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CPPREP4005 Prepare to work with trust accounts Page 1 of 12 © Property Training Australia RTO No: 41241

Table of Contents

The importance of Trust Accounting in Real Estate ............................. 2

Agents Financial Administration Act 2014 ............................................. 3

General Responsibilities of a Licensee .................................................. 3

The Operation of a Trust Account ........................................................... 4

Queensland Office of Fair Trading ......................................................... 6

The ACT States ........................................................................................ 7

Breaches .................................................................................................. 9

Trust Accounting Samples .................................................................... 10


The importance of Trust Accounting in Real Estate

Trust Accounting is simply a process of recording, classifying and summarising in dollar terms, a transaction that affects the business entity. In other words - for our Real Estate Agency and our clients.

Trust accounting is the general term to cover the accounting records and practices

required under the Agents Financial Administration Act 2014 and its Regulations to

enable real estate agents to properly account for trust money in their possession.

All trust money must be held in a trust account in the estate agent’s name. The real

estate agent is required to open and maintain a trust account in the name of the estate

agent or the entity (eg corporation) which holds the real estate licence at a financial

institution approved to hold deposits of trust money.

In Real Estate, this impacts on two areas:

The legal requirements of the Agents Financial Administration Act 2014 and also financial accountability – in other words, our ability to let our clients and other interested parties to know exactly what has happened with their funds.

There are two sets of accounts in Real Estate:

1. General Accounting Records

2. Trust Accounting Records

The Principle of the Real Estate Office is responsible to All monies with the Agency Trust Account and monies within the Agency General Operating Account.

The Principle or Financial Controller of the Agency must manage trust records and transactions in a secure and accurate manner to minimise risk and fraud.

General Accounting Records

These records reflect the state of the business. In other words, how much money XYZ Realty is spending on wages, rent, advertising, and office supplies and so on. How much profit or loss they are making. This is money we OWN not what we OWE.

Trust Accounting Records

The purpose of establishing Trust Account is for the Banking of all Sales deposits and rents collected by the Principal Agent. Because we do not own this money, it is held in trust for the owner of the money. As Agents, we must ensure that this money

•General Accounts - purpose

•Trust Accounts - purpose

•Types of software + manual systems (REI Master, Hirum, Console)

•Who can transact in these accounts

•What licence(s) must they hold

Real Estate Accounting


is kept separately from money we own. The requirements for this are set out in the Agents Financial Administration Act 2014 and subsequent regulations. All Monies received by cash or cheque must be receipted and banked with in 2 business days of receipt of monies.

Fiduciary Obligation

Because we do not own the money, An Agent have a fiduciary obligation to account for all money we receive on behalf of other people. This is what Trust Accounting is all about.

Remember your fiduciary obligation is:

1. To act in the best interests of the client

2. Loyalty

3. Obedience – act in accordance with clients instructions

4. Confidentiality

5. Full disclosure

6. Skills care and due diligence

7. Account for all monies

Agents Financial Administration Act 2014

Why are there special requirements within the AFA Act for the control of trust

money?

Real estate agents hold a significant position of trust within the community. They hold

large sums of clients’ money.

The trust money accounting system aims to ensure that all trust money held by estate

agents for each client and in respect of each transaction for that client can be

accurately accounted for at all times.

An estate agent must appoint an auditor before receiving or holding any trust money.

The Act also restricts the way agents can pay monies to a trust creditor (someone who

is owed money by the agency). Agents are not allowed to give cash refunds and must

provide payment only by:

1. Trust account cheque; or 2. Electronic Funds Transfer from the trust account to the account the person

receiving payment specifies.

General Responsibilities of a Licensee

From December 1 2014 all agents trust account transactions will be regulated by The Agents Financial Administration Act 2014 and The Agents Financial Administration Regulations 2014.


Section 12 of the Act requires a property agent or an RLA opening a new trust account at a financial institution to use the term “trust account”.

You must be licensed before an account can be opened.

You must show a copy of your licence to the bank when opening a trust account.

You must advise the Office of Fair Trading on the approved form when the account has been opened.

The Principal Licensee ultimately is the person responsible for all transactions within a Trust Account and must hold a Real Estate Agent Licence.

