IN PRACTICE
Reimbursements and GST
Will you be out of pocket?
P
roctor has previously published guidance (June, 2004) on the correct
method for practitioners to charge
GST when seeking reimbursement
from clients for disbursements incurred, however the Society is aware that some confusion
still exists and believes it timely to provide an
update to practitioners on this issue.
Incorrect treatment of GST on reimbursements could result in practitioners being liable
to fund, from their own resources, any shortfall
arising from a failure to levy GST.
Practitioners are obliged to ensure that they
account for GST on any taxable supplies they
make in the correct manner. If GST is not
passed on to the client, then the practitioner
will be personally out of pocket as it is their responsibility to remit to the ATO 1/11 of the
consideration received for any taxable supply
of their services.
The GST treatment of disbursements incurred by a practitioner and reimbursed by the
client can cause confusion. Some disbursements which practitioners incur in providing
their legal services are not “consideration” for
GST purposes and therefore exempt from GST
(for example, land title searches). However, in
some circumstances, these charges could result in GST when reimbursement is sought
from the client.
The circumstances of each case need to be
considered to determine whether or not GST is
payable on reimbursement.
Are you an agent or a principal?
Practitioners often incur disbursements as
agent for their client. For GST purposes, it is
the principal and the third party that need to
deal with the GST consequences of the transaction carried out by the agent on behalf of its
principal.
A practitioner will be acting as an agent
when the service is acquired directly for the
client and the practitioner is merely arranging
the service on the client’s behalf. In this case,
the client would normally be liable for the cost
directly, although the practitioner might also
be liable.
If a practitioner acts as agent, then no GST
should be charged on the amount to be reim-
GST payments on disbursements
remain somewhat confusing.
Peter Allen and Marc Johnston
offer a guide to current practice.
bursed by the client in respect of the service acquired. This means that, if the practitioner incurs a cost as agent, the cost of the goods or services (inclusive of GST if GST was paid) will
be billed to the client and the client may claim
the input tax credit if they are able. In other
words, the expense retains its original GST
status.
GSTR 2000/37
– What the ATO thinks
The ATO has given its opinion on GST and
disbursements in GST Ruling GSTR 2000/37.
The tax office considers that an agent/principal situation would typically apply to applica-
Peter Allen is a partner and Marc Johnston is a senior associate at Allens Arthur Robinson,
Brisbane. Marc is also a member of QLS Revenue Law Committee.
tion fees, registration fees, court fees, incorporation fees, fines, penalties, stamp duty and
taxes, barrister’s fees (if engaged by the client)
and probate fees.
The common factor in these charges is that
the disbursement is incurred in the practitioner’s capacity as a paying agent for a particular
client.
If this is the case, then no GST needs to be
added by the practitioner on the subsequent reimbursement by the client (see Goods and Services Tax Advice GSTA TPP 043).
If there is any GST charged on these fees,
then the practitioner is not entitled to the input
tax credit. This is because the taxable supply by
the third party will have been made to the client
and the client will be the party entitled to the
input tax credit for any GST paid.
The basis for this is that the goods or services
to which the disbursement relates are supplied
to the client, not to the practitioner, by a third
party. Also, the reimbursement forms no part
of the consideration payable by the client for
the supply of legal or other services by the
practitioner.
However, the Tax Office also considers that a
practitioner is sometimes not acting as an agent
when incurring expenses. Depending on the
contractual relationship between the client and
solicitor, the following fees can form part of
the expense of the legal services provided by
the practitioner – search fees, municipal search
fees (for example, 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, and
others).
In this case GST is payable on the subsequent
reimbursement of those disbursements by the
client, even though the fee itself is GST exempt
in many cases. This is made clear by the ATO in
GSTA TPP 042.
Therefore, broadly speaking, a third party
service will have been acquired by the practitioner as a principal when the practitioner instructed the supplier on his or her own account
in order to obtain assistance and information to
enable them to then provide legal services to
the client (for example, inquiries and searches)
or for the practitioner’s own use. Under this
scenario, the client would not be directly liable
>>
to the supplier for the fees.
November 2009 PROCTOR 15
IN PRACTICE
>>
GST should also be charged on services relating to telephone, postage, photocopying,
couriers, word processing or travel of the practitioner and staff.
The big question – Do I add
GST when I bill the client?
The bill is where the theory discussed above
has to be put into practice and it is vital that it is
done correctly. This is particularly important
if, for whatever reason, the client does not have
the ability to claim input tax credits to offset
the GST charged on any disbursement for
which reimbursement is sought. This is because, in that case, it will not just be a cashflow
issue for the client.
There is no easy answer for all instances. The
essential question is – on whose account is the
expense incurred? If the practitioner incurs the
expense directly as agent for the client then
there is no requirement for the practitioner to
levy GST when seeking reimbursement for the
outlay – the expense is simply passed directly
onto the client. However, if the practitioner incurs the expense in the ordinary course of providing his or her services to the client then GST
should be added when the bill is sent.
Example 1
A practitioner is acting in a cottage conveyance. Prior to settlement, the practitioner does
16 PROCTOR November 2009
a final title search to check that there are no
new dealings with the property. The fee for this
search is GST exempt. However, this disbursement was incurred on the practitioner’s own
behalf as part of the provision of legal services
to the client, so GST should be added when
seeking reimbursement from the client. The
search service provided for that fee was provided to the practitioner, not the client. The
service provided to the client was the practitioner’s legal services.
On the other hand, if the practitioner agrees
to pay the transfer duty in regard to this property and then seek reimbursement from the client, the practitioner will be doing so merely as
paying agent for the client.
The payment of this fee is directly on the client’s behalf and is not a part of the practitioner’s legal services. No GST needs to be levied
on the quantum of this amount when seeking
reimbursement for the transfer duty.
Example 2
Assume the same factual situation as discussed above. During the conveyance the practitioner requires a large amount of photocopying. Given tight time pressures and the specialist skills needed, the practitioner retains the
services of the next-door copy shop. The copy
shop invoices the practitioner for $1100.
1/11th ($100) of the consideration for the service provided by the copy shop will be GST.
Assuming that there had been no specific instructions from the client regarding the copying, the practitioner was acting as principal in
obtaining these services. It is the practitioner
who is liable to the copy shop and is entitled to
the input tax credit (in this case $100).
When seeking reimbursement from the client the practitioner has to add GST. Based upon
the usual format of GST gross up clauses, the
relevant reimbursement methodology would
be for the practitioner to deduct the credits to
which they are entitled ($1100-$100 = $1000)
and then add GST onto this amount (for example, client is billed $1100).. If they are entitled
to it, the client can claim a credit for this GST.
Consequently, if goods or services are supplied to the practitioner to enable the practitioner to provide legal services to the client, GST
is payable by the practitioner 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 practitioner’s overall fee.
Therefore, it can be seen that in most circumstances practitioners should be charging their
clients GST on any amounts they have paid for
searches or other expenses incurred as part of
providing the legal services to the client.
It is irrelevant that in many cases the fees for
the services obtained by the practitioner are exempt from GST.I