have concluded that the amounts deductible under section 25-5 of the ITAA 1997, it follows that the Associates may deduct the relevant legal expenditure, each to the extent the amounts are itemised against them on the invoice.

Note that this ruling does not extend to:

•                Associates who are not parties to the Payment Agreement and Costs Agreement

•                transactions under separate arrangements where the Associate procures legal services directly from Entity C rather than via Entity B under the Payment Agreement.

Issue 2 - GST and agency

All legislative references in the 'Reasons for decision' for Questions 1 to 5 under Issue 2, are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.

Question 1

Does paragraph 111-5(1)(a) apply to treat a reimbursement by an Associate to Entity B under the Payment Agreement as consideration for an acquisition made by the Associate from Entity B?

Summary

Paragraph 111-5(1)(a) is not applicable as the reimbursements made to Entity B are not for expenses that Entity B incurs in its own right that relate directly to its activities as an agent for the Associates. That is, the payments are not reimbursements of an agent's expenses.

The fact that the parties have entered into an arrangement under Subdivision 153-B does not change the outcome that paragraph 111-5(1)(a) is not applicable to the circumstances of the parties.

The effect of the Subdivision 153-B arrangement is that Entity B is taken to make the acquisition of legal services from Entity C as a principal and the Associate are taken to make a corresponding acquisition of legal services from Entity B. The reimbursements are consideration for acquisitions of legal services by the Associates from Entity B under the Subdivision 153-B arrangement.

Detailed reasoning

Division 111- reimbursement of employee etc.

Paragraph 111-5(1)(a) provides that if the principal reimburses an agent for an expense that the agent incurs directly in their activities as an agent of the principal, the reimbursement is treated as consideration for an acquisition that the principal makes from the agent.

Paragraphs 122 to 129 of Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37) explain the operation of Division 111 as follows:

Reimbursement of agents under Division 111

122. Where a principal reimburses an agent for expenses incurred in connection with carrying on the principal's enterprise, the principal may be entitled to input tax credits for those reimbursements.

123. If the principal reimburses an agent for an expense it incurs that is related directly to its activities as the agent, the reimbursement is treated as consideration for an acquisition that the principal makes from the agent.

124. If the principal acquires something supplied to it through an agent acting on its behalf in making the acquisition, then the general principles of agency apply and it is the principal who is considered to have made the acquisition. The consideration paid through the agent for that acquisition is covered by the basic rules about creditable acquisitions and not by Division 111.

125. For example, if the agent acquires something supplied to the principal within the authority of the agency agreement, the acquisition is effectively made by the principal and, therefore, could be a creditable acquisition to the principal. However, if the agent on its own behalf incurs, for example, petrol expenses in making that acquisition, for which the principal reimburses the agent, the principal has not made a creditable acquisition of the petrol. The principal, therefore, would not be entitled to an input tax credit under Division 11 for the agent's acquisition of the petrol. However, Division 111 may entitle the principal to input tax credits in relation to the reimbursement. (emphasis added)

For the purposes of this provision, the legal services provided by Entity C to the Associates are acquisitions that the Associates make from Entity C either directly or through Entity B as their agent. Entity B is not acquiring these services in its own right and, therefore, does not incur these legal expenses. Entity B merely pays for the legal services that Entity C supplies to the Associates on the Associates' behalf. Accordingly, Division 111 does not apply to the reimbursements that the Associates make to Entity B under the Payment Agreement.

The effect of the Subdivision 153-B arrangement is that the acquisitions of legal services by the Associates from Entity C, and the reimbursements made by the Associates to Entity B are treated in accordance with the requirements of that Subdivision. This is further explained below.

Question 2

Is the acquisition referred to in Question 1 not a creditable acquisition by the operation of subsection 111-5(3)?

Reasoning

As outlined in the reasoning for Question 1, Division 111 does not apply to the reimbursements that the Associates make to Entity B under the Payment Agreement. As such, subsection 111-5(3) is not relevant.

Question 3

Does section 153-50 apply to the arrangement between an Associate and Entity B under the Costs Agreement and the Payment Agreement, with the consequences as stated in paragraph 153-50(1)(c) and section 153-60?

Summary

The arrangement between Entity B and the Associates is in writing and satisfies the requirements of subsection 153-50(1).

The arrangement satisfies subparagraph 153-50(1)(a)(iii) where Entity B, as the intermediary, procures legal services from Entity C on behalf and for the benefit of the Associates. The arrangement satisfies subparagraph 153-50(1)(a)(iv) where Entity B as the intermediary, facilitates acquisitions of legal services from Entity C and provides consideration for the acquisitions.

