What is a discretionary trust account? A discretionary trust account is specifically the bank account operated by the trustee of a discretionary trust to manage the trust’s funds. It is distinct from the trust structure itself and serves as the practical mechanism for handling trust money.
If you want to know more about discretionary trusts refer to our article on What is a Family Trust?
Key Features
1. Account Setup
- Must be opened in the trustee’s name “as trustee for” the trust
- Requires trust deed and extra documentation (TFN and potentially an ABN)
- Separate from trustee’s personal accounts
- May need multiple signatories depending on trust deed requirements
2. Banking Requirements
- Clear designation as a trust account
- Proper account name format: “[Trustee name] ATF [Trust name]”
- Business banking features typically required
- BSB and account number unique to trust
Operational Requirements
1. Account Management
- Regular reconciliation required
- Clear audit trail of all transactions
- Separation of different income streams
- No mixing with personal funds
2. Transaction Records
- All deposits clearly identified by source
- All withdrawals properly authorized
- Distribution payments clearly marked
- Investment transactions segregated
Common Issues to Avoid
1. Mixing Trust and Personal Funds
Combining personal and trust funds is a serious breach of trustee duties and can lead to significant legal and tax complications. Even temporary mixing of funds, such as using a trust account for personal expenses or vice versa, can compromise the trust’s integrity. This can result in difficulties tracking trust distributions, potential ATO scrutiny, and complications in trust accounting. Trustees must maintain strict separation at all times and should establish clear processes to ensure all transactions are properly categorized and separated.
2. Incorrect Account Naming
The precise naming format of a trust account is crucial for legal and tax purposes. The account must clearly show it is held in trust using formats like “XYZ Pty Ltd ATF Smith Family Trust” or similar acceptable variations. Incorrect naming can lead to problems with tax reporting, difficulty in proving the trust relationship, and potential challenges in legal proceedings. Banks may also have specific requirements for trust account naming conventions that must be followed.
3. Unauthorized Signatories
Only individuals specifically authorized by the trust deed or trustee resolution should have signing authority on the trust account. Adding unauthorized signatories or failing to remove former trustees/signatories can expose the trust to fraud risk and breach trust law requirements. Regular review of signatory access is essential, especially when trustees change or when circumstances of authorized persons change (such as bankruptcy or loss of capacity).
4. Poor Transaction Descriptions
Inadequate or unclear transaction descriptions can create significant problems during tax preparation, audits, or beneficiary inquiries. Each transaction should have clear, detailed descriptions that identify the nature of the payment or receipt, relevant parties, and any specific trust purpose. Generic descriptions like “transfer” or “payment” without additional context can lead to confusion and make it difficult to demonstrate proper trust administration.
5. Inadequate Reconciliation
Failing to regularly reconcile trust accounts can lead to undetected errors, missing transactions, or unauthorized activities. Monthly reconciliation at minimum is essential to ensure all transactions are properly recorded, trust funds are accounted for, and any discrepancies are promptly identified and resolved. Poor reconciliation practices can also make it difficult to prepare accurate financial statements and tax returns, potentially leading to compliance issues with the ATO.
Compliance Considerations
Record Keeping
- Bank statements retained for minimum 5 years
- Transaction records properly categorized
- Clear linking to trust accounting records
- Regular backup of electronic records
Banking Controls
- Dual authorization where required
- Regular review of access rights
- Secure online banking protocols
- Regular monitoring of transactions
Wrap Up
A discretionary trust account is simply the banking facility used by a discretionary trust. While it’s a crucial operational tool, it should not be confused with the trust structure itself, which is a separate legal arrangement governed by trust law.
