ATO ID 2002/113: GST and non-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 non-cash basis, attribute the GST payable on the taxable supply of its services, under subsection 29-5(1) 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, when it invoices the client for its legal services in the next tax period?

Decision
No, the entity does not attribute the GST payable on the taxable supply of its services, under subsection 29-5(1) 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 invoices the client for its legal services.

Facts
The entity is a legal firm that accounts for GST on a non-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 second tax period), the entity invoices its client for legal services rendered. The client authorises the payment for these services from the trust account in the following tax period (the third tax period).

Reasons for decision
Summary: Subsection 29-5(1) of the GST Act sets out the attribution requirements for an entity that accounts for GST on a non-cash basis. Under this provision if an entity accounts on a non-cash basis then the GST payable is attributed to the first tax period in which one of the following occurs: The entity has issued an invoice for services rendered in the second tax period. Therefore, it needs to be determined whether the entity has received consideration for the supply of its services prior to issuing the invoice. 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. Therefore, the GST on the entity's taxable supply is attributable to the tax period in which: 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 entity receives consideration in the third tax period when it receives authorisation from its client and is entitled to withdraw funds from the trust account for its services. At this time, the money is applied as consideration for the entity's services. Therefore, the entity does not receive consideration for its supply until the third tax period, which is after the issuing of the bill. The entity does not attribute the GST payable on the taxable supply of legal services under subsection 29-5(1) 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 invoices the client for its legal services.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 subsection 29-5(1)
Subject references: Goods & services tax GST tax periods Attribution rules Non-cash basis