ATO Interpretative Decision

ATO ID 2002/111

Goods and Services Tax

GST and cash basis attribution rules for a legal firm when client deposits money in trust account
FOI status: may be released

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Does the entity, a legal firm that accounts for goods and services tax (GST) on a cash basis, attribute the GST payable on the taxable supply of its services, under subsection 29-5(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), to the tax period in which the client deposits money into the entity's trust account?

Decision

No, the entity does not attribute the GST payable on the taxable supply of its services, under subsection 29-5(2) of the GST Act, to the tax period in which the client deposits money into the entity's trust account.

The entity attributes the GST payable to the tax period in which it is entitled to withdraw, in full or part, the payment for its services, from the trust account.

Facts

The entity is a legal firm that accounts for GST on a cash basis. 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 any services, the client deposits money into the entity's trust account. This money is treated as security for future services provided by the entity. The entity does not have access to the money at the time of the deposit.

In the next tax period, the client authorises the payment for these services from the trust account.

Reasons for Decision

Subsection 29-5(2) of the GST Act sets out the attribution requirements for an entity that accounts on a cash basis. This provision states that:

•: if, in a tax period, all of the consideration is received for a taxable supply - GST on the supply is attributable to that tax period; or
•: if, in a tax period, part of the consideration is received - GST on the supply is attributable to that tax period, but only to the extent that the consideration is received in that tax period; or
•: if, in a tax period, none of the consideration is received - none of the GST on the supply is attributable to that tax period.

Therefore, it needs to be determined when the entity has received consideration for its supply of services.

When a client deposits money into a legal firm's trust account it is providing money that the legal firm holds on trust for the client. The client is not providing consideration for the legal firm's services. The relevant legislation and the agreement between a legal firm and a client will determine when the legal firm is entitled to withdraw funds from the trust account for disbursements or for its services. When the legal firm is entitled to withdraw funds from the trust account for its services, it is receiving consideration for its supply.

At the time the client deposits money into the trust account, the entity does not have access to the money. Therefore, the client is not providing consideration for services at the time it makes the deposit. The client provides consideration to the entity in the next tax period when the client authorises the payment of these services from the trust account.

Therefore, the entity does not attribute the GST payable on a taxable supply under subsection 29-5(2) of the GST Act to the tax period in which the client deposits money into the entity's trust account. The entity attributes the GST payable to the tax period in which it is entitled to withdraw, in full or part, the payment for its services from the trust account.

Date of decision: 22 November 2001

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 9-5
subsection 29-5(2)

Keywords
Goods & services tax
GST tax periods
Attribution rules
Cash basis

Siebel/TDMS Reference Number: CRS67521

Business Line: Indirect Tax

Date of publication: 31 January 2002

ISSN: 1445-2782

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).