Edited version of private advice

Authorisation Number: 1052259128942

Date of advice: 27 June 2024

Ruling

Subject: GST - excess and refunds

Question 1

Is the supply of legal services by the partnership to you, GST-free under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The supply of legal services by the partnership is GST-free under table item 2 of subsection 38-190(1) of the GST Act, to the extent that you were not physically in Australia in relation to the supply.

The supply is taxable under section 9-5 of the GST Act to the extent that you were physically in Australia in relation to the supply.

Question 2

Is the supply of legal services by the barrister to you, GST-free under section 38-190 of the GST Act?

Answer

The supply of legal services by the barrister is GST-free under table item 2 of subsection 38-190(1) of the GST Act, to the extent that you were not physically in Australia in relation to the supply.

The supply is taxable under section 9-5 of the GST Act to the extent that you were physically in Australia in relation to the supply.

Question 3

Ifthe partnership has treated the supply incorrectly as a taxable supply, does section 142-10 of the GST Act apply?

Answer

Section 142-10 of the GST Act applies if the partnership does not reimburse the excess GST.

Relevantly, where you are reimbursed the excess GST amount by the partnership for the supply of legal services that should have been GST-free (as per the response to Question 1), the relevant amount of GST has not passed-on to you. Consequently, section 142-10 of the GST Act will no longer apply. If the partnership reimburses you for the amount of excess GST, it can claim a refund by making an adjustment to its' business activity statement.

Question 4

Ifthe barrister has treated the supply incorrectly as a taxable supply, does section 142-10 of the GST Act apply?

Answer

GST on services supplied by the barrister is considered to be passed-on to you and payable on the supply under section 142-10 of the GST Act.

The executor of the barrister's estate (the executor) may be able to review the amounts charged to you or provide an itemised account.

Relevantly, where you (or the partnership, acting as your agent) are reimbursed the excess GST amount by the executor for the supply of legal services that should have been GST-free (as per the response to Question 2), the relevant amount of GST has not passed-on to you. Consequently, section 142-10 of the GST Act will no longer apply. If the executor reimburses you (or the partnership, acting as your agent) for the amount of excess GST, it can claim a refund by making an adjustment to the barrister's business activity statement

This ruling applies for the following periods

DD MM 20YY to DD MM 20YY

Relevant facts and circumstances

A solicitor was instructed by a you (a non-resident client), to act for you in recovering potential damages arising from an injury sustained whilst employed.

You have never been a resident or taxpayer of Australia.

You were injured onboard a ship docked in State A in 20XX.You were, at the time, carrying out your duties as a deck officer whilst cargo from the ship was being offloaded onto another vessel.

You suffered severe injuries and was flown to a hospital in State A for life saving treatment. You had surgery and received post operative care. You left Australia in December 20XX.

Legal action commenced in 20XX and eventually the matter was listed for trial in 20XX.

The solicitor took instructions from you while you were still a patient in hospital (CityA) and continued to act for you until the settlement in 20XX.

The case was settled on the 'court steps' the day before the trial was due to commence.

Apart from the short periods that you were in CityA after the accident, the solicitor took instructions from you (who was living overseas) by email communication and telephone conferences.

The solicitor personally conducted your case as a partner of a law firm (the partnership) which was dissolved in 20XX (after the case was completed). The solicitor currently practices part-time in his own name.

In the conduct of the case, the solicitor briefed a barrister, to assist the solicitor in drafting the pleadings, preparation of the case and to act as counsel at the trial.

After the settlement, the partnership and the barrister rendered tax invoices for the legal services provided to you.

The barrister's invoice was issued to you care of the solicitor through the partnership. The partnership, as your agent has paid the invoiced amount on your behalf, and included details of the barrister's fee disbursement in its tax invoice to you.

You have provided us with a copy of the partnership tax invoice which lists services and dates by which the partnership charged you. The invoice lists the dates you were present in Australia.

The barrister's invoice is not itemised and he and he will not be available to clarify any queries as he passed away recently.

The total fees for services rendered during these periods amounts to $XX,XXX (of which $X,XXX of GST was payable).

You paid GST on the entire amount of professional legal services provided by the partnership. You have calculated that you overpaid GST, which should be refunded.

