Entitlement to claim input tax credits (ITC) requires a nexus between the supply and the acquirer of the good or service. This is easily identifiable in two-party transactions where the acquirer makes the payment for the supply. In transactions involving more than two parties (referred to as a “tripartite agreement”), identifying which entity is entitled to claim ITCs becomes more problematic.
Tripartite agreements often occur for legal fees and property development agreements where the acquirer of the good or service is often not the entity paying the consideration to the supplier. GST treatment in all cases relies on a determination of whether the payment by the Payer is connected with the supply, that is, which entity is the “Recipient”.
In a recent case Konebada Pty Ltd ATF the William Lewski Family Trust v Commissioner of Taxation, the issue of entitlement to claim ITCs was considered. Konebada Pty Ltd as trustee for the William Lewski Family Trust (Konebada) paid invoices for legal services provided to members of the Lewski family and related entities (Lewski Family Group) as beneficiaries of the trust.
Konebada had entered into litigation funding agreements with lawyers providing the legal services to pay litigation costs incurred and, in return, was to receive any litigation proceeds. Konebada paid the invoices issued by the lawyers and claimed the ITCs on these invoices. The ATO issued amended assessments denying Konebada’s ITC claims on the basis that Konebada was a third-party payer and did not make creditable acquisitions (acquisition issue).
Secondly, the ATO contended that Konebada made no acquisitions in the carrying on of any relevant enterprise (enterprise issue). The amended assessments were issued by the ATO on the basis that Konebada did not acquire the legal services, or anything else, from the lawyers.
Although it was an agreed fact by the Court that Konebada was carrying on an enterprise, the Federal Court held that the scope of the enterprise carried on by Konebada did not include managing litigation, tax, legal and regulatory compliance, and commercial matters for the Lewski Family Group.
The Full Federal Court later dismissed the appeal by Konebada on the enterprise issue. It followed that Konebada made no creditable acquisitions of legal services from the lawyers and was not entitled to ITC for those acquisitions.
The ATO Decision Impact Statement on this case states:
“We do not consider as a general proposition that a ‘litigation funder’ necessarily makes an acquisition when it pays invoices issued by lawyers. Nor do we consider that, where acquisitions are made, they necessarily give rise to creditable acquisitions. Nexus and enterprise requirements must also be satisfied for input tax credits to be lawfully claimed.”
It follows that in other contexts where one entity merely pays for acquisitions made by another entity, the payer may not necessarily automatically be entitled to claim ITCs on the invoices paid. For these tripartite arrangements, two major issues need to be considered to determine entitlement to claim ITCs. Firstly, the question of “What is being supplied and by who?” needs to be addressed. Secondly, “Who is making an acquisition, and is the acquirer entitled to claim input tax credits?”.
Failure to consider these questions in tripartite agreements can lead to irrecoverable ITCs where the entity that pays for a taxable supply does not acquire the supply. The ATO have stated that they will seek to clarify, by way of further judicial guidance, the scope and application of these rules to other tripartite arrangements when a suitable case presents itself.
If you would like to discuss these matters further, please contact Mimi Ngo.