The current debate about the GST and its possible increase to 15 percent has highlighted the unfairness of its imposition in certain transactions where one party has the advantage of being able to take the payment of GST into account as a tax deduction and the other is not able to do so.
This situation frequently arises as it relates to legal services.
Unlike most medical and health care expenses and a range of other exemptions, the provision of legal services by barristers and solicitor, including most of the associated costs, are not exempt from GST.
Not all government imposed fees and charges are exempt, either. So that many basic charges by government and public agencies which citizens can’t avoid, are also subject to GST.
Leaving aside the broader issue of whether legal expenses should be exempt from GST generally, the circumstances of particular legal transactions and legal proceedings are, inter vivos, quite unfair in regard to how respective parties may be able to obtain relief from the payment of that tax.
That is to say, where consumers of legal services (as clients and litigants are called nowadays), being private individuals, businesses, companies or organisations, seek legal assistance involving matters that relate to the earning of income then, irrespective of how the matters in issue turn out, those clients can legitimately claim a tax deduction for the costs of those services, including the GST. But many situations arise where one party to legal action or a dispute is able to claim its costs against income whilst the other cannot.
For example, if a private individual sues a company, or is being sued by a company, that company can claim its expenses, or any unrecovered part of those expenses, for tax purposes, whilst a private individual is unable to do the same unless the matter is directly related to his or her income.
That is the case with or without GST of course, but the addition of GST just adds to the financial burden where the matter does not relate to income.
As such, GST is applied as a tax on a party’s capacity to pursue or defend its legal rights. It is also a further access barrier to justice for many private litigants.
To illustrate how this unfairness arises, consider, for example, legal action in which Joe (a private individual) enters into a contract with Ajax Pty Ltd (a construction company) to build an extension onto his house. A dispute ensues over some issue and the parties are involved in court or arbitration proceedings.
If Joe wins and costs are awarded to him, then some part of his legal expenses, including the GST, may be recovered from Ajax. That contractor can then deduct from its income not only its own legal costs but also Joe’s costs that have been awarded against it, including its GST and Joe’s GST.
But if Joe loses and has costs awarded against him, he cannot claim his costs and Ajax’s costs, or the GST, against any income he may earn. The matter, so far as the Tax Office is concerned, is not related to the protection of Joe’s income (as that situation is referred to).
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