The barrister only provided services to you whilst you were physically in Australia during the period DD MM 20YY to DD MM 20YY. The matter was settled shortly before it went to trial. It is customary for barristers to charge for the first day of trial in such circumstances. The tariff according to which barrister's are entitled to charge provides for a "brief fee," which includes the first day of trial and three and a half days of preparation. At the time the tariff was $XX,XXX, so you assume that the barrister charged for an extra five days or so for preparation. If one allows $X,XXX per day for such extra preparation. On this basis, you calculate that approximately half of the barrister's fee would have been GST-free.

The barrister's invoice was issued to the partnership. The services were charged to the partnership, who then included the barrister's bill as a disbursement in their own invoice issued to you.

The partnership did not charge GST on the disbursement of the barrister fees.

The partnership acted as agent for you when engaging the barrister. The barrister would not accept instructions directly from you and would only do so if he received a brief from a solicitor to act. As this is custom practice in State A, there is no documentation as to the relationship between the barrister and partnership. There is also no documentation of the agency relationship between you and the solicitor.

You are now seeking a refund of the overpaid GST because you were not liable to pay GST on services supplied to you while you were not physically in Australia in relation to the supply.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

A New Tax System (Goods and Services Tax) Act 1999 section 142-10

Reasons for decision

Question 1

Summary

The supply of legal services by the partnership to you is a GST-free supply under table item 2 of subsection 38-190(1) of the GST Act provided you were not physically in Australia in relation to the supply.

Detailed reasoning

Taxable supplies

GST is payable on taxable supplies. Under section 9-5 of the GST Act, you make a taxable supply if:

(a)          you make the supply for consideration; and

(b)          the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)          the supply is connected with Australia; and

(d)          you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Based on the facts provided, the partnership has satisfied all the paragraphs of section 9-5 of the GST Act because:

•         the partnership supplied legal services to you and received consideration for the supply by way of payment;

•         the partnership supplied legal services in the course or furtherance of their legal business;

•         the supply of legal services is connected with Australia because the partnership made the supply through an enterprise that it carries on in Australia; and

•         the partnership is registered for GST.

Hence, the supply of legal services by the partnership to you is a taxable supply to the extent that it is not GST-free or input taxed. The supply of legal services does not satisfy the input taxed provisions under the GST Act. However, it is relevant to consider whether the supply could have been GST-free.

GST-free supplies

Section 38-190 of the GST Act lists supplies of things other than goods or real property for consumption outside Australia that are GST-free. The legal services that the partnership supplies are neither goods nor real property and therefore come within the scope of subsection 38-190(1) of the GST Act. In particular, table item 2 in subsection 38-190(1) of the GST Act (item 2) is relevant to the circumstances of this case.

Under item 2, a supply is GST-free where it is:

a supply that is made to a non-resident who is not in Australia when the thing supplied is done; and

(a)          the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or

(b)          the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered.

The requirement that the recipient is "not in Australia in relation to the supply"

We consider that the precondition in item 2 requiring that the non-resident is not in Australia is a requirement that the non-resident is not in Australia in relation to the supply.

Goods and Services Tax Ruling GSTR 2004/7 'Goods and services tax: in the application of items 2 and 3 and paragraph (b) of item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999' (GSTR 2004/7) discusses when a non-resident or other recipient of a supply is in Australia when the thing supplied is done.

As expressed in paragraph 35 of GSTR 2004/7, a non-resident individual is in Australia if that individual is physically in Australia. If a non-resident individual is physically in Australia and in contact (other than contact which is only of a minor nature) with the supplier, that presence is in relation to the supply.

Paragraphs 202 and 203 of GSTR 2004/7 further discuss when an individual is in Australia in relation to the supply, which states:

202. In the case of supplies made to an individual, we consider that the physical location of the individual establishes whether that individual is in Australia when the thing supplied is done.

203. If a supply is made to a non-resident client who is physically in Australia when the thing supplied is done, the individual is in Australia. However, the individual must be in Australia in relation to the supply.

By way of clarification, example 6 in paragraph 219 of GSTR 2004/7 illustrates how a non-resident individual may be in Australia but not in relation to the supply:

219. A supply of legal services is made by an Australian lawyer to a non-resident sole trader who is in Australia on holiday for part of the time when the services are performed. The non-resident individual has no contact with the lawyer while in Australia. The presence of the individual in Australia is not in relation to the supply of the legal services.

