In brief - Lease deposits risk being transferred to ASIC after three years
Lessors and lessees should be aware of the potential implications of amendments to the Banking Act, under which money in inactive accounts will be treated as unclaimed.
New laws will affect accounts which are inactive for shorter periods
Frequently, solicitors and real estate agents hold deposits and security money for clients in relation to long term arrangements such as commercial leases. The deposit might be placed in a bank account for five years earning interest and then, upon expiry of the lease arrangement, the parties would direct the solicitor or the agent to withdraw the invested funds.
Unfortunately, as part of a recent government initiative, such deposits are now treated as unclaimed money by the Treasury and thus have to be transferred to the Australian Securities and Investments Commission (ASIC). In effect, these legislative changes will affect accounts which are inactive for prolonged periods of time and will impose an additional procedure by which unclaimed money can be retrieved.
To minimise the possibility of deposits and security monies being treated as unclaimed, you should implement contractual or other forms of arrangements whereby additional withdrawals and deposits to long term bank accounts are authorised. Alternatively, you should consult your bank about arrangements that can be made to prevent funds in specific accounts being treated as unclaimed.
Amendments anticipated to move significant sums into consolidated revenue
On 4 December 2012, the Treasury Legislation Amendment (Unclaimed Money and Other Measures) Act 2012 (Cth) ("the Act") received assent. It amends the Banking Act 1959 to provide for new arrangements for unclaimed moneys held by authorised deposit-taking institutions (ADIs).
The Act is anticipated to move $760 million into the Commonwealth government's general consolidated revenue fund in the 2012-13 financial year.
New legislation reduces period of inactivity from seven to three years
In amending section 69 of the Banking Act, the period of inactivity before monies in bank accounts are treated as unclaimed is reduced from seven years to three years. Once accounts reach the three year period of inactivity, the ADI must transfer the funds to ASIC.
As bank accounts maintained for the sole purpose of holding deposits or security bond monies in commercial transactions generally remain inactive, they are susceptible to being classed as unclaimed monies. Further, it is important to note that payment of fees or the receipt of interest accrued on the funds during the invested term is not considered to be a withdrawal or deposit to render the account active.
The Act also provides for the payment of interest on the unclaimed money, an initiative the government has never previously offered. The amount of interest and the method of calculating the interest will be determined by regulations (which are yet to be released).
Exceptions to the three year inactivity period
Pursuant to regulation 20 of the Banking Regulations, accounts held as security, set off or escrow will only be assessed as unclaimed if they are inactive for a period of at least seven years. Therefore, accounts held as security for a loan or another financial obligation, or for set-off or account combination purposes, or in escrow for a contract, will become unclaimed if no deposits and no withdrawals are made for a period of at least seven years.
It is important to note however, that the seven year inactive period will only apply to the accounts under regulation 20 and where the authorised deposit-taking institution holding the account must restrict the ability of the account holders to make deposits and withdrawals. For example, the Explanatory Statement of the Banking Amendment Regulations 2013 (No. 1) clarifies that accounts not restricted by the bank will be subject to the three year inactive period.
Effect of legislation on commercial leases
Although there are no legislative requirements for security deposits and bonds under a commercial lease, such leases typically provide for a bond to be held in the lessor's solicitor's or agent's trust account.
As the funds held in such accounts are held under a lease arrangement as security against loss arising from the tenant failing to comply with any of the terms or conditions of the tenancy agreement, it is unlikely to amount to a security or set-off for a "loan" or other "financial obligation" under the regulations. The examples provided in the Explanatory Statement focus on contracts for the provision of services and obligations to secure a financial loan; the nature of these examples suggests that a bond will not be governed.
Unless a lease amounts to a "contract" under the regulations, a bond under a commercial lease will not be an escrow account for the purposes of the Banking Act. However, in circumstances where money is held by agents, the unclaimed monies provisions under the Property, Stock and Business Agents Act 2002 (NSW) (and Unclaimed Money Act 1995 (NSW) if the amendments under the Property, Stock and Business Agents Amendment Bill 2012 are proclaimed) will apply.
What kinds of accounts are subject to a seven year inactive period?
For an account to be subject to a seven-year inactive period, it must be a security, set-off or escrow account and must secure "financial obligations", a "loan" or "in escrow for a contract". Thus, as a lease arrangement does not specifically fall within these definitions, security deposits and bonds will likely be governed by the amendments to the Act, and a three year inactive period will apply in assessing unclaimed money.
This means that lessor and lessees should be aware of the possibility that money in their inactive bank accounts will be treated as unclaimed money. To minimise the possibility of deposits and security money being treated as unclaimed, account holders are advised to make either deposits or withdrawals during the investment period, or alternatively, consult their bank about arrangements that can be made to prevent money in specific accounts being treated as unclaimed.
In the event that money is transferred to ASIC, you will need to contact ASIC and lodge a claim for such money to be returned.
A version of this article was first published in the September 2013 edition of the Law Society Journal.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.