GST is a tax on the basic right to justice

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).

In that way, if Ajax loses, it has the advantage of tax relief for all of its own costs and Joe’s costs (as assessed), including the GST element in each party’s costs whilst, on the other hand, if Joe loses he carries all of his costs and Ajax costs (as assessed), including the GST on each.

Anyone associated with legal process knows that access to justice has largely become the province of big business. The small business sector and the private individual cannot really afford to litigate.

Government provision of relatively informal dispute resolution facilities for minor consumer matters is of assistance at the lower end of litigation. But between that level and even local court action the costs can be prohibitive for the ordinary litigant.

Where legal expenses, including GST, can be deducted from income for taxation purposes, it can provide some relief for litigants and other users of legal services. But otherwise it can be a heavy financial burden. And where that burden is being increased by 10 percent then, unarguably, GST is a tax on a citizen’s basic right to justice.

Within the scope of taxation fraud, the leakage of GST must represent a significant loss to government sources. The anecdotal evidence relating to the practices of businesses and traders in particular, who charge GST without being registered and/or those who are registered but do not pass on to the Tax Office all of what is collected, is a matter of general concern which taxation agencies seem under resourced to adequately address.

Whilst more could be done to tighten up on this leakage to ensure that the present 10 percent of GST is fully collected, there is a strong case to grant GST relief in the form of a rebate, to non-income related consumers of legal services on whom that tax is imposed, directly and indirectly, in the course of the pursuit or defence of their legal rights.

This anomaly might well be given attention in any current taxation review.