Further examples of legal services being supplied to non-residents are provided in paragraphs 207 and 220 of GSTR 2004/7, which state:

207. A non-resident tourist is injured while visiting Australia and initiates a claim for damages after returning home. The presence of a solicitor in Australia acting on behalf of the injured individual does not mean that the individual is in Australia for the purposes of item 2.

Example 7 - non-resident individual is in Australia in relation to the supply

220. A non-resident individual falls over while shopping in a store in Australia. While in Australia the individual seeks legal advice from an Australian legal firm. The legal firm, on behalf of the individual, writes to the shopping centre seeking out of pocket expenses and a small amount for pain and suffering. The non-resident individual is in Australia in relation to the supply of legal advice to the extent that the individual is in Australia and, in meeting with the lawyer, is involved with the supply.

According to the facts, the partnership supplied legal services to you whilst you were both physically in Australia and outside of Australia. The legal services were in relation to proceedings pertaining to personal injury compensation against your employer.

The solicitor, in his capacity as a partner of a law firm, took initial instructions from you whilst you were still a patient in hospital (in City A), shortly after the accident and continued to act for you until the claim was settled in MM 20YY. You have provided us with an invoice that lists the dates that you were physically in Australia in relation the supply of legal services. To this extent, the supply of legal services during the above-mentioned periods by the partnership is taxable as all of the requirements of section 9-5 of the GST Act are met and it does not satisfy the GST-free provisions.

As for the period when you were outside Australia when the legal services were supplied, the supply of this portion of the legal services by the partnership may be GST-free under item 2.

Paragraph (a) and/or (b) of Item 2

Paragraph (a) of Item 2, is met if the thing supplied is not directly connected with real property situated in Australia and is not work physically performed on goods situated in Australia when the work is done.

The supply of legal services by the partnership not directly connected with real property in Australia, nor was it a supply of work physically performed on goods situated in Australia. Therefore, the supply satisfies paragraph (a) in Item 2.

Paragraph (b) in Item 2 would not apply in these circumstances, as you did not acquire the legal services in carrying on an enterprise (for example, a business).

Accordingly, for the portion of the supply, where you were physically outside of Australia when the legal services were supplied satisfies the provisions of Item 2.

Limitation of Item 2

However, a supply covered by item 2 will not be GST-free if the provisions of subsection 38-190(3) of the GST Act are met. Subsection 38-190(3) of the GST Act provides that the supply will not be GST-free if:

(a)          it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

(b)          the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

Paragraph (a) of subsection 38-190(3)

The supply of legal services by the partnership is a supply under an agreement entered into directly with you. Therefore, paragraph (a) of subsection 38-190(3) of the GST Act is satisfied.

Paragraph (b) of subsection 38-190(3)

As the supply of legal services from the partnership was not provided to another entity in Australia, the supply is not excluded from being GST-free under Item 2 by subsection 38-190(3) of the GST Act.

Consequently, the supply of legal services by the partnership will be GST-free under item 2, where you were not physically in Australia in relation to the supply. However, the supply of legal services by the partnership will be taxable under section 9-5 of the GST Act, where you were physically in Australia in relation to the supply.

Question 2

Summary

The supply of legal services by the barrister is a GST-free supply under subsection 38-190(1) of the GST Act provided you were not physically in Australia in relation to the supply.

Detailed reasoning

Taxable supplies

GST is payable on taxable supplies. Under section 9-5 of the GST Act, you make a taxable supply if:

(e)          you make the supply for consideration; and

(f)          the supply is made in the course or furtherance of an enterprise that you carry on; and

(g)          the supply is connected with Australia; and

(h)          you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Based on the facts provided, the barrister has satisfied all the paragraphs of section 9-5 of the GST Act because:

•         the barrister supplied legal services to you and received consideration for the supply by way of payment;

•         the barrister supplied legal services in the course or furtherance of his legal business;

•         the supply of legal services is connected with Australia because the barrister made the supply through an enterprise carried on in Australia; and

•         the barrister was registered for GST in Australia at the time of the supply.

Hence, the supply of legal services by the barrister to you is a taxable supply to the extent that it is not GST-free or input taxed. The supply of these legal services does not satisfy the input taxed provisions. However, it is relevant to consider whether the supply could be GST-free.

GST-free supplies

As per the response to Question 1, item 2 is relevant to the circumstances of this case.

Under Item 2, a supply is GST-free where it is:

a supply that is made to a non-resident who is not in Australia when the thing supplied is done; and

(c)          the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or

(d)          the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered.

