Edited version of private ruling

Authorisation Number: 1011714667769

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Ruling

Subject: GST and supply of legal service

Question

Are you entitled to claim input tax credit for the acquisition of legal services from an Australian legal firm?

Answer

No. You are not entitled to claim input tax credit for the acquisition of legal service from the Australian legal firm as the supply to you is GST-free.

Relevant facts

You are a company incorporated in overseas. Your central management and control are overseas. You provide a financial service for various clients.

You are the clients of public financial institutions in Australia. You hold accounts with them to facilitate the business for your clients.

You do not carry on any business through an office in Australia. You do not have an agent or representative in Australia. You declared yourself as a non-resident in your Australian income tax returns.

You engaged the legal services from an Australian legal firm. The subject of the dispute was not related to real property in Australia. The legal services consisted of representation in the dispute with another entity in Australia.

Whilst the legal firm supplied legal services to you, it also supplied its legal service to an individual who is an associate with you at the time when the supplies of legal services were performed. He acquired the legal service for his own purposes.

The legal services were provided under a number of different engagement letters. You have provided an engagement letter which was addressed to you as the recipient of the supply of the legal services.

A separate engagement letter was issued to the individual for the legal service provided to him.

The individual was present in Australia at the time when the legal services were provided to you. His presence was to assist your dealings in this legal matter as well as his own. You are the recipient of the legal firm's services.

The legal services were performed wholly in Australia. You have not entered into agreement with the legal firm which the firm is required to provide the services to another entity in Australia.

The legal firm has issued tax invoices to include services provided to you and the individual. GST was included when the legal firm invoiced you for all the services.

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit on any creditable acquisition that you make.

Section 11-5 of the GST Act provides the meaning of a creditable acquisition. It states: 

You make a creditable acquisition if:

(a)   you acquire anything solely or partly for a *creditable purpose; and

(b)   the supply of the thing to you is a *taxable supply; and

(c)   you provide, or are liable to provide, *consideration for the supply; and

(d)   you are *registered or *required to be registered.

(* denotes a defined term in section 195-1 of the GST Act).

Creditable purpose

Under subsection 11-15(1) of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

· the acquisition relates to making supplies that would be input taxed (for example, financial supplies and supplies of residential premises); or

· the acquisition is of a private or domestic nature.

You acquired the legal services in carrying on your enterprise. The acquisition of the legal service was not of a private or domestic nature. Therefore, your acquisition for the legal services was for a creditable purpose and the requirement in paragraph 11-5(a) of the GST Act has been satisfied.

Taxable supply

GST is payable on taxable supplies. Section 9-5 of the GST Act 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 for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

In your case, the supply of the legal services to you from the Australian legal firm has satisfied the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act for the following reasons:

(a) the legal firm made the supply to you for consideration,

(b) the supply is made in the course of an enterprise that the legal firm carried on,

(c) the supply is connected with Australia as the legal firm carries on its enterprise in Australia, and

(d) the legal firm is registered for GST.

The supply of legal service is not input tax under the GST Act or in any other Act. Therefore, the supply of the legal service to you would be taxable to the extent that it is not GST-free under Division 38 of the GST Act.

GST-free

Section 38-190 of the GST Act specifies when supplies of things, other than goods or real property, for consumption outside Australia are GST-free. The supply of legal services is not a supply of goods or real property. Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) is relevant in this circumstance.

Item 2 is reproduced below:

Accordingly, where the provisions of either (a) or (b) above are met, the supply will be GST-free if the non-resident is not in Australia when the thing supplied is done. 

However, the scope of Item 2 may be limited by subsection 38-190(3) of the GST Act.

A supply that is made to a non-resident who is not in Australia

A non-resident for GST purposes is an entity that is not an Australian resident for the purposes of the Income Tax Assessment Act 1936.

Based on the facts provided, you are a non-resident for GST purposes.

In order for a supply to be GST-free under item 2, you must not be in Australia when your services are performed. 

In accordance with the Goods and Services Tax Ruling GSTR 2004/7, the pre-condition that the non-resident is not in Australia when the thing supplied is done requires that neither the non-resident, nor a representative acting on behalf of the non-resident if the non-resident is a company, is in Australia in relation to the supply.

