What is a trust account and how does it work?

Managing financial responsibilities in real estate involves more than just rent collection and maintenance. A critical component is how you handle funds that do not belong to your business. For that, you need a clear understanding of trust accounts.

This guide explains what trust accounts are, how they work, why they matter, and also introduces you to the digital tools that can help simplify your responsibilities.

Property management software like MRI Software’s can help you stay compliant, track transactions, and reduce administrative workload. You can also explore trust account fundamental webinars and browse MRI Software’s trust accounting software to better manage this area of your business.

Table of contents

• What is a trust account?
• How does a trust account work?
• How do you set up a trust account?
• Benefits of an account in trust
• Example of an account in trust
• Requirements when opening a trust account
• Trust account audit requirements
• FAQs

What is a trust account?

A trust account is a specific type of bank account used to hold money on behalf of other parties. This might include tenants, landlords, or clients. The funds do not belong to the real estate agency or property manager, which means they must be managed separately from other business income.

In real estate, trust accounts are often used for rental deposits, security bonds, and payments held temporarily before being distributed. Keeping these funds in a trust account ensures you are meeting legal obligations and protecting the financial interests of your clients.

Understanding these related terms can also help:

• Trust account: A dedicated bank account for client funds
• Trust accounting: The process of tracking, auditing, and reporting on trust transactions
• Trust accountant: A professional who specialises in overseeing trust compliance and reporting

How does a trust account work?

Trust accounts work by separating operational funds from client-held funds. Any money that you collect on behalf of tenants or property owners must be deposited into a trust account and not touched unless it’s used for the intended purpose. For example, rental payments are held in trust before being distributed to landlords.

Once funds are in the trust account, transactions must be recorded in detail. The balance should always match your records, and reconciliation should be done regularly to confirm accuracy. Every state and territory in Australia has specific laws for how trust accounts are to be managed.

Modern property management platforms can simplify this process by automating entries and reconciling trust transactions in real time. This not only reduces risk but also ensures you meet compliance requirements.

How do you set up a trust account?

Setting up a trust account typically involves the following steps:

1. Choose an authorised deposit-taking institution in your state or territory
2. Register the account under the appropriate business or licensee’s name
3. Notify your governing body (such as your state’s real estate regulator)
4. Set up internal procedures to manage deposits, withdrawals, and reporting

Only authorised individuals, such as directors or license holders, are permitted to open and operate a trust account. You must also ensure your processes align with the relevant state legislation.

Most jurisdictions require that the account name includes the word “trust” and may require notification to the regulator when funds are deposited. Failing to meet these obligations could lead to penalties.

Benefits of an account in trust

There are several important reasons for operating a compliant trust account. These include:

• Legal protection: Ensures you meet regulatory requirements and avoid potential fines
• Client confidence: Demonstrates professionalism and integrity by protecting client funds
• Separation of funds: Keeps business income separate from money held on behalf of others
• Efficient auditing: Makes it easier to complete audits and maintain accurate financial records

Trust accounts also provide an additional layer of accountability, which can improve your reputation with both tenants and landlords.

Example of an account in trust

Imagine a tenant pays their rental bond and the first month’s rent in advance. These funds cannot be used for business operations. They must be held in a trust account until they are either refunded (in the case of the bond) or passed on to the property owner (for rent).

If the money was mistakenly deposited into the business’s operational account, it could be misused or mistakenly spent. This creates both legal and reputational risk. By keeping the funds in a trust account, you ensure transparency and compliance.

Requirements when opening a trust account

Each state and territory in Australia sets its own requirements for trust accounts. Some of the common expectations include:

• The account must be held at an authorised institution
• You must notify the regulator when the account is opened
• Monthly and annual reconciliations are required
• Access must be limited to authorised individuals only

Real estate agencies are also expected to keep detailed records for all trust transactions. These records must be retained for a specific number of years depending on local laws. Regular training and updated procedures can help ensure ongoing compliance.

Trust account audit requirements

Trust account audits are mandatory in most Australian states and must be completed by a registered auditor. These audits check whether the funds in the account match the records kept by the business.

Your auditor will typically review:

• Deposit and withdrawal records
• Bank reconciliations
• Receipts and disbursement journals
• Internal procedures

Failing an audit can lead to serious consequences including penalties, suspension of your real estate licence, or legal action. Many businesses choose to use trust accounting software to ensure they remain audit-ready throughout the year.

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