Facts

Michael Felson was charged with conspiracy to defraud the Commonwealth. The resulting criminal proceedings were lengthy and involved several appeals, some of which remain ongoing. In order to pay his legal costs, Mr Felson entered into litigation funding agreements with a number of entities, including the applicant in these proceedings.

The arrangements were complex, involving a number of related parties.  Essentially, in each case, the funders promised to fund the course of legal proceedings, including, in relation to those deeds to which Mr Felson was a party, his criminal defence. Mr Felson promised that if he should succeed in the criminal proceedings and if he should successfully sue the Commonwealth for malicious prosecution (which action would also be funded by the funders), he would cause a share of his damages award to be paid to the funders.

It appears that the applicant paid Mr Felson’s invoices for legal fees, using funds borrowed from a related entity.

The Issues

The essential issue in this case was whether the applicant was entitled to input tax credits in respect of its payment of invoices for the provision of legal services to Mr Felson. This involved the following sub-issues:

• whether the applicant acquired legal services as a taxable supply to it; and
• if so, whether the applicant acquired the legal services in carrying on its enterprise and whether the acquisition related to making supplies that would be input taxed .

Issue 1 – did the applicant acquire the legal services as a taxable supply?

The Court (Edmonds J) found that there was no doubt or argument that the lawyers supplied legal services to Mr Felson and that he acquired those services under a taxable supply. But, unless the applicant also acquired those services under a taxable supply from the lawyers concerned, it 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 [2009] FCA 1209; on appeal [2010] 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.

In coming to this finding, the Court observed that while it would be dangerous to generalise as to the circumstances where one set of acts may constitute two or more supplies of services (and acquisitions), in the present context it would at least require an arrangement between the applicant and the lawyers whereby the lawyers were engaged by the applicant to provide legal services to Mr Felson and, by doing so, provided legal services to the applicant as well.

The Court found that the payments made by the applicant to Mr Felson’s legal representatives were consideration for the legal services that were supplied to Mr Felson. The applicant had an administrative arrangement with Mr Felson to pay the invoices that were rendered by his lawyers.

The Court made the following points of distinction with the DOT case:

• there was no evidence of any pre-existing framework between the applicant and the legal service providers under which the applicant was liable to make payments to the legal service providers as consideration for services provided to either the applicant or Mr Felson.
• the funding agreements unambiguously provide that the solicitors were to be retained by Mr Felson alone.
• there is an insufficient connection in this case between the legal services provided and the achievement of some purpose of the applicant akin to the statutory objects and functions of the Department of Transport

The Court also rejected the applicant’s reliance on the UK decision in Customs and Excise Commissioners v Redrow Group plc [1997] 2 All ER 1, making two observations:

• as their Honours stated in DoT at [62], that case was decided in a different factual and legal context. Their Honours approved the primary judge’s observation that “[u]ltimately, we are driven back to the words of the GST Act”;
• Redrow cannot be regarded as authority for the general proposition that a person who enters into a reimbursement obligation makes an acquisition of the supply, the cost of which is to be reimbursed.

Issue 2 – was the applicant carrying on an enterprise?

The Court found that the activities of the applicant in funding Mr Felson’s defence of his criminal proceedings did not constitute an ‘enterprise’ as defined in the GST Act. There was no evidence as to how the applicant, or those providing the funding, were to profit from the arrangement. No evidence was given by those involved, no contemporaneous records were provided. The Court concluded that there was no reliable evidence before the Court as to what arrangements were put in place to ensure that the applicant had sufficient resources to fund Mr Felson’s litigation. Also, Court found that the proof of some business-like activity in connection with the applicant’s claimed litigation funding enterprise was further undermined by the difficulty of reconciling the various litigation funding deeds with each other.