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ATO clarifies GST treatment of search fees

Feature Articles

Cite as: (2004) 78(3) LIJ, p. 56

Solicitors need to ensure they are meeting the required GST payments when they employ intermediary information brokers.

By Paul Stacey

Document searching is a vital part of most common legal transactions. Whether it’s acquiring land title information and council certificates as part of a property conveyance or obtaining ASIC company extracts as part of a large corporate merger, document searching is an everyday reality.

There are several ways that any of these searches, and scores of others, can be done. They can be performed in person, e.g. by walking down to the government agency’s office and doing the search on the premises. Alternatively, they can be performed remotely via an intermediary’s web browser. The use of an intermediary information broker saves precious time and simplifies searching. It also until recently complicated the GST analysis for both the intermediary and the solicitor.

In GST Ruling GSTR 2000/37 the Australian Taxation Office (ATO) expresses the view that where a solicitor incurs “search fees” in the course of providing professional services, he or she normally does so in the capacity of a “principal”(para 51). Accordingly, the recovery of that disbursement cost by a solicitor is regarded for GST purposes as an on-supply of information to the client. This is a separate supply to that by the government agency to the solicitor.

The GST analysis of the transaction is therefore as follows. The government agency’s supply of the searched data is outside the scope of GST by virtue of the Treasurer’s determination under Div 81 of the GST Act. The solicitor’s on-supply of the data is a separate taxable supply for which he or she has a GST liability. Therefore, in order to preserve his or her financial position the solicitor should gross up the search fee when setting the disbursement charge for the on-supply. This is because input tax credits cannot be claimed on the search fee.

Simply illustrated, the prescribed search fee is $100. The solicitor sets the disbursement charge by grossing up the search fee by 11/10, i.e. $110. The solicitor pays $100 to obtain the information, on-supplies it for $110, remits $10 of GST to the ATO, leaving it in a net financial position of nil. However, if the solicitor simply were to charge its client $100, i.e. the cost to him or her of directly obtaining the information, the solicitor would be $9.09 ($100/11) out of pocket. This is because there will still be a GST liability on the now $100 on-supply of the search information.

So how is this relatively simple analysis of the GST consequences complicated by the use of an intermediary information broker?

It is not the existence of the intermediary as such which complicated the analysis. Rather, it is the number of intermediaries, the multitude of government agencies and the multiplicity of contracts which muddied the waters.

If, for example, a solicitor uses two information brokers and each information broker has agreements with 10 government agencies, then there are 20 contracts, all of which seemingly need to be considered to determine how GST flows through the supply chain. Furthermore, it is a racing certainty that there will be no consistency between the contracts vis-a-vis the capacity in which each party contracts.

As a result the situation quickly gets confusing. And this has allowed some information brokers to argue that they were agents of solicitors, whereas others recognised a GST liability on their on-supply of information to solicitors in the same way as solicitors should do for their clients. The overall effect of which was a GST-induced distortion of the commercial marketplace.

The ATO in 2003 acted to remove this distortion by writing to information brokers and advising them how GST applies. The ATO’s view is that the supply from the government agency to the information intermediary will usually be a supply from one principal to another. The ATO gives three examples of common situations, such as a search of ASIC’s database. In all three situations it concludes that there is no agency relationship as between the government agency and information broker, nor the broker and solicitor. Moreover, the ATO has indicated that it in effect intends to perform a limited GST audit of the industry by examining at least one BAS from each information broker. It expects that this will be completed by 30 June 2004.

So what does this mean for solicitors?

First and foremost they should check that they have been fully recognising and accounting for their GST liabilities.

This peril can perhaps best be illustrated by looking at the situation where two information brokers pitch for a solicitor’s business. The first says that the cost of obtaining the search data referred to previously is $143. The second claims that searches through it are free of GST and charges $133 ($100 for the search and $33 commission). The solicitor opts for the seemingly “cheaper” service and sets its disbursement charge at $133.

The solicitor may think that he or she has done the client a favour by opting for the “cheaper” service – and he or she has, but not in the way anticipated. What the solicitor has in effect done is take part of what would otherwise have been the client’s GST burden and made it his or her own. Thank you very much, says the client.

To avoid this outcome the solicitor should have grossed up the $100 search fee to $110 to cover his or her GST liability. If this had been done, the total disbursement charge would have been $143. This is the same amount as charged by the first information broker. The cheaper service was therefore just an illusion, at least for the solicitor. It is unlikely that the solicitor will be able to recover this additional amount from past billings.

If one cannot recover this cost from the client, why not partially recover it from the second information broker? If the ATO view is that the $100 search was not GST-free since it was a taxable supply by the intermediary, then the broker must have had a $9.09 GST liability on the supply. The solicitor could therefore request a tax invoice from the second information broker and belatedly claim input tax credits of $9.09. That would thereby limit the solicitor’s financial loss to 91 cents.

While this is a theoretical possibility it too is a practical impossibility. In the real world the tax invoice would not be forthcoming and the solicitor can do little to enforce the statutory requirement that the intermediary issue a tax invoice. Further, the ATO is unlikely to permit the solicitor to claim input tax credits without one. There are several reasons. The first is that the situation does not fall within existing draft internal guidelines, namely it is a contractual dispute between the parties. Second, it is clear that the ATO has drawn a line in the sand between before and after 1 July 2003 (the date of effect indicated in its letter). That is, the ATO will not seek to claim unpaid GST from intermediaries before that date. Accordingly, it is unlikely that it will allow solicitors to claim input tax credits in respect of those same transactions.

Perhaps the real message for solicitors is that now is the time to look at which information broker they use and to make sure that their own house is in order on a going forward basis. If not, they may in the event of a GST audit not only have to pay any underpaid GST but also penalties. Given that GST is a transaction tax, unlike income tax, the financial cost of this can escalate at a seemingly exponential rate.


PAUL STACEY is a senior tax writer with Thomson ATP and technical editor of Australian GST Journal. He is an acknowledged GST expert.

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