Procedure - Costs - Taxation - Particular items - Disbursements - Other disbursements - Goods and services tax.

A New Tax System (Goods and Services Tax) Act 1999 (Cth).

Judgment Number: [2005] TASSC 38

Serial No 38/2005

File Nos FCA 100/2002

PETER MARCUS THORNTON v APOLLO NOMINEES PTY LTD

1 Pursuant to two orders for costs made in the appellant's favour against the respondent, the appellant submitted bills of costs for taxation. Each bill contained items in respect of the goods and services tax ("GST") payable in respect of professional services provided to the appellant by his solicitors and particular disbursements they incurred on his behalf. In support of the GST items, the appellant submitted a private ruling provided by the Commissioner of Taxation to the effect that GST was payable as claimed in the items. Upon the hearing of the taxation, the respondent accepted that the GST items were proper claims; nevertheless, the taxing officer refused to allow the items as he considered that as a matter of principle, they were not allowable. His explanation for so doing is a public taxation ruling styled "Goods and Service Tax, GST Consequences of Court Orders and Out of Court Settlements GSTR 2001/4", as to which the taxing officer said:

"The Commissioner of Taxation has issued a public ruling, GSTR 2001/4, which deals, interalia, with 'the GST treatment of an award of costs or a negotiated costs amount' from non-insurance claims; in other words, it relates to the impact of the GST. Paragraphs 145 to 155 are particularly relevant. Paragraph 145 makes it clear the ruling is limited to 'party party costs'. Paragraph 148 states that costs 'will be treated in the same manner as damages under paragraphs 110 and 111'. Those two paragraphs make it clear that a payment of damages 'will not be consideration for a supply' and thus a liability to pay party party costs does not attract a liability to indemnify for the GST... ."

As to the private ruling to the effect that GST was payable, the taxing officer said in the course of his ruling that the Australian Taxation Office had informed him that a private ruling was subservient to a public ruling and he also said that he was not convinced that the terms of the private ruling were clear. The public ruling pre-dated the private ruling provided to the appellant so it was not correct that in this instance the private ruling was subservient to the public ruling, the reverse was the case; Taxation Administration Act 1953 (Cth), s37(iii)(b). I do not, however, consider this to be of any significance as, in my view, the issue raised can be resolved without resort to the rulings referred to.

2 A New Tax System (Goods and Services Tax) Act 1999 (Cth) imposes the GST. That Act relevantly provides:

"7-1 GST and input tax credits

(1) GST is payable on *taxable supplies ... "

"9-5 Taxable supplies

You make a taxable supply if:

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(d) you are *registered, or *required to be registered.

..."

"9-10 Meaning of supply

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these

...

"9-40 Liability for GST on taxable supplies

You must pay the GST payable on any *taxable supply that you make."

3 As is apparent from the above provisions, and as is well recognised, the provision of legal services is a taxable supply in respect of which the provider is liable to pay GST; a liability which, in the absence of any arrangement to the contrary, is passed on by the provider of the service to the client. In the subject case, the appellant's solicitors were working on a no-win no-fee basis. The appellant having won, he became liable to his solicitors for the costs of their professional services and as to that liability, he obtained the benefit of the costs order referred to, that is, orders that "the respondent pay the appellant's costs of and incidental" to the two specified appeals. Thereupon the appellant became entitled to recover from the respondent his costs as taxed by a taxing officer, Supreme Court Rules 2000, r845, and "on taxation, the taxing officer is to allow all costs, charges and expenses as were necessary or proper for the attainment of justice or for maintaining or defending the rights of any party", r859(a). The drafting of r859 can be traced back to at least the Rules of the Supreme Court 1883 (Eng), O65, r29. The same or similar words were used in the predecessors to r859, Rules of Court (Supreme Court) 1932, O LXXVIII, r69 and Rules of the Supreme Court 1965, O80, r69. In Société Anonyme Pêcheries Ostendaises v Merchants' Marine Insurance Company [1928] 1 KB 750 at 762, Aikin LJ said of the 1883 rule:

"That rule is the guiding rule in the taxation of costs. It is intended to sum up generally the principles upon which costs are awarded; and I cannot help thinking that if that rule were really rigorously applied by everybody - and by 'rigorously applied' I mean applied in all cases and giving full effect to the width of its language - there would be many fewer complaints by successful litigants than there are at the present moment. It is a rule which is intended to give to the successful litigant a full indemnity for all costs reasonably incurred by him in relation to the action. It says in terms that the Taxing Master is to allow 'all such costs, charges and expenses, as shall appear to him to have been necessary or proper for the attainment of justice.' That is the whole principle that the Taxing Master has got to apply."

