Edited version of private advice

Authorisation Number: 1051851056186

Date of advice: 8 September 2021

Ruling

Subject: GST and legal fees

Question

Was the acquisition of legal fees (and associated costs) a creditable acquisition under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

Entity A made a series of payments (loans and other payments) to Entity B (and other foreign subsidiaries) in a number of different currencies. The monies were used by Entity B and the other foreign subsidiaries to fund various investments and acquire several assets in Australia and around the world.

At the time of the making of the loans, neither entity were tax residents of Australia. In 20XX there was an appointment of additional trustees to Entity A and, as a consequence, it rendered it a resident trust estate for Australian tax purposes.

A few days earlier, an individual was appointed director of Entity B which also rendered it resident for Australian tax purposes.

In 20XX a written loan agreement was entered into by Entity A and Entity B. Interest was to be payable on the loan as of that date.

Entity A was provided with an assignment agreement pursuant to which they would accept assignment of Entity B's assets as part payment of the debt.

Entity A, an Australian tax resident, filed a tax return claiming an income tax deduction for a foreign-exchange loss as a result of repayment of the loans which had been expressed in foreign currency.

As a result of litigation, Entity A has incurred sizeable legal fees in fighting a case in the Federal Court of Australia and has incurred GST costs associated with those legal fees.

The issue is the entitlement to a refund of input tax credits associated with the legal fees (and other related fees and costs) and the issue of which entity has an entitlement to a refund of those input tax credits.

All the entities in question are presently, registered for GST (including for the periods for which this ruling applies).

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) Regulations 2019 regulation 40-5.09(3)

Reasons for decision

Entities that are registered for GST are entitled to claim input tax credits for creditable acquisitions they make.

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.

Section 11-15 of the GST Act states:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

(3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or part of an enterprise, that you carry on outside the indirect tax zone.

(4) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed if:

(a) the only reason it would (apart from this subsection) be so treated is because it relates to making financial supplies; and

(b) you do not exceed the financial acquisitions threshold.

(5) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that:

(a) the acquisition relates to making a financial supply consisting of a borrowing (other than through a deposit account you make available)^6A; and

(b) the borrowing relates to you making supplies that are not input taxed.

Subsection 11-15(1) requires that you acquire a thing in carrying on your enterprise. It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on.

Miscellaneous Tax Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides that the following indicators may give some useful guidance when deciding whether a holding entity is carrying on an enterprise:

•         Active involvement in the management of subsidiaries.

•         Providing loans, guarantees or indemnities to subsidiaries.

•         Providing equipment, premises or rights to intellectual property to subsidiaries.

•         Providing specific management services to its group such as secretarial, financial, legal, taxation, information technology or recruitment and human resources expertise.

While these indicators may give guidance as to whether an entity's activities are sufficient for it to be considered to be carrying on an enterprise, deciding that question is ultimately a matter of fact having regard to the scale of the activities undertaken, the form of operation of the entities involved and the commercial context in which it occurs.

On balance, we accept that Entity A was carrying on an enterprise.

The second requirement is that the acquisition (legal fees) has a connection to the enterprise being carried on.

The dispute between the Entity A and the Commissioner which led to the litigation case was set out by the Court.

It follows that the litigation itself arose from the repayment of certain loans. This repayment took place as an assignment.

Based on the above, the Commissioner considers that the subject of the litigation was a dispute that arose as a result of the assignment of the loans as repayment of the outstanding debts. It was this transaction that resulted in the claim for a foreign exchange loss and it is this supply that the acquisition of the legal fees relates to.

The assignment

The assignment of the debt, being the assignment of an income stream or receivable, is an input taxed supply as it is the provision of an interest in or under item 2 in the Table in regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations), (A debt, credit arrangement or right to credit, including a letter of credit).

At the time the assignment took place, both entities were resident entities. Therefore, the financial supply made under the assignment agreement is an input taxed supply.

Conclusion

The acquisition of the legal fees occurred as a result of the litigation which was connected to an input taxed financial supply (assignment of the debt) between the entities. The requirements for a creditable acquisition are not met because the acquisition was not for a creditable purpose.