The requirement that the recipient is "not in Australia in relation to the supply"

As expressed in paragraph 35 of GSTR 2004/7 and in the response to Question 1, a non-resident individual is in Australia if that individual is physically in Australia. If a non-resident individual is physically in Australia and in contact (other than contact which is only of a minor nature) with the supplier, that presence is in relation to the supply.

Paragraph 204 of GSTR 2004/7 provides that the location of a representative (in your case, the partnership) of a non-resident individual is not relevant. It is the whereabouts of the individual to whom the supply is made that needs to be considered.

The barrister supplied legal services to you whilst you were both physically in Australia and outside of Australia. The supply of legal services during the period you were physically in Australia in relation to the supply is taxable as all of the requirements of section 9-5 of the GST Act are met and it does not satisfy the GST-free provisions.

As for the period when you were outside Australia when the legal services were supplied, the supply of this portion of the legal services by the barrister may be GST-free under item 2.

Paragraph (a) and/or (b) of Item 2

The supply of legal services by the barrister was not directly connected with real property in Australia, nor was it a supply of work physically performed on goods situated in Australia. Therefore, the supply satisfies paragraph (a) in Item 2.

Paragraph (b) in Item 2 would not apply in this circumstance, as you did not acquire the legal services in carrying on an enterprise.

Accordingly, the portion of the supply where you were physically outside of Australia when the legal services were supplied satisfies the provisions of item 2.

Limitation of Item 2

However, a supply covered by item 2 will not be GST-free if the provisions of subsection 38-190(3) of the GST Act are met. Subsection 38-190(3) of the GST Act provides that the supply will not be GST-free if:

(a)          it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

(b)          the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

Paragraph (a) of subsection 38-190(3)

The supply of the legal services by the barrister to you is a supply under an agreement entered into indirectly with you (that is, through an Australian solicitor acting as your representative or agent). Therefore, paragraph (a) of subsection 38-190(3) of the GST Act is satisfied.

Paragraph (b) of subsection 38-190(3)

Paragraphs 59 and 61 of Goods and Services Tax Ruling GSTR 2005/6 'Goods and services tax: the scope of subsection 38-190(3) and its application to supplies of things (other than goods or real property) made to non-residents that are GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999' (GSTR 2005/6) provides guidance in relation to the expression "provided to another entity". Generally, a supply is made to whoever you are contractually liable to perform the services for. However, a supply is provided to whoever obtains the actual effective use or enjoyment of the supply, that is, the actual beneficiary.

GSTR 2005/6 paragraphs 472 to 476 comprising example 19 discusses whether a supply is provided to another entity, which states:

Example 19 - Australian barrister engaged by an Australian solicitor who is acting as agent of a non-resident individual

472. An Australian solicitor acting as agent for a non-resident individual engages an Australian barrister to supply legal services to the non-resident individual on an immigration matter. The individual is not in Australia when the legal services are performed, and the supply is not directly connected with real property situated in Australia.

473. The supply of legal services by the barrister is made to the non-resident individual (principal) through the solicitor, as agent for the non-resident. The presence in Australia of the solicitor does not mean that the non-resident individual is in Australia for the purposes of item 2. The supply by the barrister to the non-resident individual meets the requirements of item 2.

474. The supply of legal services by the barrister to the non-resident individual is a supply under an agreement entered into indirectly with a non-resident (that is, through the resident agent). Paragraph 38-190(3)(a) is therefore satisfied.

475. What is being supplied is advice on immigration matters concerning the non-resident individual. The barrister has been engaged by the Australian solicitor to provide advice to the non-resident individual. The legal services are provided to the non-resident, not the agent. The supply by the barrister to the non-resident individual is both made and provided to the non-resident, through the solicitor as agent. The supply by the barrister is neither made nor provided to the solicitor.

476. Subsection 38-190(3) does not apply to the supply of the legal services provided by the barrister.

Goods and Services Tax Ruling GSTR 2000/37 'Goods and services tax: agency relationships and the application of the law' (GSTR 2000/37) provides further explanation on the difference between subsequent reimbursement for disbursements made in a solicitor's capacity as a paying agent as opposed to reimbursement being a part of consideration payable for services.

Paragraphs 48 to 49 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.