The kinds of acquisitions to which the arrangement applies are specified in the Payment Agreement and the Costs Agreement.

The parties have agreed that for the purposes of the GST law, Entity B is to be treated as making the acquisitions of legal services from Entity C and the Associates are to be treated as making corresponding acquisitions of legal services from Entity B.

Under section 153-60, the acquisition of legal services are taken to be creditable acquisitions made by Entity B from Entity C. Entity B is taken to make taxable supplies of legal services to the Associates. The value of that taxable supply of legal services by Entity B to the Associates is determined in accordance with paragraph 153-60(2)(b).

Subdivision 153-B arrangement does not apply where an Associate is not registered for GST.

Detailed reasoning

Subdivision 153-B

Subdivision 153-B contains special rules for transactions made by, or through, an 'intermediary' on behalf of a principal. Under this subdivision, entities enter into an arrangement under which the intermediary is treated as a separate supplier and/or acquirer. That is, the intermediary is treated as a principal in its own right. The intermediary and the principal are treated as acting between themselves as principal to principal for GST purposes in relation to the supplies/acquisitions identified in a written arrangement. This simplifies the way principals and intermediaries account for GST.

Subsection 153-50(1)

Subsection of 153-50(1) sets out the requirements for a Subdivision 153-B arrangement as follows:

Arrangements under which intermediaries are treated as suppliers or acquirers

(1) An entity (the principal) may, in writing, enter into an arrangement with another entity (the intermediary) under which:

(a) the intermediary will, on the principal's behalf, do any or all of the following:

(i) make supplies to third parties;

(ii) facilitate supplies to third parties (including by issuing invoicesrelating to, or receiving consideration for, such supplies);

(iii) make acquisitions from third parties;

(iv) facilitate acquisitions from third parties (including by providing consideration for such acquisitions); and

(b) the kinds of supplies or acquisitions, or the kinds of supplies and acquisitions, to which the arrangement applies are specified; and

(c) for the purposes of the GST law:

(i) the intermediary will be treated as making the supplies to the third parties, or acquisitions from the third parties, or both; and

(ii) the principal will be treated as making corresponding supplies to the intermediary, or corresponding acquisitions from the intermediary, or both; and

(d) in the case of supplies to third parties:

(i) the intermediary will issue to the third parties, in the intermediary's own name, all the tax invoices and adjustment notes relating to those supplies; and

(ii) the principal will not issue to the third parties any tax invoices and adjustment notes relating to those supplies; and

(e) the arrangement ceases to have effect if the principal or the intermediary, or both of them, cease to be registered.

Applying subsection 153-50(1) to the payment agreement

Under this subsection, an agreement between a principal and an intermediary must be in writing under which the intermediary will do any or all the things listed in subparagraphs 153-50(1)(a)(i) to 153-50(1)(a)(iv).

Subparagraph 153-50(1)(a)(iii)

Under this subparagraph, a principal may, in writing, enter into an arrangement with an intermediary under which the intermediary makes acquisitions from third parties on behalf of the principal.

Subparagraph 153-50(1)(a)(iii) is satisfied as a specified paragraph of the Addendum to the Payment Agreement provides that Entity B acquires legal services from Entity C on behalf of the Associates. Additionally, the Addendum to the Costs Agreement amended the Costs Agreement by stating that Entity B is authorised by the Associates to procure legal services on their behalf and for their benefit.

Subparagraph 153-50(1)(a)(iv)

This subparagraph applies to an intermediary that facilitates acquisitions from third parties including by way of providing consideration for such acquisitions.

This subparagraph is satisfied as particular clauses of the Payment Agreement provide that Entity B will facilitate the acquisition of legal services from Entity C and make payments for the acquisitions to Entity C.

Paragraph 153-50(1)(b)

Under this paragraph, the arrangement must specify the kinds of supplies or acquisitions to which the arrangement applies.

This paragraph is satisfied as under a particular paragraph of the Addendum to the Payment Agreement the parties have agreed that the arrangement is for the acquisition of legal services from Entity C under the Costs Agreement. A particular clause of the Payment Agreement defines 'legal services' as all legal services, and related support services, provided by Entity C to one or more of the Associates.

