Edited version of private advice

Authorisation Number: 1052311626543

Date of advice: 3 October 2024

Ruling

Subject: GST - disbursement fees

Question

Are you, Entity 1, liable to pay GST on the overseas disbursements made when you engage foreign patent attorneys to conduct services on behalf of your Australian clients, and subsequently invoicing your clients, pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

When you acquire the services of foreign patent attorneys, there are two distinct supplies, being the supply of professional services from the foreign patent attorneys and official fees and expenses relating to costs incurred for the registration of intellectual property rights overseas on behalf of your Australian clients.

The portion of the disbursement amount relating to expenses incurred for the registration of intellectual property rights overseas will not be a taxable supply under section 9-5 of the GST Act. This is because you are acting as a paying agent for your Australian clients when paying the expenses on behalf of your Australian clients.

However, the disbursement amounts relating to the professional services performed by the foreign patent attorneys will be taxable as the expenses pertaining to the professional services are considered to be one of the costs in carrying on your enterprise and as such, all elements of paragraph 9-5 will be satisfied.

Therefore, the total disbursement amounts that you on-charge to your clients will be partly taxable.

This ruling applies for the following periods:

DDMMYYYY to DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

You, Entity 1, are a patent attorney company based in Australia.

You are registered for GST since DDMMYYYY.

You file patents, trademarks and designs in several foreign countries on behalf of your Australian clients.

You engage foreign patent attorney associates in those countries to handle the application and registration of foreign patent, trademarks and designs.

You stated that you normally separate your professional services costs from the disbursements (e.g. costs and fees payable to foreign patent attorneys and foreign patent agencies).

You have provided invoices that you have issued to your clients as part of the services you performed.

The total fees payable by your client are separated into two line items - whereby the first line item are fees relating to your services, and the second line item comprises of the disbursement fees to cover the costs incurred in registering the intellectual property rights overseas.

You also provided invoices which were issued to you by the foreign patent attorneys. These invoices include two separate components:

•                     A supply of professional services from the foreign patent attorneys, and

•                     Official fees and expenses such as government fees relating to disbursements to cover the costs incurred in registering the intellectual property rights overseas.

You advised that because of the uncertainty regarding the correct practice on whether to include GST on the disbursement fees, you decided to include GST on the disbursement fees you incurred as a precaution.

The inclusion of GST into the disbursement fees puts you at a cost disadvantage, especially for your clients who are not registered for GST as they cannot claim back the GST component.

You advised that you are acting as a paying agent for your clients, and provided the following reasons to justify your contentions:

•                     Your clients would pay the same disbursements whether if you were involved or not. For example, your clients would pay the exact same foreign patent attorney and disbursement amounts directly to the associated foreign patent attorney for the filing of an application of intellectual property rights overseas, irrespective of your involvement. Your professional services component comprises of the services you provide for your clients, and

•                     Goods or services to which the disbursement relates are supplied to your clients, not to you. For example, the filing of a patent overseas is supplied by the respective foreign patent attorney to your clients.

The Client Agreement (Agreement) is an agreement that sets out the terms on which your clients engage you for your services.

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 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

Reasons for decision

Section 9-40 provides that you must pay GST the GST payable on any taxable supplies that you make.

Section 9-5 provides that a supply will be a taxable supply if:

(a)           the supply is made for consideration;

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

(c)           the supply is connected with the indirect tax zone (Australia); and

(d)           the supplier is registered, or required to be registered for GST.

On the information provided, your supply of your services to your clients is a taxable supply as all the requirements of section 9-5 are satisfied. Hence, GST is payable on the amounts presented in the first line item of the tax invoices issued to your clients as they are amounts that relates specifically to the supply of your services to your clients.

However, as part of providing your services to your clients, you engage other foreign patent attorneys to handle the application and registration of intellectual property rights of your clients overseas. As a result, the foreign patent attorneys on-charges two types of fees to you, which are professional fees relating to the supply of the professional services from the foreign patent attorneys, and official fees to cover the costs incurred in registering or maintaining the intellectual property rights overseas. You initially paid both fees to the respective foreign patent attorneys and in accordance with the Agreement, your clients reimbursed you fully for both fees as part of their disbursements to you.

Therefore, we need to determine whether the reimbursement of both the professional fees and official fees by your clients to you forms part of the consideration for your supply of your services.

