What is the Deal with Interest Bearing Deposit Accounts?

Is the concept of an interest bearing account as foreign as snapchat? Have you been requested to open an interest bearing deposit account and are breaking out in a cold sweat? Is the process as intimidating as visiting the dentist for the first time in 5 years?

You are not alone (insert collective sigh of relief).

So what is an Interest Bearing Deposit (IBD) account?

Let’s break it right down to the basics.

An interest bearing deposit account is sometimes referred to as an ‘at call’ account. This is because the funds can be ‘called’ upon at short notice. It is a joint account often between two parties, the Seller & Buyer. It is where the 10% sale deposit is invested for a short term at a high interest rate.

With me so far? Not so intimidating now is it! Perfect.

Account terms are generally 42 days (the time between exchange & settlement). It can be longer depending on the settlement period.

The interest is generally split 50/50 on settlement between the two parties. There can be variances such as 100% to vendor or 80/20 and so on.

Who opens an Interest Bearing Deposit account?

A solicitor will put a request in writing on the agent to open an account. Your bank has a form you will complete which is part of the Pink Form process in NSW.

You will need both parties Tax File Numbers and full legal names as per the Contract for Sale. You do not need signatures. The agency itself will become the trustee for the Seller & Buyer.  An example account name is MY TOWN REALTY AS TRUSTEE FOR: JONES TO SMITH.

What is the rate of interest on an IBD account?

This varies from bank to bank.  It is generally not much higher than the current cash rate at the time of investment.

Can I open an account with any bank?

Yes you can. However for practicality sake, it’s much easier if you open the IBD account with the same bank as your Trust Account. Why make things more difficult?  Doing so will streamline the settlement process. Who doesn’t love things being streamlined?

What makes an IBD account different from a normal trust account?

A normal trust account does not earn interest that is available for the parties. Instead the interest on trust money is remitted to the relevant compensation fund (depending on which state you’re in). Settlement is performed from the trust account, not the interest bearing account. Therefore you can provide the parties with a statement of account.

Do I need to open an IBD for every sale?

No, you only need to open an IBD account when requested to do so by the parties solicitors.

What happens if the parties don’t provide their TFN?

You need to advise the parties that if they don’t provide their TFN that they will need to declare the interest in their next tax return. This usually does the trick pretty quickly.

What happens on settlement?

You will be made aware by the solicitors that the property is due to settle on a particular date. At this point, you will need to arrange to have the initial funds plus the interest transferred back to the trust for settlement.

Who audits IBD accounts?

Your auditor. Although this process happens outside the trust account, your auditor will still check you have followed the correct processes and accounted correctly to all the relevant parties.

So there you have it. The world of Interest Bearing Deposit Accounts explained. So go forth and open an IBD with confidence!

– Jane Morgan is the Director of End of Month Angels, a consultancy firm specialising in Trust Accounting. Jane knows the legislative requirements of running a successful Real Estate office through her 20 years industry experience. Don’t trust just anyone with your trust accounting. Book an appointment with an End of Month Angel today.