Edited version of your written advice

Authorisation Number: 1013136305575

Date of advice: 6 December 2016

Ruling

Subject: Whether you are entitled to GST credits relating to payments made by third parties to your XYZ for legal expenses that you incurred

Question 1

Are you, entitled to an amount of $X of GST credits (also known as input tax credits) relating to payments made by third parties to your XYZ for legal expenses that you incurred?

Answer

Yes, you are entitled to $X/Y of GST credits (1/Y^th of $X ) under section 11-20 and subsection 11-30(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) because your acquisition of legal services was only partly creditable.

Under Section 29-10 of the GST Act, the amount of $X/Y of GST credits are attributable to the tax period in which the $11X payment was made, or later tax periods, subject to the four-year time limit under section 93-5 of the GST Act and provided that you hold a tax invoice in the period you give the Commissioner a GST return.

Relevant facts and circumstances

You have been registered for Goods and Services Tax (GST) at all relevant times, account for GST on a cash basis and report quarterly.

You have been on the relevant legal Register since a date in Year A and began carrying on an enterprise as a sole trader legal advisor from a date in Year B.

You were sued in Year C in relation to services provided by your enterprise as a sole trader legal advisor to an entity (entity). This litigation continued until an unspecified date in Year D

You engaged a legal advisor (XYZ) to act for you and other parties in the Year C to Year D litigation. You were Defendant XX. There was no formal written agreement concerning costs. You have stated that you engaged the XYZ as the principal and not as agent for any other person or entity. You had acted as legal advisor for some of the other defendants in probate but they were not your clients in the Year C to Year D litigation. You were solely liable for the legal expenses incurred in relation to your XYZ.

You incurred legal expenses for your XYZ's services between Year C and Year D.

Your XYZ was registered for GST at the time you incurred the legal expenses.

You, your XYZ, and other parties to the Year C to Year D litigation entered into Deed of Settlement around early Year D. One of the things agreed to under the Deed of Settlement was the application of funds arising from the liquidation of the entity. You have provided to us an undated and unsigned copy of this Deed of Settlement but not an executed Deed of Settlement.

You, your XYZ and various other parties entered into a Deed (deed) dated on a particular date in Year D. Under the deed any monies payable to some of those other parties arising from the liquidation of the entity would be placed in trust. The first $V paid by the liquidator would be divided equally between your XYZ and another legal advisor as consideration for legal expenses for you and other parties. Under the deed, your XYZ and the other legal advisor agreed that if each received $V/2 that sum would discharge all their fees for acting for their clients. The $V/2 for your XYZ was for legal fees for acting in the litigation for eight defendants. You are the XX^th Defendant. You have provided to us a dated and signed copy of this deed.

Clause 4 of the deed states in part that your XYZ was 'acting in the proceeding for the X^th-XX^th Defendants'.

The liquidator paid $11X to your XYZ on or about a particular date in Year E in accordance with the deed except that it was paid directly rather than to you to be held in trust for your XYZ.

You have provided a tax invoice and adjustment note the XYZs' clerk, on behalf of your XYZ which states that the total of legal expenses incurred was $Z, and that on a particular date in Year E an amount of $11X was paid which reduced the amount owing to $W. An adjustment was then made reducing the price of the supply to $11X, including GST of $X, so that the resulting balance of the account was nil.

You have submitted an application for a private ruling dated on a particular date in Year E asking if you are entitled to amount of $X in GST credits (also known as input tax credits) relating to payments made by third parties to your XYZ for legal expenses that you incurred?

A check of the relevant legal Register of the XXX Legal Services Board shows you listed as a legal practitioner currently.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● Section 9-70

● Section 9-75

● Section 11-5

● Section 11-15

● Section 11-20

● Section 11-25

● Section 11-30

● Section 29-10

● Section 93-5

Reasons for decision

Summary

Your acquisition of the services of your XYZ was a creditable acquisition under section 11-5 of the GST Act and you are entitled to GST credits under section 11-20 of the GST Act.

Your XYZ acted for Y defendants, including you. The other defendants were not your clients so the acquisition of the services of the XYZ to represent them was not done in carrying on your enterprise and, as such, was not for a creditable purpose. The acquisition was only partly creditable under section 11-30 of the GST Act so the amount of GST credit is reduced. The extent of creditable purpose for the acquisition is 1/Y^th. You are entitled to $X/Y ($X x 1/Y x 100%) in GST credits.