Professional fees

Paragraph 9-15(1)(a) provides that consideration includes any payment in connection with a supply of anything. In the case of taxes, fees and charges incurred by a supplier (in this instance, the foreign patent attorneys) in the course of its enterprise are 'business costs'. When a supplier on-charges a business cost to its customers, the business cost loses its character as a distinct and separate expense item and instead becomes part of the price of the service provided.

In your case, you make taxable supplies of filing intellectual property rights in several foreign countries. In doing so, you engaged foreign patent attorney associates to handle the application and as a result, you incurred expenses which include professional fees. These expenses, along with your service fee, is then treated by you as the final price (consideration) for your taxable supplies, which are payable by your clients.

Therefore, when you on-charge the professional fees by making it part of your final price for your services, your clients are no longer paying the professional fees to the associated foreign patent attorneys, but rather, they are paying for one of your costs in carrying on your enterprise. As such, the disbursement made by your clients for the professional fees component will be treated as consideration under paragraph 9-15(1)(a) and is therefore taxable.

Official fees

You may incur expenses on a client matter both as principal in the ordinary course of providing your services to a client and as an agent of the client.

In this case, the 'official fees' that you incur which you subsequently on-charge to your clients as part of the disbursement amounts are those fees paid for registering an intellectual property right overseas (which are paid to overseas patent officials).

It is relevant to determine whether the official fees form part of the consideration of the professional fees you incurred on behalf of your clients.

Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37) discusses the principal and agency relationship and explains the application of the GST law to transactions involving these relationships.

Paragraphs 48 to 54 of GSTR 2000/37 consider the effects of an agency relationship on disbursements by lawyers, and can be applied to any situation involving service providers and their clients.

Paragraphs 48 and 49 of GSTR 2000/37 provide the following:

           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.

To make the distinctions clearer, paragraphs 50 to 53 of GSTR 2000/37 describe the type of fees that a solicitor may pay on behalf of a client and describes when those fees would be paid as an agent and as a principal. Paragraph 50 and 51 of GSTR 2000/37 state:

           50. The following are examples of common fees and charges, for which a client is liable, that may be paid 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.

           51. The following are examples of common disbursements that, depending upon the contractual arrangements between the client and the solicitor, can be incurred by a solicitor and then reimbursed by a client as part of the consideration payable for legal services provided to the client by the solicitor. If the following disbursements are incurred by a solicitor, GST is payable on the subsequent reimbursement by the client to the solicitor:

•                     search fees;

•                     municipal search fee (e.g. rates; zoning; permits);

•                     birth/death/marriage certificate fees;

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

•                     witness fees;

•                     fees for recording court proceedings;

•                     service of document fees;

•                     fees for expert report or attendance in court; and

•                     fees to obtain court transcript.

Paragraph 50 of GSTR 2000/37 above indicates that generally application fees and registration fees, for which a client is liable, may be paid for by a solicitor as a paying agent of the client. Hence, the reimbursement forms no part of the consideration payable by the client for the supply of (professional) services by the solicitor.

In your case, your clients have authorised you to liaise with foreign patent attorneys to handle the application of intellectual property rights overseas. The registration of the intellectual property rights is lodged by the foreign patent attorneys and as a result of the lodgment, the foreign patent attorneys incur official fees which are subsequently on-charged to you. These official fees are fees that your clients are liable to pay to the overseas agencies. You initially paid the official fees on behalf of your clients to the foreign patent attorneys but under the Agreement, your clients are liable to pay 100% of any disbursement amounts to you, which includes the official fees.

Under the general law of agency, you are considered to be standing in the shoes of your clients when you engage the foreign patent attorneys for the registration of intellectual property rights overseas. It is the client that has made an acquisition of the rights and will therefore be liable to pay the official fees to the foreign patent attorneys.

We consider that when paying the official fees to the foreign patent attorneys, you are acting as a paying agent for your clients. The subsequent reimbursement by your clients for the official fees does not form part of the consideration payable by your client for the supply of your services. Hence, no GST is payable on the amount relating to the official fees.

Conclusion

As we have determined above, the overseas disbursements when you invoice your clients will be partly taxable. The official fees component of the disbursement amount will not be taxable as we are satisfied that you are acting as a paying agent on behalf of your clients. However, the professional fees component of the disbursement amounts will be taxable the professional fees are treated as the consideration for your taxable supplies, which are payable by your clients, therefore satisfying all paragraphs of section 9-5. As such, the total disbursement amounts that you on-charge to your clients will be partly taxable.