On Friday the Federal Court handed down its decision in Professional Admin Service Centres Pty Ltd v Commissioner of Taxation  FCA 1123 in which it found that the applicant was not entitled to input tax credits for the payment of legal fees of third party pursuant to a litigation funding arrangement.
This case involved a litigation funding arrangement involving the provision of legal services to a Michael Felson (formerly known as Nikytas Nicholas Petroulias) for the defence of his criminal proceedings. The Court (Edmonds J) considered that there was no doubt that the lawyers supplied legal services to Mr Felson and that he acquired those services under a taxable supply. However, unless the applicant also acquired those services under a taxable supply from the lawyers concerned, the Court considered that did not make a creditable acquisition and the applicant was not entitled to an input tax credit notwithstanding its payment of the relevant invoices.
The Court accepted that, in certain circumstances, one set of acts may constitute two or more different supplies of services and may give rise to two or more different acquisitions: referring to Secretary, Department of Transport (Vic) v Commissioner of Taxation  FCA 1209; on appeal  FCAFC 84 (“DoT”). However, the Court found that on the evidence, it was unable to comprehend how the payments made by the applicant to Mr Felson’s legal representatives were for the “acquisition” of anything by the applicant. Put another way, the lawyers engaged by Mr Felson made no supply to the applicant. The terms of the litigation funding deeds clearly stated that Mr Felson’s lawyers would be paid by the applicant but retained by the client. Mr Felson’s evidence was that he engaged the lawyers. There is no evidence of any arrangement between the applicant and the lawyers pursuant to which legal services would be provided to the applicant. Those services were provided to Mr Felson alone.
My analysis of the decision can be accessed here.
In other news, on Thursday the Tribunal handed down its decision in Zarev and Commissioner of Taxation  AATA 777 where the Tribunal affirmed the decision of the Commissioner to partially disallow the applicant’s claim for input tax credits. In this case, the Commissioner initially determined that the applicant was not carrying on an enterprise and was not entitled to any credits. However, after receiving further information from the applicant the Commissioner accepted that the applicant was carrying on an enterprise but was only entitled to some of the credits claimed as a number of the acquisitions had no connection with the enterprise and were private or domestic in nature. The Tribunal found that the applicant did not substantiate those claims. The Tribunal also affirmed the Commissioner’s decision to impose a penalty of 50% on the basis that the applicant’s conduct was reckless.