Edited version of your private ruling

Authorisation Number: 1012599007275

Ruling

Subject: GST and legal fees

Question

Is the payment made by you as a result of a court order requiring you to pay the plaintiff's costs, consideration for a creditable acquisition under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the payment made by you for legal services as a result of a court order requiring you to pay the plaintiff's costs, is not consideration for a creditable acquisition under the GST Act. Accordingly, you are not able to claim an input tax credit in respect of this payment.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You were involved in a legal proceeding.

As part of the settlement agreement, you were required to pay the plaintiff's legal cost.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 11-15(2)

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

Reasons for decision

Under section 11-20 of the GST Act you are entitled to claim the GST paid on any creditable acquisition you make.

You make a creditable acquisition under section 11-5 of the GST Act 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.

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on an enterprise.

However, under subsection 11-15(2) of the GST Act, 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 in nature.

The acquisition of legal services will be a creditable acquisition if all the conditions of section 11-5 of the GST Act are met.

Goods and Services Tax Ruling GSTR 2001/4 considers the GST consequences of court orders and out-of-court settlements. Specifically, paragraphs 145 to 149 of GSTR 2001/4 provides:

Costs

145. When a dispute is finalised, either by a court giving judgment or through negotiation of a settlement, the unsuccessful party in the action may be required to pay the costs or part of the costs that have been incurred by the successful party in bringing or defending the claim. These costs, referred to as party costs, could include, barrister's fees, solicitor's costs, fees for various expert reports and court costs.

146. In any legal action the parties concerned are required to pay their legal advisers the solicitor client costs incurred and the supply of these legal services will attract GST and be GST inclusive sums to the extent that they are not GST-free. Both parties to a dispute, as recipients of a supply of legal representation respectively, may be entitled to an input tax credit for a creditable or partly creditable acquisition of these services.

147. For the purposes of this Ruling, we are concerned with the subsequent stage when the successful party is able to recover costs wholly or partly through a court order for costs or by negotiation of an amount in a settlement.

148. As we have seen for a supply to be a taxable supply the conditions under section 9-5 of the GST Act must be met. In the instance of the payment of costs under the court order or settlement there is no supply for consideration from the successful party to the unsuccessful party. This is essentially paying compensation for costs or losses incurred in the dispute and will be treated in the same manner as damages under paragraphs 110 and 111.

149. Accordingly, the payment of court ordered costs or costs negotiated in a settlement in the circumstances described will not be consideration for an earlier or current supply. It does not matter that the payment of the costs order or settled amount is made by an entity other than the unsuccessful party.

Following from this, paragraphs 110 and 111 of GSTR 2001/4 state:

Damages

110. With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the aggrieved party. If a payment made under a court order is wholly in respect of such a claim, the payment will not be consideration for a supply.

111. If a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement.

The payment by you of the plaintiff's legal fees in accordance with the court order will not constitute consideration for a supply, as there is no supply from the successful party to the unsuccessful party. Rather, the payment will be akin to a payment of damages.

Accordingly, as your payment is not consideration for a supply, section 11-5 of the GST Act will not be satisfied and as such, you are not considered to have made a creditable acquisition. You are therefore unable to claim an input tax credit in respect of the payment made by you for legal services, as a result of a court order requiring you to pay the plaintiff's costs