Edited version of private advice

Authorisation Number: 1052366039356

Date of advice: 27 February 2025

Ruling

Subject: GST - legal expenses

Question 1

Is the supply of legal services made by the entity to a non-resident individual located outside Australia GST-free?

Answer 1

Yes

This ruling applies for the following periods:

Not applicable

The scheme commenced on:

Not applicable

Relevant facts and circumstances

•                The entity (you) is an Australian company and is registered for GST.

•                You have supplied legal services to a non-resident in relation to a family law dispute involving both real property and parenting matters.

•                The real property that is located in Australia was included in the asset pool subject to division as part of a divorce property settlement.

•                The real property was the non-resident's family home whilst the non-resident resided in Australia.

•                The real property was owned by the non-resident's spouse. The spouse continues to live in the family home.

•                The non-resident was an Australian resident until 20xx where he moved overseas.

•                You have provided tax invoices for the services supplied to the non-resident from 20xx.

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

Does Division 165 apply to this private ruling?

Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 is a general 'anti-avoidance' rule that can apply in certain circumstances if you or another entity obtains a GST benefit from a scheme that you entered into or carried out for the main purpose of obtaining a GST benefit or allowing another to obtain one.

It may also apply in some cases where the GST benefit arises as a principal effect of a particular scheme. An entity can get a 'GST benefit' under the GST, Luxury Car Tax or Wine Equalisation Tax laws.

If Division 165 applies, the benefit can be cancelled. For example, we might increase the net amount for a particular tax period.

Unless your private ruling specifically discusses Division 165, we have not considered the application of the anti-avoidance provisions to your case.

If you want us to rule on whether Division 165 applies in your circumstances, contact your contact officer to find out what details we will need to make the private ruling.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for entity.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Summary

The supply of legal services in relation to a family law dispute involving real property to a non-resident individual located outside Australia is GST-free under table item 2 of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

GST is payable on a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act if:

a.              the supplier makes the supply for consideration; and

b.              the supply is made in the course or furtherance of an enterprise that the supplier carries on; and

c.              the supply is connected with Australia; and

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

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

All of the above must be satisfied for a supply to be a taxable supply.

From the information given, your supply of legal services to an overseas individual satisfies paragraphs (a) to (d) of section 9-5 of the GST Act.

However, your supply of legal services to the non-resident individual is not a taxable supply to the extent that it is GST-free or input taxed.

There is no provision under the GST Act that makes your supply of legal services input taxed.

GST-free supply

Relevant to your supply of legal services to the non-resident individual is item 2 in the table in subsection 38-190(1) of GST Act (item 2).

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident that 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 for GST.

Only one of the paragraphs in item 2 needs to be satisfied.

Precondition of item 2 - non-resident is 'not in Australia'.

Under item the requirement that the non-resident is not in Australia when the thing supplied is done is a requirement that the 'non-resident is not in Australia in relation to the supply' when the thing supplied is done.

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.

From the information given your supply of legal services made to the individual who was a non-resident located outside Australia. In this instance the precondition that the 'non-resident is not in Australia in relation to the supply' is met.

Paragraph (a) of item 2

Goods and Services Tax Ruling GSTR 2003/7: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999? provides guidance on paragraph (a) of item 2.

state: Paragraphs 21 to 25 in GSTR 2003/7 state:

21. Under items 1, 2 and 3 it is only where the connection between the supply and the goods or real property is a direct one that the location of goods or real property is regarded as the place where consumption occurs. The addition of the adverb 'directly' to the phrase 'connected with' implies a more emphatic connection between the supply and goods or real property. The inference is that the supply is so closely aligned with goods or real property that it is appropriate to treat the location of the goods or real property as the place where consumption occurs.

22. We consider, therefore, that the expression 'directly connected with' contemplates a very close link or association between the supply and goods or real property. (This is discussed further at paragraphs 113 to 134 of the Explanations section of the Ruling.)

23. The goods or real property must, in our view, be particular goods or real property for this very close connection to exist. A supply that is connected with goods or real property in general, rather than with particular goods or real property, does not have a sufficiently close connection with goods or real property for that connection to be a direct one.

24. For example, a supply of advice or information to a non-resident about the potential for investment in the real property market in Melbourne is not directly connected with real property. While the supply is connected with real property, the generality of the advice or information means that the supply does not have a direct connection with real property. The supply is not one so closely connected with real property in Melbourne that the place of consumption is regarded as Melbourne.

25. Fundamental to establishing whether there is a direct connection between a supply and particular goods or real property is determining what the supply is for. For example, without knowing what legal services are for, it cannot be said what they are connected with. Legal services in acting for a purchaser or vendor in the conveyance of land are directly connected with that real property. However, legal services in establishing a trust that will subsequently hold real property are not directly connected with the underlying real property.

The real property in question in this case is a family home where the non-resident lived prior to the separation. This family home is owned by the non-resident's spouse and not by the recipient of the legal services. This family home is included in the asset pool for the purposes of division of assets. The supply of legal services made to the non-resident is in relation to property and parenting matters and not specifically on the property owned by non-resident's spouse.