In accordance with Section 29-10, the GST credits are attributable to the tax period in which the $11X payment was made, or later tax periods, subject to the four-year time limit under section 93-5 of the GST Act and provided that you hold a tax invoice in the period you give the Commissioner a GST return.

Detailed reasoning

Section 11-20 of the GST Act states that you are entitled to the GST credits for any creditable acquisition that you make.

Section 11-5 of the GST Act states that you make a creditable acquisition if

● you acquire anything solely or partly for a creditable purpose; and

● the supply of the thing to you is a taxable supply; and

● you provide or are liable to provide consideration for the supply; and

● you are registered or required to be registered for GST.

The supply of the XYZ's services to you was a taxable supply, you were liable to provide consideration and you are registered for GST at all relevant times. Creditable purpose remains to be considered.

Under section 11-15 of the GST Act you broadly acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise but not to the extent that the acquisition

● relates to making supplies that would be input taxed, or

● is of a private or domestic nature.

We emphasise that section 11-15 of the GST Act includes the phrase 'to the extent that'.

You were sued in relation to carrying on your enterprise as a sole trader legal advisor and as a result your legal expenses are a creditable acquisition under section 11-5 of the GST Act as the legal services were solely or partly for a creditable purpose, a taxable supply to you, you were liable to provide consideration and you were registered for GST at the times when those legal expenses were incurred.

Section 11-20 of the GST Act provides that you are entitled to GST credits for any creditable acquisitions that you make.

Section 11-25 of the GST Act provides that the amount of GST credits for a creditable acquisition is equal to the GST payable of the supply but the amount of the GST credits is reduced if the acquisition is only partly creditable.

Subsection 11-30(1) of the GST Act provides that an acquisition that you make is partly creditable if it is a creditable acquisition and you make the acquisition only partly for a creditable purpose.

When you acquired the services of a XYZ to act for you, this was done in carrying on your enterprise because you were being sued in relation to services provided by you to the entity as a sole trader legal advisor. The acquisition was for a creditable purpose to this extent.

When you acquired the services of a XYZ to act for the other defendants, this was not done in carrying on your enterprise. Those persons were not your clients in this litigation and, as such, the acquisition was not for a creditable purpose to this extent.

As such, your acquisition of legal expenses was a creditable acquisition under section 11-5 of the GST Act but was only partly creditable.

Subsection 11-30(3) of the GST Act provides that the amount of GST credits on an acquisition that is partly creditable is:

Full GST credit x Extent of creditable purpose x Extent of consideration

You incurred legal expenses in relation to providing the services of a XYZ to Y defendants. You were one defendant. Your extent of creditable purpose is 1/Y^th.

You are entitled to GST credits of:

$X x 1/Y x 100% = $X/Y

Goods and Services Tax Ruling GSTR 2003/12 Goods and services tax: when consideration is provided and received for various payment instruments and other methods of payment in paragraphs 19 to 20A explains the attribution of GST credits (also known as input tax credits) on creditable acquisitions for taxpayers that account for GST on a cash basis.

19. Subsection 29-10(2) attributes the input tax credit to which you are entitled for a creditable acquisition to the tax period in which you provide consideration, but only to the extent that you provided the consideration in that tax period.

20. However, an input tax credit is not attributable to a tax period if you do not have a tax invoice for the acquisition when you lodge your BAS for that tax period. You attribute the input tax credit to the first tax period for which you have a tax invoice when you lodge your BAS.

20A. If the BAS for a tax period states a net amount that does not take into account an input tax credit attributable to that tax period, the input tax credit may be attributable to a later tax period under subsection 29 10(4) (subject to the four year time limit contained in Division 93).

Under section 9-15 of the GST Act, consideration can include payments made by persons other than the recipient of a supply.

The amount of $11X paid to your XYZ on a particular date in Year E was consideration for your legal expenses that are a creditable acquisition. You account for GST on a cash basis so, under subsection 29-10(2) of the GST Act, you are entitled to attribute $X/Y of GST credits in relation to legal expenses referrable to that amount to the tax period in which the $11X payment was made.

Under section 93-5 of the GST Act you cease to be entitled to the GST credits referrable to the payment of $11X four years after the day on which you were required to give the Commissioner a GST return for the tax period in which the $11X payment was made.

Subsection 29-10(3) of the GST Act states that you can only attribute GST credits to a tax period if you hold a relevant tax invoice. You have provided a copy of a relevant tax invoice so the requirements of this subsection are satisfied.