4 There is no suggestion that the services provided by and the disbursements incurred by the appellant's solicitors to which the items of GST relate were not necessary or proper for the attainment of justice or for maintaining or defending the rights of the appellant. The taxing officer has allowed the charges for those services and disbursements. In these circumstances, it is to my mind very clear that any liability for GST payable in respect of the provision of those services that is passed on to the appellant is also a cost or expense that was necessary or proper for the attainment of justice or for maintaining or defending the rights of the appellant. Rule 837A provides that a bill of costs for taxation may include an amount referable to GST paid or to be paid and that the taxing officer may make an allowance for the same. There is accordingly no basis for any suggestion that a GST expense is for some reason or other an expense that is beyond the range of expenses that are recognised by r859.

5 In refusing to allow the items claimed referable to GST, the taxing officer relied on the Commissioner of Taxation's public ruling GSTR 2001/4, which the taxing officer said:

"... make(s) it clear that a payment of damages 'will not be consideration for a supply' and thus a liability to pay party party costs does not attract a liability to indemnify for GST."

I set out below pars145 - 152 (footnotes excepted) of the public ruling:

"Costs

145 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, referred to as party party costs, could include, barrister's fees, solicitor's costs, fees for various expert reports and court costs.

146 In any legal action the parties concerned are required to pay their legal advisers the solicitor client costs incurred and the supply of these legal services will attract GST and be GST inclusive sums to the extent that they are not GST-free. Both parties to a dispute, as recipients of a supply of legal representation respectively, may be entitled to an input tax credit for a creditable or partly creditable acquisition of these services.

147 For the purposes of this Ruling, we are concerned with the subsequent stage when the successful party is able to recover costs wholly or partly through a court order for costs or by negotiation of an amount in a settlement.

148 As we have seen for a supply to be a taxable supply the conditions under section 9-5 of the GST Act must be met. 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 will be treated in the same manner as damages under paragraphs 110 and 111.

149 Accordingly, the payment of court ordered costs or costs negotiated in a settlement in the circumstances described will not be consideration for an earlier or current supply. It does not matter that the payment of the costs order or settled amount is made by an entity other than the unsuccessful party. The costs order or settled amount should take account of any entitlement to an input tax credit of the parties to the original supply.

Example - Unregistered entity

150 Matthew, a part-time artist not registered for GST, is sued by another more prominent artist in a defamation action. The matter proceeds to court but the judge dismisses the case against Matthew and costs are awarded in his favour.

151 GST would have been included in the fees for the legal representation supplied to Matthew. However as Matthew is not registered he is unable to claim an input tax credit for the amount of GST included in those fees. Therefore, the actual cost to him is a GST inclusive amount.

152 The payment of the awarded costs to Matthew is not a payment for any supply made by Matthew. The costs award is compensation for the costs incurred by Matthew in defending the claim brought by the other artist and is treated in the same way as a payment of damages. There is no GST liability for Matthew arising from the receipt of the payment."

6 This portion of the ruling does no more than explain that the payment of a successful party's costs (like a payment of damages) is not a supply for a consideration from the successful party to the unsuccessful party and does not itself attract any liability for GST. This has no bearing on the obligation of the successful party to reimburse that party's solicitor for GST payable in respect of the services provided by that solicitor or the propriety of including an item for this expense in the amount to be recovered from the unsuccessful party. As to those costs, the ruling acknowledges in the first sentence of par146 that in any legal action, the parties concerned are required to pay their legal advisers for the services provided and the supply of those legal services will attract GST and be GST inclusive. As explained in par147, the ruling is concerned with the subsequent stage when the successful party recovers costs from the unsuccessful party. What the ruling makes plain, is that a further liability for GST will not arise at that subsequent stage when the unsuccessful party complies with the order for costs and makes payment to the successful party. Paragraphs 151 and 152 of the ruling recognise that whilst GST would be included in the fees for the legal representation supplied to Matthew (the successful party), there is no additional GST liability for Matthew arising from the unsuccessful party's payment of those fees. The ruling is consistent with my conclusion that the GST liability of the appellant's solicitors that was passed onto the appellant and is the subject of the GST items in his bills of costs for taxation were properly claimed.

7 The objection is sustained and the items claimed in each bill in respect of GST are allowed.