Consignment trust account handbook: Motor vehicle dealers

Trust money is money received or held by a dealer for or on behalf of another person in relation to a sale on consignment.
A dealer has important legal and fiduciary responsibilities in relation to trust account management. It is essential to remember that trust account money belongs to other people. The removal of money from a trust account for a reason other than a lawful purpose is a criminal offence.

An appropriate set of accounting records must be kept for the trust account. Where multiple trust accounts are held, a consolidated set of accounts should also be maintained to assist the audit process.

Reference: Section 32E of the Act and regulation 10D of the Regulations.

Trust accounting is the general term used to cover the accounting records and practices required under the Act to enable dealers to properly account for money received in relation to a sale on consignment.

All moneys paid to a dealer in trust in respect of a consignment sales must be paid into and held in the dealer’s trust account, which is to be held with an authorised financial institution.

Reference: Sections 32C, 32D of the Act

The titling of a consignment trust account must meet the requirements of Regulation 10C of the Regulations. The name of the trust account must include:

• the full name of the dealer;
• the dealer’s licence number;
• the trading name (if any); and
• the words “consignment trust account”.

Reference: Regulation 10C(1) of the Regulations

All money received by a dealer for the sale of a vehicle under a consignment agreement must be deposited into the dealer’s consignment trust account no later than the next business day after the money is received.

Reference: Section 32D of the Act

Whenever a consignment trust account is opened or closed a dealer must advise the Commissioner in writing as soon as practicable.

The notification should provide:

• the name and number of the trust account; and
• the name and address of the authorised financial institution where the trust account is or was maintained.

It is good practice to also include the date on which the change was made.

Reference: Regulation 10C(2) of the Regulations

Regulation 10I of the Regulations requires that a dealer and the relevant financial institution must produce to the auditor all books, papers, accounts, documents and securities in any way relating to any trust moneys received by the dealer in their possession, custody or power. It is essential that a dealer keep full and accurate accounts and records of all proceeds received from sales of vehicles under consignment agreement and all payments made by the dealer of or from those proceeds.

Trust documents and records that should be maintained include:

• a record of money received for or on behalf of any other person;
• trust receipt books;
• duplicates of every completed trust account deposit form;
• trust ledgers;
• trust cheque books;
• records of trust money payments;
• bank statements of trust monies;
• trust account reconciliation statements;
• requests for the issue of bank cheques; and
• any other books, accounts or records kept by a dealer relating to trust money.

It is also recommended that back-up copies of computer records be retained offsite. This ensures the dealer has access to the records in the event of error, falsification of records by an employee or physical damage to the system.

Reference: Sections 32H of the Act.

When a dealer receives money for or on behalf of any other person in relation to a sale by consignment, they must keep a written record of the money received. All trust records and documents are to be retained for a minimum period of six years from the date the money was received and be readily accessible.

Reference: Regulation 10D(2) of the Regulations.

Section 32I of the Act requires an annual audit of every dealer’s consignment trust account.

An audit is an examination by an independent person of the accounts held by a dealer. Unless the Commissioner approves otherwise, a registered company auditor must conduct the audit. A dealer needs to maintain all documents and records relating to a trust account in a manner that enables them to be conveniently and properly audited by the dealer’s auditor and furnish the auditor with all such information and particulars as he or she reasonably requires.

Other duties of dealers relating to audits are discussed in section three.

The documents and records listed at 1.6 above enable the tracking of trust money held by a dealer at any time in order to verify that money has been dealt with in accordance with the Act. The auditor will conduct a sample-based audit of the records when performing the annual audit. As well as the annual audit, the Commissioner may order a special audit of a dealer’s trust account records at any time.

Reference: Sections 32I and 32J of the Act.

There is no explicit requirement in the legislation for the dealer to notify the Commissioner of an overdrawn trust account. Regulation 10G of the Regulations requires the financial institution to inform the Commissioner in writing whenever a dealer’s trust account is overdrawn. Regardless of the amount overdrawn or whether the overdrawn amount is a result of a bank error, the Commissioner must be notified as soon as practicable.

The notification should include the name and number of the trust account and the amount involved. The notification is required to be sent to the Commissioner as soon as practicable.

