Law firms in Australia sit in one of the most heavily regulated bookkeeping environments of any industry. Trust accounting alone — the requirement to hold client funds in a separate trust account, reconcile it daily, and submit to an external examination — creates a compliance layer that has no equivalent in most other sectors. Add fully taxable GST on legal fees, the Legal Services Award for support staff, and the need to reconcile disbursements against cost agreements, and you have a practice where sloppy bookkeeping doesn’t just create ATO problems — it creates professional disciplinary exposure. Bookkeeping for law firms in Australia requires someone who understands these obligations from the outset, not someone learning on the job.
Trust accounting: the non-negotiable at the centre of legal bookkeeping
Every Australian state and territory requires law firms that hold money on behalf of clients to maintain a dedicated trust account, governed by state legislation — the Legal Profession Uniform Law 2014 (NSW and VIC), the Legal Profession Act 2007 (QLD), and equivalent legislation in other states. The rules are substantively similar across jurisdictions: trust money must be deposited promptly, held separately from the practice’s general funds, and disbursed only on written authority.
The bookkeeping obligations that flow from this are specific:
- A separate trust account bank account (cannot be mixed with operating funds)
- A trust ledger — a record of every deposit and withdrawal against each matter
- Daily reconciliation of the trust account balance against the sum of all matter ledger balances
- Monthly reconciliation against bank statements
- An annual or biennial external examination by a qualified accountant or auditor
Failures in trust accounting are taken seriously by state law societies and can result in disciplinary proceedings, not just accounting corrections. A shortfall in the trust account — even an inadvertent one caused by misposting — triggers reporting obligations. This is a domain where every transaction needs to be correctly coded the first time.
⚠ Compliance Reminder
External examinations are mandatory — not optional
Law firms holding trust money must have their trust records examined by an approved external examiner — typically annually or biennially depending on jurisdiction and trust balance. The examination tests whether trust records comply with the relevant Legal Profession Act. Findings of non-compliance are reported to the Law Society or Law Institute.
GST on legal fees: fully taxable, no exemptions
Unlike medical and some allied health services, legal fees attract GST in full. A law firm registered for GST — mandatory once annual turnover exceeds $75,000 — charges 10% on all professional fees. This includes conveyancing, commercial advice, litigation, and family law. There are no GST-free categories for legal services.
Where it gets more complex is disbursements. Some disbursements passed on to clients are taxable in the hands of the firm; others are out-of-pocket expenses that qualify as input-taxed or exempt from GST. Court filing fees — charged by courts — are GST-free at source, but the treatment when on-charged to clients depends on how they’re documented. Barrister fees carry GST if the barrister is registered. Travel and accommodation costs passed on at cost are generally taxable. Getting the GST treatment of disbursements wrong on the BAS is a common and auditable error.
Law firms typically lodge BAS quarterly via the ATO’s online business portal or through a registered BAS agent. See the BAS and ATO obligations page for quarterly lodgement deadlines and penalties for late lodgement.
The Legal Services Award and payroll for support staff
Support staff at law firms — legal secretaries, receptionists, paralegals, and file clerks — are covered by the Legal Services Award 2020 (MA000116). The Award sets minimum rates across classification levels from Level 1 (entry-level clerical) to Level 7 (senior paralegal/legal executive). Solicitors and qualified lawyers are not covered by the Award — they’re typically engaged under individual employment contracts above Award rates or as principals.
Payroll compliance for a law firm involves:
- Paying support staff at or above Legal Services Award rates for their classification level
- Applying the correct casual loading (25% for casual employees) on top of base rates
- Paying superannuation at 11.5% (rising to 12% from 1 July 2025) on ordinary time earnings
- Lodging Single Touch Payroll (STP) reports to the ATO with each pay run
- Processing payroll tax if total Australian wages exceed the relevant state threshold — in NSW it’s $1.2 million, in VIC it’s $700,000, with rates between 4.75% and 6.85% depending on jurisdiction
Solicitors classified as employees — not just partners drawing profit shares — also need to be assessed for award or above-award entitlements under their employment contracts. Outsourced payroll services can handle payroll processing, STP lodgement, and super compliance end-to-end. See the payroll services page for what’s included.
