Edited version of your written advice

Authorisation Number: 1012995061979

Date of advice: 11 April 2016

Ruling

Subject: GST and entitlement to input tax credits

Question 1

Are you entitled to an input taxed credit (ITC) in respect of the supplies of legal services made by barrister A?

Advice

No, you are not entitled to an ITC in respect of the supplies of legal services made by barrister A. This is because you are acting as a paying agent when making the payments to the barrister and therefore you have not made a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 2

Are you entitled to an ITC in respect of the supplies of legal services made by barrister B?

Advice

No. You are not entitled to an ITC in respect of the supplies of legal services made by barrister B. This is because you are acting as a paying agent when making the payments to the barrister and therefore you have not made a creditable acquisition under section 11-5 of the GST Act.

Relevant fact

You are an Australian entity and registered for the goods and services tax (GST). Your business activity is provision of legal services.

You were engaged by a non-resident entity, for your legal services where you will act on behalf of the non-resident's clients in regard to an overseas legal dispute.

The non-resident is not registered for GST and has no operations or physical presence in Australia.

The Costs Disclosure and Engagement Terms you have with the non-resident, provides the following amongst other things:

8. Payment/money on account

We may ask you to pay us in advance some money on account of payment which will be made to a third party and our costs.

By returning a cheque payable to a third party, you authorise this office to hold the cheque on your behalf in transit pending payment of the outstanding fees pursuant to the provisions of section 257 of the Legal professional Act 2004.

We will ask you to pay us the money paid on your behalf under this Costs Agreement as and when we send you an invoice for these payments.

15. Engagement of a third party

It may be necessary for us to engage on your behalf the services of a third party to provide specialist advice or services. We will consult you as to the terms of that party's engagement, but you may be asked to enter into a cost agreement directly with that third party. The third party engaged by us will disclose its costs and we will disclose those costs to you.

16. Engagement of another law practice

It may be necessary for us to engage on your behalf the services of another law practice such as a barrister to provide specialist advice or services, including advocacy services or to act as our agent. We will consult you as to the terms of that law practice's engagement, but you may be asked to enter into a Costs Agreement directly with that law practice. Any other law practice engaged by us will disclose costs in a similar manner and we will disclose those costs to you.

Under your instruction, the non-resident has entered into a cost Disclosure Statement Offer and Agreement with barrister A and barrister B so that they can assist you with the overseas legal dispute. You act as the instructing solicitor for the non-resident when liaising with the two barristers.

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 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 57-10

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Detailed reasoning

Questions 1 and 2

Under section 11-20 of the GST Act, an entity is entitled to an ITC for any creditable acquisition that it makes.

Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if:

a) It acquires anything solely or partly for a creditable purpose;

b) The supply to is a taxable supply;

c) It provides or is liable to provide consideration for the supply; and

d) It is registered or required to be registered for GST.

All of the above requirements must be satisfied in order to be entitled to an ITC.

Paragraph (a) of section 11-5

Subsection 11-15 (1) of the GST Act provides that an entity acquires a thing for a creditable purpose to the extent that it acquires it in carrying on its enterprise.

The acquisitions from the two barristers were made under the Costs Disclosure Statement Offer and Agreement between the barristers and the non-resident. However, the Memorandum of Fees for the two barristers is sent to your office for payment.

There is a distinction between an entity incurring expenses on a client matter as an agent for a client and as a principal in the ordinary course of providing their services to the client. In this instance we need to determine whether there is an agency relationship or not between you and the non-resident when you pay the fees to the barristers.

Is there an agency relationship?

Goods and Services Tax Ruling GSTR 2000/37 provides guidance on agency relationship.

According to GSTR 2000/37, an agency relationship exists under the common law of agency where the 'agent' acting under its authority can effect legal relations between the 'principal' and a third party. The basic principle is that the actions of the agent are treated as being the actions of the principal. Consequently, for GST purposes, the principal and not the agent would make the supply and therefore the liability for paying the GST on a taxable supply, as well as any entitlement to input tax credits for a creditable acquisition, rests solely with the principal and not the agent. Hence, the supply shall be made between the principal and the third party.

Paragraphs 48 to 54 of GSTR 2000/37 describe the effects of an agency relationship on disbursements by lawyers, and paragraphs 48 to 50 state:

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

49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor 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 solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

50. The following are examples of common fees and charges, for which a client is liable, that may be paid for by a solicitor as a paying agent of the client. If the solicitor makes the payment, GST is not payable on the subsequent reimbursement by the client to the solicitor for:

• application fees;

• registration fees;

• court fees;

• barrister's fees when the barrister is engaged by the client;

• incorporation fees;

• most fees in connection with registering and maintaining the status of particular legal relationships such as companies, partnerships, societies or associations;

• fines, penalties, stamp duty and taxes; and

• probate fees.

Your Cost Disclosure and Engagement Term with the non-resident provides that it may be necessary for you to engage on behalf of the non-resident the services of a third party to provide specialist advice or services or the services of another law practice or practitioner such as a barrister to provide specialist advice or services. As for the payments, you will ask the non-resident to pay you the money paid on its behalf in under this Costs Agreement as and when you send an invoice for these payments.

From the above and with the non-resident entering into a Costs Disclosure Statement Offer and Agreement with the barristers, you are considered to be acting as a paying agent for the non-resident when you pay the fees to the barristers.

Consequently, it is the non-resident who has acquired the barristers' services and it is the non-resident that is entitled to any ITC where it satisfies all the requirements in section 11-5 of the GST Act.

Paragraph 11-5(a) of the GST Act is therefore not satisfied as you have not made any acquisitions from the barristers.

Since you have not made any acquisitions from the barristers there is no need to consider the other paragraphs in section 11-5 of the GST Act.

Summary

You have not made a creditable acquisition under 11-5 of the GST Act as you have not made any acquisitions from the barristers. You therefore cannot claim an ITC in respect of the legal supplies made by the two barristers under section 11-20 of the GST Act.

Division 57 of the GST Act

Division 57 of the GST Act is a special rule that effectively makes resident agents acting for non-residents responsible for the GST consequences of what the non-residents do through their resident agents.

Section 57-10 of the GST Act provides who is entitled to input tax credits under Division 57 of the GST Act and states:

57-10 Who is entitled to input tax credits

1) If a *non-resident makes a *creditable acquisition or *creditable importation through a *resident agent:

a) The agent is entitled to the input tax credit on the acquisition or importation; and

b) The non-resident is not entitled to the input tax credit on the acquisition or importation.

2) This section has effect despite sections 11-20 and 15-15 (which are about who is entitled to input tax credits).

(* refers to a defined term in section 195-1 of the GST Act)

One of the criteria for a creditable acquisition is the entity is registered or required to be registered for GST.

The non-resident is not registered for GST and therefore its acquisition of services from the two barristers is not creditable acquisitions under section 11-5 of the GST Act. Section 57-10 of the GST Act is therefore not applicable to you.

For more information on Division 57 please refer to Goods and Services Tax Ruling GSTR 2000/37 which is available from our legal database at www.ato.gov.au