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Ruling
Subject: Input Tax Credit
Question
Can you claim input tax credit on legal expenses incurred?
Answer
Yes, you can claim input tax credit on legal expenses.
Relevant facts and circumstances
You are a partnership registered for the goods and services tax (GST).
You are carrying on an enterprise of leasing commercial premises.
You leased a commercial premises to a lessee (the Lessee).
The Lessee failed to meet rental payments and was in arrears for a significant amount.
After several failed attempts to collect the arrears, you evicted the Lessee as per the terms of your lease agreement.
The Lessee disputed the eviction and is seeking damages and compensation for lost earnings.
You incurred legal fees in defending your case.
The legal fees include GST.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 11-20.
Reasons for decision
To claim input tax credit you must make a creditable acquisition.
Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:
You are entitled to the input tax credit for any *creditable acquisition that you make.
(The term marked with an asterisk is defined in section 195-1 of the GST Act.)
Section 11-5 of the GST Act states that 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.
For an acquisition to be creditable all of the four conditions above must be satisfied. .
The supply of the legal services to you was a taxable supply and you provided or liable to provide consideration for it. You are registered for the GST. Therefore, you satisfy paragraphs (b), (c) and (d) above.
'Creditable purpose' is defined in section 11-15 of the GST Act as follows:
You acquire a thing for 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; or
§ the acquisition is for a private or domestic nature.
You acquired legal services in carrying on your enterprise of leasing commercial premises. The litigated dispute you have with a tenant is in relation to the leasing of a commercial premises. Leasing commercial premises is not input taxed. It is also not one of a private and a domestic nature. Therefore, your acquisition of legal services is for a creditable purpose. Thus, paragraph 11-5(a) of the GST Act is satisfied.
As you have satisfied all of the conditions in section 11-5 of the GST Act, your acquisition is a creditable acquisition.
Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.
Therefore, as you made a creditable acquisition of legal services, you are entitled to input tax credit.