Written by Peter Carter

July 25, 2020

About APLA

APLA is a non-profit national association of lawyers and other professionals with branches in every state and territory and over thirteen hundred members.

Our members are devoted to the protection and enforcement of the rights of those injured at the hands of wrongdoers and to injury prevention through safer products, workplaces and other environments.

We value a fair, just and democratic society, and aim to redress the imbalance between the ample resources available to corporations and their insurers on the one hand, and those available to members of the public on the other.

Our Concern

The current Bill will unfairly discriminate against public access to the civil justice system.

Tax reform should not unfairly burden any sector of the community or disadvantage any person in the conduct of their personal or business affairs. Yet the GST proposal will significantly disadvantage a group which already suffers inequitable tax treatment.

In its current form, the GST will heighten the existing inequity arising from the tax-deductibility of corporate litigation expenses. See the Senate Legal and Constitutional References Committee’s Inquiry into the Australian Legal Aid System (Third Report), June 1998, Chapter Ten.

In this era of diminishing legal aid and increasingly complex laws, access to the justice system is becoming the preserve of corporate entities and the rich. It is trite to say that meaningful access to justice is a key component of a functional society, but this crucial pillar of our social contract will be further undermined by a new tax which increases the cost of legal services.

When real people use the legal system, they pay the full cost of the services they use, but corporations do not. Their legal bills are considered a business expense and are therefore tax-deductible.

All statutory compensation schemes will also increase in cost. Usually, cost increases bring pressure to lower benefits, so the GST package must ensure there is no such reduction.

Incorrect Assumptions

The Government’s assumption that a 10% GST equates to a 6% increase in legal fees does not apply in the case of consumers engaged in litigation.

In fact, the GST will have the effect of increasing the real cost of legal services for individual litigants by much greater than ten per cent. For example, if the winner’s legal costs were $10,000, there would be $1,000 of GST payable. In such a case, the litigant would ordinarily recover about two-thirds (say $6,700) from the negligent party. This would leave the remaining $3,300 plus the $1,000 GST payable by the individual. In real terms, the individual litigant’s costs will rise by about one-third, from $3,300 to $4,300, not by a simple 10%.

The goal of achieving taxation consistency is not a universally appropriate goal. There are sectors of the community with greater capacity to absorb tax increases than others. In the legal sector, corporations with the greater financial resources are receiving preferable tax treatment to individuals, who by and large cannot afford legal services.

As a result of various factors which need not be itemised here, most actions are won by individual litigants.

Except in a few small specialist jurisdictions, all Australian Court rules use the “loser pays” system. In this system, unsuccessful parties to litigation pay the majority of the successful party’s legal costs, usually about two thirds. The basis of the calculation of the loser’s contribution is the Court authorised “Scale of Costs”, the details of which are set out in each State or Territory’s Supreme Court Rules.

There is no value-added factor which would attract GST to the loser pays contribution, but GST will obviously be payable on the winner’s entire legal bill.

Effect On Particular Groups

Unless some compensatory action is taken, individual litigants will face an increased tax burden. This does not comply with either the letter or the spirit of the Prime Minister’s principles of taxation reform numbers one ( “There should be no increase in overall tax burden”) and four (“that there should be appropriate compensation for those deserving of special consideration”) announced on 13 August 1998.