Refer: Regulation 10G of the Regulations

To aid in keeping full and accurate records, it is helpful for the dealer to adhere to a number of basic trust accounting principles, which include that:

• accurate records are kept for all transactions and are written up by the end of the next business day;
• each client must have a separate trust ledger account and each individual trust ledger account must never go into debit;
• trust money is banked by close of business of the next business day where practicable, and in the same form it was received (i.e. cash received must be banked as cash);
• client funds held in a particular trust ledger have cleared before drawing against those funds;
• unidentified deposits to the trust account are immediately followed up;
• un-presented trust cheques are followed up and presented as soon as practicable;
• appropriate authorisation is held for any transfer journal entries;
• adjusting journal entries for any errors or discrepancies are addressed as soon as possible and detailed notes made to assist in the annual audit;
• trust account reconciliations are completed at least monthly and should be completed more often where recommended by the auditor and/or the volume of transactions so dictates;
• trust account reconciliations are completed on time and signed by the dealer principal;
• fee entitlements should not be transferred from the trust account to the general account until after settlement of the transaction;
• back-up computer records are kept offsite.

2.2.1 Trust account records

A dealer who maintains a consignment trust account must ensure that a written record of the trust account is kept. This record must contain all the details of money received by the dealer for a sale by consignment, and may take the form of a duplicate copy of every receipt issued.

Reference: Regulation 10D of the Regulations.

2.2.2 Trust receipts

A dealer must provide a receipt for all money received. If money is received directly, a written receipt must be provided. Where money is received electronically, an electronic receipt may be provided.

Regardless of whether the receipt is hard copy or electronic, all trust receipts show the following information:

• the name of the dealer and the dealer’s licence number;
• a number or letter, or a combination of both, in consecutive order that allows the receipt to be uniquely identified;
• the date on which the money was received;
• the name of the person paying the money;
• the amount of money received;
• a brief description of the purpose of the payment; and
• if the receipt is hand-written, the name of the person receiving the money evidenced by the signature of that person.

The example below demonstrates a general purpose trust receipt format that meets the requirements under the Regulations

Vehicle consignment receipt, by Consumer Protection

All receipts should be posted to the cash receipts journal by the next working day.

Reference: Regulation 10E(3)(a) to (g) of the Regulations

2.2.3 Interim receipts

The use of interim receipts is not encouraged. However, there are certain circumstances when an interim receipt may need to be issued (e.g. when the dealer’s printer is out of order). In these situations, a duplicate of the interim receipt should be retained in the records and the interim receipt should be immediately followed by a formal trust receipt cross-referenced to the interim receipt.

When using a manual system to issue interim receipts, cross-referencing information should be included when recording the receipt in the trust ledger and issuing the formal receipt. If a computer system is used, the formal trust receipt should be cross-referenced against the interim receipt in the computer system.

A dealer must ensure that deposited funds have cleared before those funds are drawn against. Drawing against a trust ledger account before a deposit has cleared will cause a shortfall in that ledger if the deposit is dishonoured.

At no time should a trust ledger account have a debit balance.

As a matter of best practice, all withdrawals from a trust account should be made by electronic transfer or a trust cheque. Where a trust cheque is used, a dealer must retain the cheque butts and ensure such cheque butts contain all relevant information.

Any withdrawal from a trust account must be in relation to the consignment sale as detailed in the consignment agreement. In particular, a dealer is prohibited from withdrawing money paid into a consignment trust account except for the purpose of:

• Paying an amount owed to the vehicle consignor or a person authorised by the consignor;
• Paying an amount owed to the holder of a security interest in the consigned vehicle;
• Paying an amount owed to the dealer in commission or charges for sale of the consigned vehicle; or
• Paying an amount that is authorised by the Regulations to be paid.

Any other purported withdrawal from a consignment trust account by a dealer is unlawful unless the dealer has the prior approval of the Commissioner.

Reference: Section 32E of the Act.

2.4 Balancing a trust account at the end of each month

To ensure the requirements of section 32H(d) of the Act are met, a dealer should complete a trust account reconciliation statement at the close of business each month. This statement reconciles the cash records of the business with respect to consignment sales against the bank records for the consignment trust account. It reconciles the balances of the trust account cash book, the bank trust account statement and the total of the clients’ trust account ledgers. The purpose of the exercise is to match all three totals after taking into account any reconciling items.

The trust account reconciliation should be carried out at the end of each month and include trading as at the close of business of the last day of the month.

The completed reconciliation should be noted by the dealer even if there are no funds in the account, and retained and produced to the auditor for the annual audit.

Regular monitoring of trust account transactions and account balances may help prevent the fraudulent transfer of money from a trust account.

Trust reconciliation statements, including related bank statements, must be retained as they form part of the trust account records.

2.5 Buffer account

In no circumstances should extra funds be kept in the trust account.

A buffer fund cannot be used to offset bank fees or for any other reason. Dealers should clear their commission or account fees to their general account.