Paragraphs 50 and 51 of GSTR 2000/37 discusses barrister's fees when the barrister is engaged by the solicitor, and provides examples where the solicitor can be a paying agent or incurring the services in their own right and then reimbursed as a part of the consideration payable for their own legal services provided to the client by the solicitor.

In this case, what is being supplied is legal advice concerning your court proceedings. The barrister is engaged by the partnership to provide advice to you. The legal services are provided to you and not to the Australian solicitor who is acting as your agent. The partnership acted as your agent in engaging the barrister and included the amount incurred as a disbursement in their invoice issued to you. The partnership did not include the barrister's fee as a part of their own services provided to you. Therefore, the supply of legal services by the barrister is neither made nor provided to another entity in Australia.

As the supply of legal services has not been provided to another entity in Australia (i.e. the solicitor), the supply is not excluded from being GST-free under Item 2 by subsection 38-190(3) of the GST Act.

Consequently, the supply of legal services by the barrister will be GST-free under item 2, where you were not physically in Australia in relation to the supply. However, the supply of legal services by the barrister will be taxable under section 9-5 of the GST Act, where you were physically in Australia in relation to the supply.

Question 3

Summary

Section 142-10 of the GST Act will not apply where the partnership reimburses you for the amount of excess GST. If the partnership reimburses you for the amount of excess GST, it can claim a refund by making an adjustment to its' business activity statement.

Detailed reasoning

The object of Division 142 of the GST Act is to ensure that excess GST is not refunded if this would give an entity a windfall gain. Generally, the Division operates so that the supplier is not entitled to a refund of an amount of excess GST where the supplier has passed on GST to another entity (the recipient), and has not reimbursed that other entity for the passed-on GST.

Under section 142-5(1) of the GST Act 'excess GST' is an amount of GST that has been taken into account in an entity's assessed net amount and is in excess of what was payable by the entity in the relevant tax period prior to taking into account or applying the provisions of Division 142 of the GST Act.

In relation to refunding the excess GST, section 142-10 of the GST Act provides that the excess GST that has been passed on to a recipient is taken to have always been payable and payable on a taxable supply, until the recipient has been reimbursed for the passed-on excess GST.

This means that an amount of excess GST will only be refundable if:

•         it has not been passed on to the recipient, or

•         it has been passed on to the recipient and the recipient has been reimbursed.

The Commissioner's view on the meaning of the terms 'passed on' and 'reimburse' for determining whether section 142-10 applies to an amount of excess GST is explained in Goods and Services Tax Ruling GSTR 2015/1 'Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1)'. Paragraph 12 states:

Excess GST passed on

17. If the excess GST has been passed on to the recipient, section 142-10 applies to treat the excess GST as always having been payable, and payable on a taxable supply, until the excess GST has been reimbursed to the recipient. Once section 142-10 ceases to apply, the supplier can claim a refund of the excess GST.

Paragraph 110 of GSTR 2015/1 further states:

110. For example, where the supplier mischaracterises a supply by incorrectly treating an input taxed or GST-free supply as a taxable supply , the costs of the GST will generally be embedded in the price of the supply, and be passed on to the recipient,

In this case, where the partnership has incorrectly treated the entire supply of legal services as a taxable supply and does not refund/reimburse you the relevant amount of GST that should have been GST-free, excess GST has been passed-on to you. Consequently, consistent with the view in paragraph 17 of GSTR 2015/1, section 142-20 of the GST Act applies and the partnership is not entitled to the refund of the excess GST and the excess GST is treated as always having been payable on the supply.

However, where the partnership reimburses you the excess GST, it will be entitled to a refund of excess GST as it is not considered to have passed-on to you. If the partnership reimburses you for the amount of excess GST, it can claim a refund by making an adjustment to its' business activity statement.

Question 4

Summary

GST on services supplied by the barrister is considered to be passed-on to the non-resident client and payable on the supply under section 142-10 of the GST Act.

Detailed reasoning

Where the barrister has incorrectly treated the entire supply of legal services as a taxable supply and has not refunded/reimbursed you the relevant amount of GST that should have been GST-free, excess GST has been passed on to you. Section 142-10 of the GST Act provides that the excess GST that has been passed on to you is taken to have always been payable and payable on a taxable supply, until you have been reimbursed for the passed-on excess GST.

The Commissioner is unable to refund the excess GST to you. You should contact the executor of the estate with this information to confirm that GST may have been charged incorrectly for the periods when you were not in Australia in relation to the barrister's supply of legal services to you.