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GST Q&A – GST and debt recovery costs

How does GST apply to debt recovery costs both incurred and charged to customers?

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Question

Currently, we have a number of debts which are referred to a debt recovery agency. The agency charges fees associated with this action to recover their costs plus a margin. Council pays these fees to the agency and recovers the costs from the Customer. When the agency invoices Council there is GST on a portion of their fees.

Is there supply between the agency and Council for one part of the arrangement and between Council and the customer on the other part, or is Council purely acting as a conduit for the fees being charged by the agency, to be paid by the customer?

This will assist in determining if we should be claiming input tax credits on the invoice payable to the agency and if there should be GST on our invoice to the customer.

Answer

Based on your description of the arrangement, it appears that Council has engaged the debt recovery agency to assist Council in collecting the outstanding debts. Therefore, this appears to be a service provided by the agency to Council. On this basis, to the extent such invoices include GST, Council is the entity that would be entitled to claim input tax credits (provided the acquisition is made for a creditable purpose).

With regard to costs, these may be incurred by the agency on Council’s behalf. Again, if such costs include any GST then Council is the entity that would be entitled to claim input tax credits (again, provided the acquisition is made for a creditable purpose).

Where Council recovers costs from the Customer in addition to the outstanding debt, it appears that such recovery would not be subject to GST. We refer to this Edited Private Ruling (EPR) where the ATO treats the amount recovered from the Customer as damages for loss, and refers to the ATO’s public ruling GSTR 2001/4. While the EPR deals with a situation where there is a court order a similar outcome arises where a claim is made and damages are paid even though there is no court order/proceedings provided the amount is sought as damages for loss.

Disclaimer: Information provided in this article, while correct at time of publishing, is subject to change.