However, staff members in an Agency can be delegated to operate the Trust Account on a day-to-day basis, such as Administration / Accounts Manager.

The Operation of a Trust Account

The operation of a trust account means opening and maintaining a trust account. It does not mean the physical act of recording information into the books of account of a trust account either manually or by computer. Such recording is a clerical function that does not require the person performing the recordings to be licensed.

Electronic vs manual trust accounting

These days most trust accounting uses specialised Real Trust Account software, eg REI Master, Hirum, Console. Managing electronic trust records and transactions in a secure and accurate manner to minimise risk and fraud are essential and requires each agency to:

Record all information in accordance with legal and regulatory requirements

Complete all reconciliations and keep both hard and soft copy

Ensure all computer systems are backed

Trust Accounting Legislation

Agent’s Financial Administration Act 2014

Trust Accounts Transactions

• Receipts (rents and sales)

• Bank deposits

• Payments to owners

• Agency commissions

• Reconciliation (end of month and audit)

Trust Account Security

Rules to follow

• Both hard and soft copy

• Regular computer back-ups

• Storage to include offsite

• Password security

• Keep records as required

• Follow ALL lawful requirements


up regularly

Ensure all backed up data is secured and stored safely offsite

Maintain password security

Some important rules

No person can withdraw Funds from Trust Account as Cash – as the Banks will not allow this to occur.

An Agent cannot legally draw from the Trust Account - Agencies commission and fees for Sales or Property Management prior to paying the owner the balance due to them.

An agent may draw an amount from the trust account to pay an expense only if The agent is authorised in writing to draw an amount to pay an expense and the agent holds an invoice from the entity to be paid.

All Monies received by cash or cheque must be receipted and banked with in 2 business days of receipt of monies.

The regulation states the Trust Account reconciliation must be finalised within 5 business days from the end of the month.

Trust Account records must be kept for not less than 5 years

Trust Account Timeframes

Rules to

follow

• All monies consecutively receipted

• Deposits - 2 business days

• Reconciliations – 5 business days from end of month

• Records kept – 5 years

Withdrawing agency commission prior to paying seller or landlord

Principal making cash withdrawals for own use

Payments from Trust to Agency creditors

Unlawful Practices


Accounting to the Client

The agent must account to the client:

if the client asks in writing - within 14 days after receiving the request;

if the client has not asked, in writing, for the account - within 42 days after a transaction has been finalised; or

if applicable, at the time specified in the appointment of agent.

The account must specify:

all amounts received in relation to the transaction;

how the amounts are to be paid out; and

the source and amount of any rebate, discount, commission or benefit that the licensee received.

The agent must pay the full balance to the client either by cheque or bank transfer. At times however, the agent will be required to retain a proportion of the balance in the trust account.

Retaining funds

Sometimes an agent may retain a proportion of the funds payable to a client in the trust account. This occurs when they can foresee expenses which need to be paid before additional funds are received on behalf of the client.

For example a client has authorised Virtual Realty to pay his council rates while he is overseas. Before these are due the agent must ensure there are enough funds to cover this expense in the trust account. This may mean that the agent can retain some funds payable to him in order to pay the rates bill when it arrives.

Queensland Office of Fair Trading

Qld OFT regulate Trust Accounts and it is important to be aware that:

There is a much greater focus on breaches that are reported. We have experienced telephone and email follow-ups by OFT staff and some clients have had phone or personal visits by OFT staff to discuss the breaches further;

There is a focus on the ‘End of Month Reconciliation’ date being the last day of the month. While it has always been a requirement for reconciliations to be prepared at the last day of a calendar month immediately after that month finishes, we are aware that many agents with rent rolls have adopted a process of closing the month a few days before this date to enable owners to receive their money before the end of the month. In past years we have not seen this process objected to by the OFT despite it not being in accordance with the technical rules. This year however, it has become clear that the OFT does require this to be strictly adhered to and we expect this will therefore be a challenge to some agencies in terms of changing processes. For example, the


October end of month close MUST be performed at the date of 31 October, after this date has passed (ie it could be done on 1 November).

More information is being collected by the OFT as part of the audit reporting. Previously, as part of our audit report, we would send a copy of the bank reconciliation at the last day of the audit year. Currently, the OFT is requesting far more information than this and now also require lists of outstanding cheques and unpresented deposits, breakdowns of any adjustments and trial balances for all ledgers in addition to the basic reconciliation.