Therefore, your supply of legal services made to the non-resident satisfies paragraph (a) in item 2 as your supply of legal services to the non-resident is neither a supply of work performed on goods located in Australia nor a supply that is directly connected with real property in Australia.

Since paragraph (a) is satisfied there is no need to consider paragraph (b)

Your supply of the legal services to the non-resident is GST-free under paragraph (a) in item 2 to the extent that subsection 38-190(2), 38-190(2A) or 38-190(3) of the GST Act does not negate this GST-free status.

Limitations of item 2

Subsection 38-190(2) of the GST Act

Subsection 38-190(2) of the GST Act provides that a supply covered by any of the items 1 to 5 in the table in subsection 38-190(1) of the GST Act is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free.

Where a transaction involves a supply of a right or option to acquire something, the supplier will usually enter into an obligation to supply the thing if the right or option is exercised. The fact that the transaction also involves an entry into an obligation does not in itself preclude the operation of subsection 38-190(2) of the GST Act if there is a relevant supply of a right or option to acquire something.

For example, an Australian vehicle rental firm supplies car rental rights to a UK travel agency. The travel agency supplies car rental vouchers to UK tourists who may use the vouchers to obtain car rental in Australia. The supply of the car rental to the tourists is a supply that is connected with Australia. The supply of car rental rights to the UK travel agency is therefore not GST-free.

From the information given, subsection 38-190(2) of the GST Act does not apply to your supply of legal services as your supply is not a supply of a right or option to acquire something the supply of which would be connected with Australia.

Subsection 38-190(2A) of the GST Act

Subsection 38-190(2A) of the GST Act provides that a supply covered by any of items 2 to 4 in the table in subsection 38-190(1) of the GST Act is not GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of a real property situated in the indirect tax zone that would be input taxed under Subdivision 40-B or 40-C of the GST Act.

Subdivision 40-B of the GST Act specifies the supply of a premises by way of lease, hire or licence is input taxed. Subdivision 40-C of the GST Act is about the sale of residential premises and the supply of residential premises by way of long term lease

For example, a non-resident individual, who owns residential rental property situated in Australia and who is not registered or required to be registered, acquires gardening services for the property and also acquires the services of a tax agent to prepare their tax return for the rental income earned from the residential property. The acquisition of each service relates to the making of an input taxed supply of real property. The supplies of those services are therefore not GST-free.

Subsection 38-190(2A) of the GST Act will apply regardless of whether an acquisition may either relate directly or indirectly to the making of those input taxed supplies of real property. In addition, where only part of the supply relates to the real property activities, the entire supply will be caught under subsection 38-190(2A) of the GST Act. Equally, where only part of the real property is used to make supplies that would be input taxed under subdivisions 40-B or 40-C of the GST Act, the entire acquisition will not be GST-free under subsection 38-190(1) of the GST Act.

Under subsection 38-190(2A) of the GST Act it is the acquisition of the supply which must relate (whether directly or indirectly, or wholly or partly) to the making of a supply of real property that would be input taxed.

Goods and Services Tax Determination GSTD 2007/3 provides guidance on the application of subsection 38-190(2A) of the GST Act regarding an accountant making supplies to an entity consisting of advise about residential premises and tax return preparation.

Paragraphs 11 and 12 in GSTD 2007/3 state the following:

11. The test in subsection 38-190(2A) is whether there is a connection between the acquisition of the supply and the making of a supply of real property that is input taxed under Subdivision 40-B or 40-C. It is not a requirement that the acquisition relates only to the making of supplies of real property that would be input taxed under Subdivision 40-B or 40-C. Subsection 38-190(2A) negates the GST-free status of a supply, such as the supply of advice or tax return preparation services to a non-resident property owner, even if the acquisition of those services also relates, directly or indirectly or wholly or partly, to the making of supplies that are not input taxed supplies of real property.

12.The phrase 'relates to', is not defined and takes its ordinary meaning. It has been held to be capable of wide meaning. In any case, that the phrase is intended to have a wide meaning and application is put beyond doubt by the words 'whether directly or indirectly, or wholly or partly' in subsection 38-190(2A), which amplify its scope.

The acquisition of legal services made by the recipient of the supply the non-resident, does not relate whether directly or indirectly, or wholly or partly to the making of a supply of residential property by the non-resident. The non-resident does not own the residential property that has formed a part of the asset pool subject to division as a part of the property settlement.

Accordingly, section 38-190(2A) of the GST Act does not apply to your supply of legal services.

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides that without limiting subsection 38-190(2) or (2A), a supply covered by item 2 in that table is not 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; and

c)              for a supply other than an input taxed supply - none of the following applies:

                                 i.                  the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;

                                ii.                  the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or

                               iii.                  the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient's acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense.

From the information given subsection 38-190(3) of the GST Act does not apply to your supply of legal services as you are not required to provide your legal services to another entity in Australia.

To summarise, your supply of legal services to a non-resident individual located outside Australia and who do not own residential property in Australia is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act.