Paragraph 153-50(1)(c)

This paragraph has two requirements that need to be satisfied:

•                first requirement - subparagraph 153-50(1)(c)(i)

The requirement of subparagraph 153-50(1)(c)(i) is satisfied as a particular paragraph of the Addendum to the Payment Agreement provides that the parties agree for Entity B to be treated as making the acquisition of legal services from Entity C, a third party, and paying for those acquisitions.

•                second requirement - subparagraph 153-50(1)(c)(ii)

The requirement of subparagraph 153-50(1)(c)(ii) is satisfied as a particular paragraph of the Addendum to the Payment Agreement provides that the principals will be treated as making acquisitions from Entity B as the intermediary.

Paragraph 153-50(1)(d)

This paragraph is not applicable as the parties' arrangement under Subdivision 153-B is about acquisitions from a third party and not about supplies to third parties.

Paragraph 153-50(1)(e)

This paragraph provides that the arrangement ceases to have effect if the principal or the intermediary, or both of them, cease to be registered for GST.

In this case, according to a particular paragraph of the Addendum to the Payment Agreement, the parties agree that all parties to the Payment Agreement must be registered for GST in compliance with paragraph 153-50(1)(e).

A particular paragraph of the Addendum to the Payment Agreement states that the parties agree that any party that ceases to be registered for GST automatically cease to be a party to the Payment Agreement.

According to a particular paragraph of the Addendum to the Payment Agreement, a new member may join the agreement if they are registered for GST.

A particular paragraph of the Addendum to the Payment Agreement expressly excludes the following entities, which do not satisfy the GST registration requirement in section 153-50, from the Subdivision 153-B arrangement:

•                Entity II

•                Entity III

•                Entity IX.

As Entity II as trustee for the X Trust is also not registered for GST, it was confirmed that the entity should be excluded from the Subdivision 153-B agreement.

Thus, when considering the agreements between the parties, we are satisfied that all the conditions of subsection 153-50(1) are met in respect of the Associates that are registered for GST. Therefore, for GST purposes, Entity B will be treated as making the acquisitions of the legal services from Entity C and the Associates that are registered for GST will be treated as making corresponding acquisitions of legal services from Entity B.

Subsection 153-60(1)

Subsections 153-60(1) and (2) set out the effect of a Subdivision 153-B arrangements on acquisitions as follows:

(1) An acquisition that the principal makes from a third party through the intermediary is taken to be a creditable acquisition made by the intermediary from the third party, and not by the principal, if:

(a) the acquisition is of a kind to which the arrangement applies; and

(b) the acquisition is made in accordance with the arrangement; and

(c) both the principal and the intermediary are registered.

(2) In addition, the intermediary is taken to make a supply that is a taxable supply to the principal. This supply is taken:

(a) to be a supply of the same thing as is acquired in the creditable acquisition (the intermediary's acquisition) that the intermediary is taken to make; and

(b) to have a valueequal to 10/11 of the amount that is payable to the intermediary by the principal in respect of the intermediary's acquisition.

The principal is taken to make a corresponding acquisition from the intermediary, and the acquisition is taken to be a creditable acquisition if, apart from this section, the principal's acquisition from the third party would have been a creditable acquisition.

Paragraphs 86 to 91 of GSTR 2000/37 explain the effects of the arrangements on creditable acquisitions. Paragraphs 86 and 87 of GSTR 2000/37 state:

86. The effect of entering into these arrangements is that the principal and the intermediary treat creditable acquisitions that the principal makes from third parties through the intermediary as two separate acquisitions and that they are treated as acting between themselves as principal to principal for GST purposes. When an intermediary makes a creditable acquisition from a third party on behalf of the principal, it is taken to make a creditable acquisition in its own right. The intermediary is entitled to claim an input tax credit on that acquisition.

87. The intermediary is taken to make a taxable supply to the principal of the same thing that the intermediary is taken to acquire. The value of that supply is determined by reference to the amount that the principal is required to pay the intermediary. This amount is the amount the third party charged for the supply, plus the amount the intermediary is permitted (under the contract with the principal) to charge as a commission or similar payment for the intermediary services. However, the intermediary's supply of services is not a taxable supply in its own right and the principal is not entitled to claim input tax credits relating to the payment of the commission or similar payment.

Therefore, where an Associate makes a creditable acquisition of legal services from Entity C through Entity B, Entity B is taken as having made a creditable acquisition of the legal services from Entity C in its own right (subsection 153-60(1)).

