Treatment of Trust Interest and Trust Bank Charges – Section 86(2) Trust Accounts

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Treatment of Trust Interest and Trust Bank Charges – Section 86(2) Trust Accounts

1. Policy Title

Accounting Treatment of Trust Interest, Trust Bank Charges, VAT Components, and LPFF Settlements for Section 86(2) Trust Accounts

2. Purpose of This Policy

This policy prescribes the correct accounting treatment for:

  • Interest earned on attorneys’ trust accounts governed by section 86(2) of the Legal Practice Act 28 of 2014;
  • Trust bank charges and their VAT components; and
  • Payments of trust interest to the Legal Practitioners’ Fidelity Fund (LPFF).

The objective is to ensure compliance with statutory requirements, accurate financial reporting, and a clear audit trail consistent with banking mechanics and LPC oversight.

3. Scope and Applicability

This policy applies exclusively to:

  • General trust accounts governed by section 86(2) of the Legal Practice Act 28 of 2014, where:
    • Interest earned on trust funds accrues to the Legal Practitioners’ Fidelity Fund, and
    • The legal practice is entitled only to prescribed offsets (principally net bank charges).

This policy does not apply to:

  • Section 86(3) trust accounts (client-specific interest-bearing accounts);
  • Section 86(4) trust investment arrangements; or
  • Any other trust structures where interest accrues to a client or third party.

Separate policies must be applied to those arrangements.

Section 86(2) of the Legal Practice Act 28 of 2014 provides that:

  • Interest earned on trust money deposited in a general trust account is payable to the Legal Practitioners’ Fidelity Fund,
  • Subject to such deductions as may be permitted in terms of the Act and applicable rules.

Accordingly, trust interest earned under section 86(2) does not constitute income of the firm.

5. Accounting Classification

Account Name: Trust Interest Payable to LPFF
Account Type: Current Liability

This account represents the net amount of interest earned on section 86(2) trust funds that is payable to the LPFF after permitted offsets.

6. Recognition of Trust Interest Earned

When interest is credited by the bank to the section 86(2) trust account:

  • Debit: Trust Bank Account
  • Credit: Trust Interest Payable to LPFF

The interest is recognised immediately as a liability, not as revenue.

7. Treatment of Trust Bank Charges

Trust bank charges must be accounted for in accordance with their actual allocation by the bank and their relationship to trust interest.

7.1 Net Bank Charges Covered by Trust Interest

Where trust interest is available, banks automatically offset bank charges net of VAT against that interest before remitting the balance to the LPFF.

Accounting treatment:

  • Debit: Trust Interest Payable to LPFF
  • Credit: Trust Bank Account

This reduces the LPFF liability and has no profit-and-loss impact.

7.2 VAT Portion of Trust Bank Charges

The VAT component of trust bank charges:

  • Is not part of the statutory offset against LPFF interest under section 86(2);
  • Is not absorbed by trust interest; and
  • Is mechanically redirected by the bank to the business account.

Accounting treatment:

  • Recognised as a firm operating expense;
  • VAT recovery, if any, is accounted for in accordance with the firm’s VAT status and applicable recovery mechanisms.

The VAT portion must not be posted to the Trust Interest Payable to LPFF account.

7.3 Bank Charges Not Covered by Trust Interest

Where trust interest is insufficient to cover bank charges:

  • The uncovered portion is automatically debited to the business account;
  • This portion is a firm expense and does not affect the LPFF liability.

8. Payment of Trust Interest to the LPFF

When trust interest is paid over to the LPFF:

  • Debit: Trust Interest Payable to LPFF
  • Credit: Trust Bank Account

This entry represents settlement of a liability and must never be treated as an expense.

9. Prohibited Treatments

Under no circumstances may the following occur in respect of section 86(2) trust accounts:

  • Trust interest recognised as firm income;
  • Payments to the LPFF recognised as expenses;
  • VAT components of trust bank charges debited to the LPFF liability;
  • Gross bank charges used to reduce the LPFF liability;
  • Retrospective adjustments to LPFF interest based on later VAT recoveries.

10. Audit and Control Considerations

  • The bank’s automatic allocation between trust and business accounts provides an objective audit trail.
  • The balance on Trust Interest Payable to LPFF must at all times reconcile to:
    • Interest earned
    • Less net bank charges covered by interest
    • Less amounts paid to the LPFF.

11. Conclusion

For section 86(2) trust accounts, trust interest accounting is fundamentally a liability-based process, not an income or expense process, except to the limited extent that VAT components and uncovered bank charges are genuine firm expenses.

This policy reflects the minimum accounting treatment required for statutory compliance, consistency with banking practice, and audit-defensible financial records.

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