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ATO Interpretative Decision

ATO ID 2002/112

Goods and Services Tax

GST and input tax credit where funds are used from a trust account to pay a third party for services provided to the client
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the entity, a legal firm, entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it uses funds from its trust account to pay a third party for services provided to the entity's client?

Decision

No, the entity is not entitled to an input tax credit under section 11-20 of the GST Act when it uses funds from its trust account to pay a third party for services provided to the entity's client.

Facts

The entity is a legal firm. The entity is engaged by a client to provide legal services. This supply is a taxable supply under section 9-5 of the GST Act.

As part of the service agreement, prior to the provision of services, the client deposits money into the entity's trust account. This money is treated as an advance for later disbursements made by the entity on behalf of its client and as security for future services provided by the entity.

The entity then advises this client to seek the service of a third party. The client contracts with this third party directly.

The entity, acting as agent for the client, pays for these services using funds from the trust account. The entity and the client are registered for good and services tax (GST).

The supply of service to the client, by the third party, is a taxable supply under section 9-5 of the GST Act. The service acquired by the client is acquired in the carrying on of its enterprise.

Reasons for Decision

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes. Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if:

•
the entity acquires anything solely or partly for a creditable purpose; and
•
the supply of the thing the entity is a taxable supply; and
•
the entity provides, or is liable to provide, consideration for the supply; and
•
the entity is registered or required to be registered for GST.

According to section 11-5 of the GST Act, an entity acquires a thing for a creditable purpose to the extent that it acquires it in carrying on its enterprise.

The entity is acting as an agent for its client when it pays the third party using funds from the trust account. The entity is not acquiring a service in carrying on its enterprise, rather it is merely paying for a service that its client acquired. Therefore, the entity is not acquiring a service for a creditable purpose. The entity is not entitled to an input tax credit under section 11-20 of the GST Act, when it makes a payment to a third party for a service provided to it's client.

[Note 1: The client is entitled to claim an input tax credit under section 11-20 of the GST Act as the client is registered for GST, has provided consideration for the supply via its agent, the service to the client is a taxable supply and the service is acquired for a creditable purpose.
Note 2: Subsection 153-5(1) of the GST Act allows the principal to claim an input tax credit, provided that the agent or the principal hold a tax invoice that is issued by the third party.]

Date of decision:  22 November 2001

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   section 11-5
   subsection 153-5(1)

Keywords
Goods & services tax
GST special rules
Acquisitions and supplies by Agents
GST supplies & acquisitions
Creditable acquisition
Taxable supply

Business Line:  GST

Date of publication:  31 January 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 22 November 2001 Original statement
  13 January 2006 Archived

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