A trust account is a bank account that holds and manages money intended for another person or entity. Usually, this means that you’ll be holding the money on behalf of someone else – such as an estate to pay out when appropriate.
If your business accepts cash, it may make sense to open up a trust account to protect yourself from any possible disputes associated with accepting payment (for example, if something were to happen and the other party could not honour their obligation).
Accountants Australia offers standard templates for trust accounts to help promote transparency and accuracy in commercial transactions. As well as acting as a guide through which you can access all relevant information at once, these templates offer best practices for complying with legal requirements and avoiding issues down the line.
Table of Contents
Comply with legal requirements
By complying with legal requirements, accountants can help limit your liability in situations where you have acted on behalf of another person or entity. Not only that but there are often statutory protections or guarantees for acting as a representative of an individual or company. For example, if you are sued because you were operating within the terms of the trust account set up, these protections may apply to protect you from any liability, should things go wrong.
Reduce risk
Not only does setting up a trust account reduce the risk associated with accepting cash transactions, but it also allows accuracy and transparency within transactions involving money. It is one of the most effective ways to ensure both parties stay on the right side of the law and limit liability. Since trust accounts offer transparency, they allow you to see every transaction that has taken place within the account.
Safe storage
You can use trust accounts to store money for later use, such as investing or even fixing up a building to resell at a higher price in the future. It’s important to note here that some types of bank accounts (such as savings accounts) do not actually hold on your behalf but instead merely keep track of your balance and make it easy for you to access and withdraw cash. Meaning it is critically important that you establish what kind of account you’re looking at when choosing to store your money.
Low maintenance costs
Low-maintenance cost is a direct benefit. Since trust accounts typically do not require you to keep track of transactions and monitor your balance, they allow you to deposit money into the account and leave it for as long as necessary. You can even set up standing orders or direct debits to ensure that money leaves your account regularly (for example, if you’re using this account for investing purposes)
Improved cash flow management
Setting up a trust account allows your business to manage its cash flow more effectively. It means better planning when managing any debts in terms of days in outstanding (DIO), which directly impacts how much interest is accrued over time (see benefit 7). As well as that, it means you can plan and avoid any issues surrounding payments and invoicing.
Greater financial capacity
One of the primary things to consider when choosing a bank is whether or not they offer cash management and treasury services. It essentially means they have access to professional expertise in those areas, which comes in useful if your business is looking for ways to improve its financial performance.
Improved budgeting
Budgeting with a trust account makes it fundamentally easier to understand how much money is coming in, as well as what kind of expenses your business incurs over time. Since you can see every transaction that has taken place within the account, you can easily plan and create a realistic budget. Not only that, since your income is clearly defined, you can also plan for tax payments at the end of each financial year.
Increased tax deductions
When it comes to paying taxes, every business wants to get as much money back as possible – especially if what you’re selling is essential to everyday life, such as food or utilities. By setting up a trust account, you can maximize your tax deductions by storing money in this type of bank account exclusively for tax-related matters. It means any funds deposited into this account will be exempt from being taxed during the next financial year.