The ACT States

Part 2 Trust accounts

Division 1 Opening and keeping trust accounts

9 Who may open trust account

A person must not open an account purporting to be a general trust account or special trust account under this part unless the person is a principal agent.

Maximum penalty—200 penalty units.

10 Application and grant of authority to open a trust account—collection agents

Not applicable to property agents, auctioneers and resident letting agents

11 Requirements for opening and keeping trust accounts

(1) An agent must not open a general trust account or special trust account at a place other than the office or branch of an approved financial institution within the State.


Note—

A special trust account is a trust account created under section 17 in which an amount is held for investment at the direction of both parties to a sale.

(2) Before opening a general trust account or special trust account the agent must give the manager or other officer in charge of the financial institution’s office or branch—

(a) if the person is a licensee—a copy of the licensee’s licence.


12 Account’s name

(1) An agent opening a general trust account must ensure the account’s name includes the words ‘trust account’.


(2) A licensee opening a special trust account must ensure the account’s name includes the words ‘special trust account’.



13 Notice of account’s opening, closing or name change

(1) This section applies if an agent does any of the following (each an event)—

(a) opens a general trust account;

(b) if the agent is a property agent—opens a special trust account;

(c) changes the name of a general trust account or special trust account;

(d) closes a general trust account or special trust account.

(2) The agent must give the chief executive written notice under subsection (3) of the happening of the event within 2 months of its happening.


(3) The written notice must state—

(a) whether the account is a general trust account or special trust account; and

(b) the name of the financial institution where the account is or was kept; and

(c) the account name; and

(d) the identifying number of the financial institution

Note—

This is commonly referred to as the bank state branch number (BSB). (e) the account number.

Division 3 Payments from trust accounts

21 When payments may be made from trust accounts

(1) An amount paid to a trust account must be kept in the account until it is paid out under this Act.

Maximum penalty—200 penalty units or 2 years imprisonment.

(2) An amount may be paid from a trust account only in a way permitted under this Act.


22 Permitted drawings from trust accounts

(1) An agent may draw an amount from the agent’s trust account to pay the agent’s transaction fee or transaction expenses for a transaction only if—

(a) the amount is drawn against the transaction fund for the transaction; and

(b) the agent is authorised to draw the amount under this section.


(2) The agent is authorised to draw an amount from the transaction fund to pay a transaction expense when the expense becomes payable.

(3) After the transaction is finalised, the agent is authorised—

(a) to draw an amount from the transaction fund to pay the person entitled to the amount, or someone else in accordance with the person’s written direction, that is equal to the difference between—

(i) the balance of the transaction fund; and

(ii) the total of the agent’s transaction fee and any outstanding transaction expense; and

(b) after the amount, if any, mentioned in paragraph (a) has been paid—to draw the agent’s transaction fee from the transaction fund.

Example of when a transaction is finalised—


the settlement of a contract for the sale of property or the termination of the contract

(4) For subsection (3)(a) or (b), if a dispute about the transaction fund arises, the transaction is not taken to be finalised until the agent is authorised to pay out the transaction fund under section 26.

(5) The agent must pay an amount mentioned in subsection (3)(a) to the person entitled to it, or someone else in accordance with the person’s written direction—

(a) if the person asks, in writing, for the balance—within 14

days after receiving the request; or

(b) if the person has not asked, in writing, for the balance—within 42 days after the transaction is finalised.


(6) In this section—

transaction expense means an expense an agent is authorised to incur in connection with the performance of the agent’s activities for a transaction.

transaction fee means fees, charges and commission payable for the performance of an agent’s activities for a transaction.

transaction fund means an amount held in an agent’s trust account for a transaction.

under this Legislation.

Breaches

Trust Account breaches can have serious consequences for both the Agency and the Client.

Mismanagement of Trust Account moneys can result in penalties, fines and even imprisonment. Clients can lose money and even minor mistakes reflect poorly on the Agency and result in distrust and a negative customer experience. Contractual issues can also be impacted adversely.

