Trust account

A bank account in which money is held on behalf of someone else and can only be used for their specific purpose. Solicitors and real estate agents are required to use them for client money.

Definition

A bank account in which money is held on behalf of someone else and can only be used for their specific purpose. Solicitors and real estate agents are required to use trust accounts for client money. Standard residential building contracts have historically not required builders to hold owner funds this way, which is why progress payments usually land in the builder's general account.

Why it matters

The absence of a trust-account requirement is one of the central structural gaps in Australian residential construction. A solicitor cannot spend client money on the firm's own bills; the money is held separately and used only for the client's matter. A builder, under the standard contract, faces no equivalent rule. The owner's progress payment becomes the builder's money the moment it is paid, available for any purpose, including debts on other jobs. That is legal and ordinary, and it is why owners become unsecured creditors when a builder fails.

How it works in practice

In professions where trust accounts are mandatory, client money is deposited into a designated account, kept separate from the firm's operating funds, and subject to record-keeping and audit requirements. Misuse is a serious regulatory breach.

Residential building has had no general equivalent. Reform proposals in several states have looked at stronger trust-account requirements for builders. In the meantime, regulated escrow achieves a similar separation by holding owner funds outside the builder's operating account and releasing them on verified progress.

Common misconceptions

Progress payments are already held in trust

Under standard Australian residential contracts they are not. The funds become the builder's the moment they are paid and can be used for any purpose.

A trust account and an escrow account are identical

They are closely related but not the same. A trust account is a specific legal and regulatory construct for professions like law; escrow is a broader arrangement for holding funds neutrally until conditions are met.