Legal Services Award MA000116 — Key Rates
- Level 1 (entry clerical): base rate per Fair Work’s current national minimum schedule
- Casual loading: 25% on all ordinary hours
- Overtime: time-and-a-half after 38 hours per week; double time after 2 hours of overtime
- Saturday work: time-and-a-half; Sunday: double time
- Check Fair Work’s Award summary for current minimum rates by classification level
Matter-based billing: reconciling time, costs, and payments
Law firms typically bill by matter — each client engagement is a discrete matter with its own billing history, disbursements ledger, and trust account position. The bookkeeping challenge is keeping matter-level records in sync with the accounting software. Payments received from clients need to be correctly applied to the right matter, distinguished between trust receipts (funds received before work is done) and general receipts (payment for completed work).
Cost agreements — the written fee disclosure documents required under Legal Profession legislation — set out the basis of charging and create a reference point for billing disputes. When invoices are raised against a matter, they should reconcile to the cost agreement. If a matter settles with unused trust funds, those funds must be returned to the client or redirected as instructed — not absorbed into revenue.
Practice management software like LEAP or Smokeball handles the matter ledger and billing layer. Xero or MYOB handles the accounting and BAS side. A bookkeeper bridges the two — reconciling trust movements, matching payments against invoices, coding disbursements correctly, and keeping the accounts receivable current so the firm has visibility over outstanding work-in-progress. See the accounts receivable and payable page for more on debtor management.
Common bookkeeping failures in law firm accounts
Three failure patterns appear consistently in law firm bookkeeping that gets to the external examiner in a poor state:
Trust-to-general transfers without authority. Drawing from the trust account before issuing a tax invoice and getting client authority — even for amounts legitimately owed — is a breach of trust accounting rules. The correct sequence is: complete the work, issue the invoice, receive written authority (usually the cost agreement or a specific direction), then transfer from trust to general.
Disbursements miscoded as income. Court fees, barrister fees, and search fees passed on to clients need to be coded as disbursements — not revenue. Miscoding them inflates turnover, misrepresents GST, and distorts the firm’s profitability picture.
Reconciliation not done monthly. The trust account reconciliation needs to happen at least monthly against bank statements, and the ledger balance needs to match the bank balance. Firms that do this quarterly at best will have accumulated errors that take significant time to unwind before an examination.
What Free My Cloud handles for law firms
✓ Trust account transaction coding
✓ Trust-to-general reconciliation
✓ Bank reconciliation — trust and general
✓ Accounts receivable tracking by matter
✓ Disbursement coding and GST treatment
✓ BAS preparation and lodgement support
✓ Payroll processing (Legal Services Award)
✓ Records maintained examination-ready
We work alongside your practice management software (LEAP, Smokeball, or similar) — the bookkeeping layer sits in Xero or MYOB, integrated with matter billing. See the accounting services overview or contact us to discuss your firm’s requirements.
Use the savings calculator to get a cost estimate for outsourced bookkeeping for your firm, or see the taxation and compliance page for broader obligations that apply to legal practices as businesses — not just to their client work.
Yes. Any law firm that holds money on behalf of clients — as a deposit, settlement funds, or pre-payment — must maintain a dedicated trust account under the relevant state Legal Profession Act. Trust money cannot be held in the firm’s general operating account. Rules are set by the Legal Profession Uniform Law 2014 (NSW and VIC), the Legal Profession Act 2007 (QLD), and equivalent state legislation.
An external examination is a mandatory review of a law firm’s trust accounting records by a qualified accountant or auditor approved by the state Law Society or Law Institute. It checks whether the trust account has been maintained in compliance with Legal Profession legislation — specifically whether records are accurate, reconciliations are current, and the bank balance matches the ledger. Findings of non-compliance are reported to the regulatory body.
Yes. Legal services are fully taxable supplies under the GST Act. A law firm registered for GST (mandatory above $75,000 turnover) charges 10% GST on professional fees across all practice areas — litigation, conveyancing, commercial, family law, and others. Some disbursements on-charged to clients may be treated differently depending on whether GST was charged at source.
Legal secretaries, receptionists, paralegals, and other support staff at law firms are covered by the Legal Services Award 2020 (MA000116). The Award sets minimum rates across seven classification levels. Solicitors and lawyers practising as employees are not covered by the Award but are subject to employment contract terms and statutory entitlements under the Fair Work Act.
Most Australian law firms use practice management software like LEAP or Smokeball for matter billing and trust accounting, integrated with Xero or MYOB for general accounting and BAS. The bookkeeper typically works across both systems — coding transactions in Xero/MYOB and ensuring that trust movements in the practice management software reconcile to the bank account.
