GST and input tax credit where funds are used from a trust account to pay a third party for services provided to the client

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?

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.

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.

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.]