A commonly misunderstood area of legal practice administration is identifying whether GST can be claimed on the payment of disbursements and whether it should be charged on the recovery of legal disbursements. A question often asked is should GST be applied to the total value of the disbursement, or should the disbursement simply be on-charged including any GST charged by the original supplier without the addition of GST being applied by the legal practice. An incorrect application of GST can become a costly error for clients, particularly where the client isn’t registered for GST and therefore can’t claim the GST back from the Australian Taxation Office (ATO).
This article will summarise the key principals of disbursements and provide several common examples where GST is or isn’t claimable by a legal practice or chargeable on the recovery of legal disbursements.
The agency relationship is vital to determining the correct treatment of GST. The below points are an extract from Goods and Services Tax Ruling GSTR 2000/37, which outlines the agency relationship and how it can be applied in the scenario of a client and solicitor relationship.
- 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.
- 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 should be charged 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.
GST not to be claimed or charged by the legal practice
The following are examples of common fees and charges, for which a client is liable for, 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 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. A common example would be registering a company through ClearDocs where the client could have done it directly through them.
- Fines, penalties, stamp duty and taxes
- Probate fees
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 (however GST can also be claimed on the expenses paid by the solicitor where applicable):
- 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
- Fees to obtain court transcript
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
- Travel expenses of the solicitor and staff
As can be seen by the examples above, depending on the nature of the engagement and relationship, the treatment of GST can vary. In many instances, if the legal practice incorrectly claims the GST input tax credits on the disbursements paid before subsequently on charging the client the net disbursements plus GST, the net result to the client for GST purposes remains the same.
Circumstances that can arise due to incorrect administration, which disadvantages clients under an agency arrangement, include:
- GST charged on legal disbursements which didn’t originally have GST apply and the client can’t claim back the GST.
- The legal practice has applied GST on top of a GST inclusive disbursement cost, effectively resulting in the client being charged multiple layers of GST which can’t be recovered fully even if registered for GST.
In conclusion, it’s vitally important for the management of legal practices to understand and determine if an agency relationship exists with their clients. Further to this they must establish the nature of their client’s relationship with the suppliers where the legal practice may cover the costs, so that appropriate GST treatment can be applied. These actions are so important to apply correctly to ensure both the client (if required) and legal practice accurately report to the ATO. This will assist in managing cost recovery by the firm which is both compliant and doesn’t disadvantage their clients or erode firm profits.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.