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Ruling

Subject: GST and reimbursements

Question

Are you liable for goods and services tax (GST) when on-charging the following expenses to your clients?

a) Main Roads Search Fees

b) Council Searches

c) Lodgement of Settlement Notices fee to government agency

d) Title, Plan and Company Searches

e) Requisition Fees to government agency

f) Court Filing Fees

g) Unpaid Tax Interest

h) Postage

i) Motor Vehicle Expenses for employees using the Tax Office cents/kilometre reimbursement method

Answers

GST is payable when you on-charge your clients the following expenses:

a) Main Roads Search Fees

b) Council Searches

d) Title, Plan and Company Searches

h) Postage, and

i) Motor Vehicle Expenses for employees using the Tax Office cents/kilometre reimbursement method.

GST is not payable when you on-charge your clients the following expenses:

c) Lodgement of Settlement Notices fee to government agency

e) Requisition Fees to government agency

f) Court Filing Fees, and

g) Unpaid Tax Interest.

Relevant facts and circumstances

You are a legal firm and registered for GST.

You incur costs in the course of providing legal services to your clients.

GST is not included when you pay for the following expenses:

· Council Searches

· Lodgement of Settlement Notices fee to government agency

· Requisition Fees to government agency

· Court Filing Fees

· Unpaid Tax Interest, and

· Motor Vehicle Expenses for employees using the Tax Office cents/kilometre reimbursement method.

The Unpaid tax Interest was incurred because of a delay in payment of Stamp Duty caused by your client.

GST is payable for the following disbursements:

· Main Roads Search Fees

· Title, Plan and Company Searches, and

· Postage.

You then on-charge these costs to you clients after full payments are made to the suppliers.

Summary

You are not liable for GST on the reimbursement paid to you by your clients when you are a paying agent of the clients for the expenses. The reimbursement forms no part of the consideration payable by the clients for the supply of your services

However, if goods and services are supplied to you to enable you to perform services supplied to your clients, GST is payable by you on any reimbursement by the clients of expenses incurred on those goods and services, whether the reimbursement is separately itemised or included as part of your overall fee. This is because the reimbursement is part of the consideration payable by the clients for services supplied by you.

Detailed reasoning

Where a supplier makes a taxable supply, section 9-70 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the amount of GST payable on the supply is 10% of the value of the taxable supply or 1/11^th of the price.

Section 9-5 of the GST Act states:

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.

(* denotes a defined term in section 195-1 of the GST Act)

You supply legal services to your client. Your supply satisfies paragraphs (a) to (d) of section 9-5 of the GST Act as:

a) the amount you charge your client represents the consideration for your supply of legal services (see below for consideration)

b) the supply is made in the course of your enterprise

c) the supply is connected with Australia as the supply is made through an enterprise you carry on in Australia, and

d) you are registered for GST.

There is no provision in the GST Act that makes your supply of legal services in Australia GST-free or input taxed.

Accordingly, your supply of legal services is a taxable supply under section 9-5 of the GST Act. Your GST liability is 1/11^th of the total amount that you charged your client relating to services supplied through you.

Consideration

Subsection 9-15(1) of the GST Act defines consideration as:

(1) Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

Goods and Services Tax Ruling GSTR 2000/37 (available at the ato website) 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 describe the effects of an agency relationship on disbursements by lawyers.

Paragraphs 48 and 49 of GSTR 2000/37 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.

To make the distinctions clearer, paragraphs 50 to 53 of GSTR 2000/37 describe the sort of fees that a solicitor may pay on behalf of a client and when those fees would be paid as an agent or as a principal. These paragraphs are reproduced below:

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

53. The following are examples of costs that a solicitor may incur in carrying on the business of providing a legal service to the client. GST is payable on any subsequent payment by the client to the solicitor for the supply of the legal service for:

· telephone expenses;

· postage expenses;

· photocopying expenses;

· courier expenses;

· word processing expenses; and

· travel expenses of the solicitor and staff.

Paying agent

The key features for the lodgement of settlement notices fees to government agency, requisition fees to government agency, court filing fees, and unpaid tax interest are that you merely perform the action or pay for the costs on behalf of your client. It is your client who is personally responsible to register the relevant document and pay the applicable fee or tax. When you pay for these costs on behalf of your client, you do not hold liable to the relevant authority for doing so. The obligation rests with the client. Therefore, you are acting as a paying agent of the clients for these fees.

Accordingly, the subsequent reimbursements you seek from your clients for these fees do not represent consideration in making a taxable supply. You will not be liable to pay GST on these reimbursements.

Expenses incurred in your own right

In carrying on your business of providing legal services to your clients, you have incurred expenses such as main roads search fees, council searches, title, plan and company searches, postage and motor vehicle expenses for employees using the Tax Office cents/kilometre reimbursement method. These expenses are incurred in your own right in the course of providing your service. This view is substantiated in paragraphs 51 and 53 of GSTR 2000/37.

As you did not incur these expenses as a paying agent, then the amount you sought from your client is not a reimbursement. The amount you sought to recover is an amount you are seeking in supplying your legal services. This applies irrespective of whether or not the initial acquisition was exempt from GST under Division 81 of the GST Act. This is because the subsequent supply loses its characteristic as a supply which is excluded from GST when it is on supplied by you to your client. Accordingly, the amount sought represents consideration in making a taxable supply and GST is payable under section 9-5 of the GST Act.