Mastering Trust Accounts During Tax Time: 5 Must-Know Tips for the Building Industries

Tax time can be a stressful period for any business, but when it comes to trust accounts, the stakes are even higher. Mistakes in trust account management can lead to compliance issues, financial penalties, and a tarnished reputation. For businesses in the construction industry, where large sums are often held in trust, it’s critical to get it right.

In this expanded guide, we’ll delve deeper into five key strategies that can help you through the complexities of trust accounts and ensure a smooth and compliant tax season.

1. Stay Informed: Know the Rules Inside Out

Understanding the rules and regulations surrounding trust accounts is not just a best practice—it’s a legal necessity. The laws governing trust accounts are designed to protect the interests of all parties involved in a project, from clients to subcontractors. Non-compliance can lead to severe penalties, including fines, suspension, or even cancellation of your business licence.

Detailed Strategies to Stay Informed:

Attend Industry Workshops: Many professional bodies, such as the Queensland Building and Construction Commission (QBCC), offer workshops and seminars focused on trust accounts management. These events are invaluable for staying updated on regulatory changes and best practices.
Online Training and Webinars: If in-person events aren’t feasible, look for online courses or webinars. Websites like CPA Australia and the Australian Institute of Building provide resources specifically tailored to the construction industry.
Regular Legal Consultations: Develop a relationship with a legal professional who specialises in construction law. They can provide insights into legislative changes and help you understand how they impact your business.

Case Study: Consider a construction company that was unaware of a recent legislative change requiring the use of separate trust accounts for different projects. The oversight led to a hefty fine and reputational damage. Had they been more proactive in staying informed, they could have avoided this costly mistake.

2. Perform a Financial Health Check

Before the tax season kicks in, performing a comprehensive financial health check is crucial. This step ensures that your trust accounts are not only compliant but also optimised for cash flow and project management.

Steps to Conduct a Financial Health Check:

Audit Your Trust Accounts: Ensure that every transaction is accurately recorded and categorised. Look for discrepancies that could indicate errors or potential compliance issues.
Evaluate Your Cash Flow: Assess how your trust accounts are affecting your business’s liquidity. Are funds being released in a timely manner? Are there bottlenecks that could disrupt project timelines?
Forecast Financial Needs: Based on your current and upcoming projects, forecast your financial needs. This will help you plan for any cash flow gaps that might arise due to the requirements of maintaining trust accounts.

Example: Imagine you’re a builder with several ongoing projects. By performing a financial health check, you realise that payments for a large project are delayed, causing a cash flow crunch. This insight allows you to negotiate better payment terms with your client or adjust your budget to cover the shortfall, ensuring that your other projects remain unaffected.

3. Ensure Software Compliance

Using compliant accounting software is non-negotiable when it comes to managing trust accounts. The right software can streamline your record-keeping, reduce the risk of errors, and provide real-time insights into your financial status.

Key Features to Look for in Trust Account Software:

Automated Reconciliation: This feature ensures that all transactions are matched against your bank statements, reducing the risk of errors.
Project-Specific Reporting: The ability to generate reports for individual projects helps in maintaining transparency and ensures that funds are being used as intended.
Compliance Checks: Some software includes built-in compliance checks that alert you to potential issues, such as incorrect fund allocation or missing documentation.

Recommended Software Options:

MYOB Advanced Construction Edition: Specifically designed for the construction industry, this software offers robust trust account management features.
Xero with Hubdoc Integration: Xero, combined with Hubdoc, allows for easy document management and compliance, making it simpler to keep track of receipts and invoices related to trust accounts.
QuickBooks Online with Trust Account Add-Ons: QuickBooks offers several add-ons specifically for trust accounting, which can be beneficial for small to medium-sized businesses.

Example in Practice: A plumbing business using generic accounting software found it challenging to separate project funds accurately, leading to compliance issues. After switching to a platform with specialised trust account features, they could automate the allocation of funds, ensuring compliance and reducing administrative workload.

4. Consider Outsourcing Your Trust Account Management

Managing trust accounts requires meticulous attention to detail. For many small and medium-sized businesses, outsourcing this function can be a cost-effective solution that ensures compliance while freeing up time to focus on core business activities.

Advantages of Outsourcing:

Expertise on Tap: Professional accountants who specialise in trust accounts bring a wealth of knowledge and experience. Wardle Partners Accountants & Advisors are up-to-date with the latest regulations and can offer tailored advice.
Reduced Risk of Errors: Trust account management involves complex calculations and precise record-keeping. Outsourcing reduces the risk of human error, which can lead to compliance breaches.
Cost Savings: While there is an upfront cost associated with outsourcing, it can save you money in the long run by avoiding penalties and freeing up your team to work on revenue-generating activities.

What to Look for in an Outsourcing Partner:

Industry Experience: Choose a provider with experience in your specific industry. Construction trust accounts have unique requirements, and not all accountants will be familiar with these.
Transparent Pricing: Ensure there are no hidden fees. Look for a provider who offers a clear breakdown of their services and costs.
Compliance Assurance: The provider should offer regular reports and updates on the status of your trust accounts, ensuring full transparency and compliance.

At Wardle Partners Accountants & Advisors, we support licensees in meeting their ongoing QBCC licence requirements by conducting comprehensive quarterly financial reviews. We provide detailed feedback and guidance, helping clients understand how they align with or fall short of QBCC standards.

This proactive approach not only ensures compliance but also empowers our clients to focus on growing their business with peace of mind and confidence, knowing their financial health is in capable hands.

5. Keep Up-to-Date with Changes in Legislation

The regulatory environment for trust accounts is constantly evolving. Staying ahead of these changes is crucial to ensure compliance and avoid penalties.

How to Stay Updated:

Subscribe to Industry Newsletters: Publications like the QBCC newsletter provide regular updates on legislative changes and compliance requirements.
Join Professional Associations: Organisations such as the Master Builders Queensland offer resources and training sessions that can help you stay informed.
Consult with Legal Experts: Regular consultations with a legal professional can provide personalised advice and insights into how upcoming changes might impact your business.

Example of Upcoming Changes: Starting from 1 March 2025, trust accounts will be mandatory for all eligible construction projects valued at $3 million or more. By 1 October 2025, this threshold will lower to $1 million, and retention trust accounts will become mandatory across the contractual chain.

What This Means for Your Business: These changes will likely require significant adjustments to your financial and project management practices. Begin preparing now by reviewing your current processes and consulting with your accountant or legal advisor to develop a compliance strategy.

Conclusion

Managing trust accounts during tax time doesn’t have to be a source of anxiety. With the right help, strategies and tools, you can ensure compliance, protect your business’s financial health, and focus on what you do best—delivering high-quality projects.

Partner with Wardle Partners Accountants & Advisors today to stay informed, perform regular financial health checks, ensure software compliance, and be up-to-date with legislative changes so you’ll be well-equipped to handle the complexities of trust account management.

Did You Know?

In Queensland, if you hold or release funds incorrectly from a trust account, you could face fines up to $40,000 or more, and even risk losing your building licence. According to QBCC, it’s crucial to have stringent checks and balances in place to ensure all funds are handled according to the latest regulations.