32563

EDITED VERSION OF GST PRIVATE RULING

Authorisation Number: 32563

SUBJECT:

GST and payment of legal costs

QUESTION AT ISSUE:

Is goods and services tax (GST) payable on legal costs that are recovered from a ratepayer by a council pursuant to a court order where the total amount recoverable includes unpaid rates?

FACTS:

The council engages a debt collection agent to collect overdue rates from a ratepayer. As part of this collection process, the council instructs the debt collection agent to proceed with legal action against the ratepayer using the services of an appointed legal firm.

The legal firm issues the debt collection agent with a tax invoice for their legal services. The debt collection agent pays the legal firm and is then reimbursed by the council for these costs.

The amount recoverable from the ratepayer under the court order includes both the unpaid rates and legal costs incurred by the council.

The council is registered for GST.

DECISION:

No, GST is not payable on legal costs that are recovered from a ratepayer by the council pursuant to a court order where the total amount recoverable includes unpaid rates.

REASONS FOR DECISION:

Goods and Services Tax Ruling GSTR 2001/4 provides the Tax Office's view on the GST consequences of court orders and out-of-court settlements.

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that 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.

A supply is a taxable supply, if amongst other things, the supply is made for consideration. In relation to payment of the legal costs pursuant to a court order, it needs to be established if that payment by the ratepayer is consideration for a supply, if any, by the council to the ratepayer.

Essentially, a supply is something which passes from one entity to another. The supply may be of particular goods, services or something else. 'Supply' is defined in section 9-10 of the GST Act as 'any form of supply whatsoever'.

The meaning given to 'consideration' in section 9-15 of the GST Act extends beyond payments to include acts and forbearances. Section 9-15 of the GST Act also provides that a payment will be consideration for a supply if the payment is 'in connection with' a supply and 'in response to' or 'for the inducement' of a supply. Therefore, for there to be a supply for consideration, there must be a sufficient nexus between the supply and the payment which is provided for that supply.

It will not be sufficient for there to be a supply and a payment. The Commissioner of Taxation considers that, in the context of the GST Act, the expression 'you make the supply for consideration' in paragraph 9-5(a) of the GST Act means the same as 'there is consideration for the supply that you make'. In determining whether a sufficient nexus exists between a supply and consideration, regard needs to be had to the true character of the transaction.

Paragraphs 145 to 149 of GSTR 2001/4 discuss the GST implications of the payment of court ordered costs and costs negotiated in a settlement. Paragraph 145 states that when a dispute is finalised, either by a court giving judgment or through negotiation of a settlement, the unsuccessful party in the action may be required to pay the costs or part of the costs that have been incurred by the successful party in bringing or defending the claim. These costs could include solicitor's costs and barrister's fees.

Paragraph 148 of GSTR 2001/4 reiterates that for a supply to be a taxable supply, all of the requirements of section 9-5 of the GST Act must be met. It further states that in the instance of the payment of costs under the court order or settlement, there is no supply for consideration from the successful party to the unsuccessful party. This is essentially paying compensation for costs or losses incurred in the dispute and are treated in the same manner as damages (see paragraphs 110 and 111 of GSTR 2001/4).

Based on the discussions in GSTR 2001/4, in relation to the payment of the legal costs by the ratepayer, there is no supply by the council to the ratepayer that the recovery of the legal costs relates to. As such, the payment of the legal costs pursuant to a court order does not constitute consideration for a supply by the council to the ratepayer.

Accordingly, GST is not payable on legal costs that are recovered from a ratepayer by the council pursuant to a court order where the total amount recoverable includes unpaid rates.

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The Register of Private Binding Advice is published as a public record of the binding advice issued by the ATO. Each piece of advice is based on a specific set of circumstances advised to the ATO and the law in force at the time of the advice, and is considered binding only in respect of the person/s or entity/ies on whose behalf the advice was sought. The Register is a historical record of advice provided, and is not updated to reflect changes in the law, withdrawal of advice or any other change in circumstance. Each piece of advice has been edited to avoid disclosing the identity of the person or entity on whose behalf advice was sought and published advice may therefore not disclose all the relevant facts or circumstances on which the advice was based. For these reasons, advice published in this Register cannot be relied upon as precedent for any other person or entity.