Paragraph 37 of GSTR 2004/7 provides that a non-resident company is in Australia if that company carries on business (or in the case of company that does not carry on business, carries on its activities) in Australia:

· at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

· through an agent at a fixed and definite place for a sufficiently substantial period of time.

Further, paragraph 38 of GSTR 2004/7 provides that a non-resident company is in Australia if the company is registered with ASIC, or if the company has a permanent establishment in Australia for income tax purposes.

Pursuant to the information you have provided, you are a company that is incorporated outside Australia. You hold accounts with the public financial institutions in Australia to facilitate trading for your clients. It is considered that the financial institutions are not your agents in Australia because they are carrying on their own business and you are merely being one of their customers.

You also advised that your associate was in Australia at the time when the legal services were provided. His purpose of his presence is to assist your dealings with the legal firm as well as for his own private matters.

Paragraphs 494 and 495 of GSTR 2004/7 provide an example where an executive of a non-resident company visiting Australia to issue instructions on behalf of the non-resident company to an Australian legal firm. It states that the presence of the executive, whether he has the authority to issue instructions on behalf of the non-resident company or not, does not mean that the non-resident company is in Australia. This is because the non-resident company does not carry on business within Australia through a place of its own or through an agent.

You stated that you do not carry on your business in Australia through an office or agent/ representative in Australia. Accordingly, you are a non-resident who is not in Australia when the supply of the legal services is done.

Where a non-resident entity is not in Australia when the supply is done, the supply must still meet the requirements in either paragraph (a) or (b) of Item 2.

Paragraphs (a) and/or (b) of Item 2

Under paragraph (a) of Item 2, a supply of a thing that is made to a non-resident who is not in Australia when the thing supplied is done, is GST-free, if the supply is neither a supply of work physically performed on goods situated in Australia nor directly connected with real property situated in Australia when the work is done.

The supply of legal services by the Australian legal firm is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Therefore, the requirements in paragraph (a) of Item 2 have been met and it is not necessary to consider the requirements in paragraph (b) of Item 2.

However, the scope of Item 2 is limited by subsection 38-190(3) of the GST Act.

Limitations to Item 2

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, whether directly or indirectly, with a non-resident, and

(b) the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

Pursuant to the information you have provided, paragraph 38-190(3)(a) of the GST Act is satisfied because the supply of the legal services by the legal firm is entered into with you, a non-resident as per the engagement letters

The next step is to consider paragraph 38-190(3)(b) of the GST Act.

Goods and services Tax Ruling GSTR 2005/6 explains the operation of subsection 38-190(3) of the GST Act.

Paragraphs 59 and 61 of GSTR 2005/6 provide guidance in relation to the expression 'provided to another entity'. Generally a supply is made to whoever you are contractually liable to perform the services for, in this instance the supply is made to you. However, a supply is provided to whoever obtains the actual effective use or enjoyment of the supply, that is, the actual beneficiary. That is the contractual flow of the supply is to one entity (the non-resident) and the actual flow of the supply is to another entity in Australia.

Based on the information provided, the legal firm has not provided and are not required to provide its services to other entities in Australia. Hence, the contractual and actual flow of the services is to you, being a non-resident.

As such, subsection 38-190(3) of the GST Act does not exclude the supply of the legal services from being GST-free under Item 2.

Therefore, the supply of the legal services to you by the Australian legal firm has not satisfied the requirements in paragraph 11-5(b) of the GST Act as it is not a taxable supply.

Accordingly, your acquisition of the legal services is not a creditable acquisition and you are not entitled to claim input tax credits for it.

Additional information

Where an amount of GST is incorrectly included in the price of a non-taxable supply, the recipient should contact the supplier for a refund. The ATO may provide a refund to the supplier where the supplier has reimbursed the GST incorrectly charged to the recipient. The ATO cannot provide a refund directly to a recipient.

The legal firm has not issued a separate invoice to your associate and this ruling does not discuss the GST implications on the supply of legal services to your associate.

Please note that the supply of the legal services by the legal firm is GST-free to the extent of the portion of services provided to you.

The issue of apportionment of consideration for mixed supplies is discussed in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts..

All Goods and Services Tax Rulings referred in this ruling are available to view or download at our website www.ato.gov.au