ATO ID 2002/111: GST and cash basis attribution rules for a legal firm when client deposits money in trust account
Date of decision: 22 November 2001
Business line: Indirect Tax

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
Summary: 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: 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.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 subsection 29-5(2)
Subject references: Goods & services tax GST tax periods Attribution rules Cash basis