Withdrawing agency commission prior to paying seller

Principal making cash withdrawals for own use

Payments from Trust to Agency creditors

Unlawful Practices


Trust Accounting Samples

Agents Financial Administration Act 2014

TRUST RECEIPT

Ocean View Realty Pty Ltd ABN 28749378271

Licensee: Hannah Sharman

Water Drive Holiday Beach Qld 5335 Phone 53355533 Fax 53355344

Received from

MARY AND JOE BAKER

Date

05/07/ XX

By

CHQ/CASH/EFT

The sum of

EIGHT HUNDRED AND FIFTY DOLLARS

$850

Particulars

RENT UNIT 8 FROM 05/07 TO 12/07

On Account of

A GRANGER

Ocean View Realty Pty Ltd

Per SIGNATURE

No: 400300

MY BANK DEPOSIT

HOLIDAY BEACH BRANCH 05 /07 /XX

Account Name – Ocean View Realty Pty Ltd Trust Account

Account No. - 412 376 194 007

Details of cheques deposited Drawer Bank Branch Amount

M and J BAKER BEST BANK MELBOURNE 850

Rent money is not receipted and / or banked

Discrepancies on trust account receipts, eg wrong amount receipted

Discrepancies on owners and agency disbursements (eg mistake on cheque)

Errors in Credit Card Transactions

EFT deposits without sufficient tenant identification

Errors by Bank eg bank fees charged or deducted from Trust A/C


Total Cheques 850

Total Cash

Total Deposit 850

Trust Cash Receipts Book Folio R1

Date Rec No Received from

Account of Transaction Folio

Amount Bank

05/07 400300 M&J BAKER A GRANGER RENT FROM 05/07 TO 12/07 UNIT 8

C1 850.00 YES

06/07 400301 T&R RENTER

M SMITH RENT FROM 06/07 TO 20/07 UNIT 2

C2 500.00 YES

06/07 400301 T&R RENTER

RTA BOND RECEIVED FOR UNIT 2 C3 1000.00 YES

Total: 2350.00

Trust Cash Payments Book

Folio P1

Date Cheque Paid To Account Of Transaction Folio Amount

07/07 201401 M SMITH M SMITH OWNERS REQUEST FOR RENT + BALANCE OF ACCOUNT

2058.75

07/07 201401 OV REALTY M SMITH AGENTS FEE + GST 41.25

Total: 2100.00

TRUST LEDGER

NAME Andrew Granger Folio C1

Date Particulars Folio DR CR Balance

04/07/XX Balance 500.00 Cr

05/07/XX RENT FROM 05/07/XX TO 12/07/XX UNIT 8

850.00 1350

Cheque

Date 07/07/XX

Payee……………

Mary Smith – Owners

payment on request

…………………..

………………….

………………….

MYBANK

Holiday Beach Qld

Date 07/07/XX Pay……Mary

Smith……………………………………or bearer

The sum of TWO THOUSAND AND FIFTY-EIGHT DOLLARS AND SEVENTY-FIVE

CENTS…………………....$2058.75

Ocean View Realty Pty Ltd Trust Account

…………XXXXX…. …………XXXXX……

412 – 376 – 194007


STATEMENT OF ACCOUNT

Mybank

Holiday Beach Qld

8 July 20XX

Account Name: Ocean View Realty Pty Ltd Trust Account

Account No: 031 992 262 689

Ocean View Realty Pty Ltd Water Drive

Holiday Beach Qld

Date Particulars Debit Credit Balance

Opening Balance 2100.00 Cr

July 5 Cheque 850.00 2950.00

July 6 Cash 1500 4450.00

July 7 201402 41.25 4408.75 Cr

OCEAN VIEW REALTY PTY LTD

Trust Account Reconciliation

As at 08/07/XXXX

Bank Account

Bank balance as at 08/07/XX 4408.75

Plus outstanding deposits NIL

Less Cheques not presented CHQ 201401 2058.75

Reconciled Balance as per Cash Book 2350.00

Trust Account Balance

Trust account balance as at 01/07/xxxx 2100.00

Plus total receipts 2350.00

Less total payments 2100.00

Trust account balance 2350.00

Ledger Totals

A GRANGER UNIT 8 1350.00

M SMITH UNIT 2 NIL

RTA BONDS 1000.00

Total held in Trust 2350.00

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