The removal of these excess funds from the trust account is for the benefit of all parties. If a dealer maintains a buffer in a trust account, it can make it difficult to identify if the trust account is overdrawn. This means they are less likely to identify poor trust account management practices or fraud by employees.

A dealer who accepts vehicles for sale by consignment must maintain a trust account and appoint an auditor (subject to Commissioner approval) at the time of opening the trust account.

Dealers seeking to appoint an auditor and setup a consignment trust account must complete the 'First Time Auditor Appointment and Consignment Trust Account Notification Form’ and await Commissioner approval of the proposed appointment.

If the dealer has not held or received any trust funds during the year, the dealer is required to complete and lodge a statutory declaration to this effect in lieu of an audit report.

All audit reports or statutory declarations (as appropriate) are required to be lodged within three months of the end of the financial year. Therefore, the audit period ends on 30 June of each year, with the audit report or statutory declaration to be delivered to the Commissioner by 30 September each year. It is the auditor’s responsibility to deliver the audit report to the Commissioner.

Reference: Sections 32A and 32I of the Act, regulations 10H and 10N of the Regulations

A dealer must appoint an auditor at the time of opening a consignment trust account.

The appointed auditor must be a registered company auditor as defined in section 9 of the Corporations Act 2001(Cth).

To comply with regulation 10L, an auditor must disclose to the Commissioner any close relationship by blood or marriage, or any business dealings the auditor has with the dealer at any time during the auditor’s appointment. Dealers should ensure their auditor is aware of this requirement, and are encouraged to notify the Commissioner as well, if any relationship exists. The Commissioner will consider each instance of disclosure on a case-by-case basis and may act to disqualify an auditor as the Commissioner thinks fit.

Where an auditor is related to a dealer by blood or close relationship, there is a clear conflict of interest that could compromise the auditor’s independence. Where an auditor has business dealings with a dealer at any time during the auditor’s appointment, the Commissioner will consider the facts in each case. Generally, the Commissioner will not approve an auditor where that auditor also acts as the dealer’s general accountant.

Reference: Section 32I of the Act, regulations 10H(1) and 10L of the Regulations

The dealer must make all trust account records available to the auditor at every audit, or when the auditor reasonably requests them. The trust account records the dealer is obliged to provide the auditor includes any books, papers, accounts, documents and securities in the dealer’s possession, custody or power that are reasonably necessary for the audit to be conducted.

Reference: Regulation 10I of the Regulations

An auditor must audit trust accounts in accordance with accepted auditing practice, including selective testing when the auditor considers it appropriate. The auditor must also be satisfied the trust records are kept in accordance with the requirements of the Act. The audit of a dealer’s trust account is a compliance audit, where materiality does not apply and the auditor is to report every discrepancy to the Commissioner.

On completion of an audit, the auditor is required to deliver the original audit report to the Commissioner by 30 September each year i.e. within three months of the end of the audit period, which is from 1 July to 30 June.

It is the duty of the auditor to report any relevant issues to the Commissioner.

Reference: Regulations 10J and 10K of the Regulations

A dealer must promptly implement any recommendations made by the auditor where the recommendations arise from a breach of the Act. The Commissioner looks upon any breaches of the trust account provisions seriously and may take enforcement action where necessary.

If a dealer considers the recommendations to be unfair or unreasonable, the dealer may make a request in writing to the Commissioner to reconsider the recommendations in light of the objections.

In accordance with regulation 10H of the Regulations, a dealer must continue to employ an auditor approved by the Commissioner unless the Commissioner approves a subsequent change in the appointment. Dealers seeking to change their auditor must complete the ‘Change of Auditor Request Form for Motor Vehicle Dealers Selling on Consignment’ and await Commissioner approval of the proposed appointment.

Reference: Regulation 10H of the Regulations

Under the Unclaimed Money Act 1990, dealers must comply with the following process through which they transfer moneys they owe to another organisation or person to Department of Treasury (Treasury).

• In January each year, dealers must provide Treasury with a summary of the unclaimed moneys they hold.
• In the second half of the year, Treasury will make a Register of Unclaimed Money available for public inspection.
• The public will have until 31 July the following year in which to claim moneys from the dealer concerned.
• In August, following the aforementioned 31 July, dealers must transfer the balance of any monies remaining unclaimed to Treasury.

For further details on lodging moneys with Treasury, please refer to the unclaimed moneys section of the Department ofTreasury website.

Please note, where information is not available, a dealer is to state ‘unknown’ on the covering letter to Treasury. Dealers should be aware that it is a requirement of section 32H of the Act to keep full and accurate records of all money received and paid with respect to the sale of vehicles under consignment agreements.