In turn, Entity B is taken to make a taxable supply of the same legal services to the Associate (subsection 153-60(2) and paragraph 153-60(2)(a)). The value of the taxable supply is equal to 10/11 of the amount that is payable to Entity B by the Associate in respect of Entity B's acquisition from Entity C (paragraph 153-60(2)(a)).

The Associate is taken to make a corresponding acquisition from Entity B, and the acquisition is taken to be a creditable acquisition if, apart from section 153-60, the Associate's acquisition from Entity C would have been a creditable acquisition (paragraph 153-60(2)).

Question 4

If the answer to Question 3 is 'Yes', is an Associate taken to hold a tax invoice for the purposes of subsection 29-10(3) if they hold a copy of the tax invoice issued by Entity C to 'Entity B & Associates' under the Costs Agreement which identifies the fees and GST for the legal services provided to the Associate?

Detailed reasoning

Subsection 29-70(2) provides that:

The supplier of a taxable supply must, within 28 days after the recipient of the supply requests it, give the recipient a tax invoice for the supply, unless it is a recipient created tax invoice.

The effect of the Subdivision 153-B arrangement is that, for the purposes of the GST law, Entity B is taken to be the supplier making taxable supplies of legal services to the Associates.

There is no provision in Subdivision 153-B that overrides the basic rules under subsection 29-70(2). Therefore, an Associate is not taken to hold a tax invoice for the purpose of subsection 29-10(3) if they hold a copy of the tax invoice issued by Entity C to 'Entity B & Associates'.

Entity B is required to issue tax invoices to the Associates for the taxable supplies of legal services that it is taken to make to the Associates. An Associate can attribute the input tax credits for their creditable acquisitions of legal services in the tax period that they hold a tax invoice issued by Entity B for the taxable supplies that Entity B is taken to make to the Associate under the Subdivision 153-B agreement. The tax invoices must contain all the information required for a tax invoice under subsection 29-70(1).

Question 5

Are Entity B and the Associates entitled to an input tax credit under section 11-20 in respect of the legal services provided to them by Entity C, to the extent that the acquisitions are creditable acquisitions?

Detailed reasoning

Section 11-20 states that:

You are entitled to an input tax credit for any creditable acquisition that you make.

The parties have entered into a Subdivision 153-B arrangement. As discussed above, the effect of the arrangement is that the Associates and Entity B will be treated as acting as principal to principal in respect of the legal services that Entity C supplies to the Associates. This means that the acquisition of the legal services that the Associates make from Entity C through Entity B is taken to be an acquisition made by Entity B from Entity C, and not by the Associates.

To the extent that the acquisitions are creditable acquisitions, Entity B is entitled to an input tax credit under section 11-20 for the legal services that it acquires or is taken to acquire from Entity C as a consequence of the Subsection 153-B arrangement (paragraph 86 of GSTR 2000/37).

Entity B is also taken to make a taxable supply to the Associates of the same thing that Entity B is taken to acquire from Entity C. The value of that supply is determined by reference to the amount that an Associate is required to pay to Entity B (paragraph 87 of GSTR 2000/37). As Entity B is not permitted to charge any commission or similar charges for its intermediary services, the value of the supply is the amount that Entity C charges for the supply.

As the supply by Entity B to the Associates is a taxable supply under the Subdivision 153-B arrangement, Entity B is required to account for the amount of GST payable on the supply, being 10% of the value of the same thing acquired from Entity C (paragraph 88 of GSTR 2000/37).

The Associates are taken to make a corresponding creditable acquisition of legal services from Entity B provided they would have otherwise been making a creditable acquisition from Entity C had Subdivision 153-B not applied (subsection 153-60(2)). It follows that the Associates are entitled to 10% of the value as an input tax credit under section 11-20 for the creditable acquisitions that they are taken to make from Entity B.

To claim an input tax credit, the Associates need to hold a tax invoice that is issued by Entity B for the taxable supplies that Entity B is taken to make to the Associates under the 153-B arrangement (subsection 29-10(3)).

An Associate can attribute the input tax credits for the creditable acquisitions that they are taken to make from Entity B in the tax period that they hold a tax invoice issued by Entity B for the taxable supplies that Entity B is taken to make to the Associate pursuant to the Subdivision 153-B arrangement.

However, the Associates cannot use the tax invoice issued by Entity C to claim an input tax credit under section 11-20 for the supply of legal services made by Entity C. This is because the parties have entered into a Subdivision 153-B arrangement under which Entity B is treated as making the acquisition of legal services from Entity C as a principal in its own right.

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