Trust Accounting Fact Sheet Disbursements The purpose of this Fact Sheet is to provide an over view of the legal obligations that exist with respect to the subject trust accounting scenario and options for resolving issues that may arise. It is not an exhaustive statement of all the relevant obligations that might apply to specific circumstances. If you need advice that addresses a specific set of facts, please contact Professional Standards on 82290229. A client has paid me money in advance for anticipated costs and disbursements. Is this trust money? Money paid in advance to a practitioner for anticipated costs or disbursements is not money to which the practitioner is legally entitled. It is trust money and therefore must be paid into the trust account. I have paid a disbursement from my office account on behalf of a client and rendered my client a bill. They have now paid me. Can I go ahead and bank the money straight into my office account? Before the money is banked into the office account consideration needs to be given to the manner in which the disbursement was paid. Failure to consider this aspect may result in trust money being deposited into the office account which is a contravention of section 31(1) of the Legal Practitioners Act 1981 because a practitioner s liability for a disbursement must be discharged before the reimbursement for that payment can be appropriated. If the disbursement was paid by the practitioner in cash, the practitioner s liability has been immediately discharged and the practitioner is wholly entitled to be reimbursed. If the disbursement was paid by the practitioner via electronic transfer or debit card, the liability is not completely discharged until the funds are showing as paid on the bank statement. When this happens, the practitioner is wholly entitled to be reimbursed. You should not presume that an electronic payment has been successful just because it has been
processed. We recommend that you verify that the payment has been made to the correct payee and the debit has appeared on the bank statement before appropriating the reimbursement. If the disbursement was paid by the practitioner via cheque, the practitioner s liability will not have been discharged until the cheque is shown as presented on the bank statement. Until that time, the practitioner is not wholly entitled to appropriate the reimbursement and the payment by the client (or the party reimbursing) must be banked into the trust account until the entitlement arises as described. If the disbursement was paid by the practitioner via credit card, the issue of at what point the payment liability has been discharged is more difficult to ascertain because unless the credit card is paid in full at some point, the liability for the expense has in many cases simply been transferred and is ongoing rather than completely discharged. It could be argued that the practitioner s liability for the disbursement is discharged when the payment is made by the credit provider to the merchant concerned because that is the point at which the merchant s claim for payment against the practitioner is satisfied. However, the practitioner s liability for the payment is not completely discharged because the practitioner is now liable for that payment to the credit provider. Furthermore, if the use of the card carries benefits of some kind, there is an issue with respect to whether the practitioner is ethically able to accept those benefits. For these reasons, we recommend that payments of disbursements are not made by credit card. If you want specific advice on this issue we recommend that you call us for assistance before proceeding. What do I need to know about disbursements and GST? The whole question of GST and disbursements hinges on the relationship that you have with your client and with third parties with whom you deal. This is a tricky area, and many businesses and professionals get it wrong. If you do not comply with your GST obligations, you will expose yourself to interest and penalties, and even to a charge of unprofessional or unsatisfactory conduct. The following is an extract from a Goods and Services Tax Ruling which deals with the issue of agency relationships: Goods and Services Tax Ruling GSTR 2000/37 Agency relationship and disbursements 48. Agents may incur expenses on a client matter both as an agent of the client and as a principal in the ordinary course of providing their services to the client. For example, in most cases, even though agreements between solicitors and clients may not use the term agent or agency, it is clear that the clients have authorised the solicitors to act on their behalf in the
particular matter. When the solicitor acts as an agent for the client, the general law of agency applies so that the solicitor is 'standing in the shoes' of the client. 49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor. F11 50. The following are examples of common fees and charges, for which a client is liable, that may be paid for by a solicitor as a paying agent of the client. If the solicitor makes the payment, GST is not payable on the subsequent reimbursement by the client to the solicitor for: application fees; registration fees; court fees; barrister's fees when the barrister is engaged by the client; incorporation fees; most fees in connection with registering and maintaining the status of particular legal relationships such as companies, partnerships, societies or associations; fines, penalties, stamp duty and taxes; and probate fees. 51. The following are examples of common disbursements that, depending upon the contractual arrangements between the client and the solicitor, can be incurred by a solicitor and then reimbursed by a client as part of the consideration payable for legal services provided to the client by the
solicitor. If the following disbursements are incurred by a solicitor, GST is payable on the subsequent reimbursement by the client to the solicitor: search fees; municipal search fee (eg rates; zoning; permits); birth/death/marriage certificate fees; barrister's fees when the barrister is engaged by the solicitor; witness fees; fees for recording court proceedings; service of document fees; fees for expert report or attendance in court; and fees to obtain court transcript. 52. The above GST treatment of disbursements is consistent with the income tax treatment of disbursements as explained in Taxation Ruling TR 97/6. 53. The following are examples of costs that a solicitor may incur in carrying on the business of providing a legal service to the client. GST is payable on any subsequent payment by the client to the solicitor for the supply of the legal service for: telephone expenses; postage expenses; photocopying expenses; courier expenses; word processing expenses; and travel expenses of the solicitor and staff. Example 10 54. A law firm acting for a client charges the client for costs incurred in providing a legal service and receives a fee for its professional services. The firm acts as a paying agent for the client with respect to the outgoings which the client is legally obliged to pay (such as the payment of land taxes
and court costs) for supplies made to it. However, an agency relationship generally does not apply to those circumstances where the law firm provides a legal service for a client, pays for taxable supplies on its own behalf and then charges the client for those expenses (such as photocopying and telephone calls). For further assistance on the topic of GST and disbursements please contact the Australian Taxation Office or your accountant. Date of last review 9 October 2012