Two ideas trip up accounting firms on trusts under Tranche 2. The first is that if you never touch cash, you are safe. The second is that because you already hold a thick file on the trust for tax, your customer due diligence is basically done. I have had both said to me in the same meeting. Both are wrong, and each one is wrong in a way that can cost the firm.
Here is the short version. Holding a client’s money to move a transaction along is a designated service in its own right, whether or not a coin ever changes hands. And the file you build to prepare a trust distribution is a tax file. It is not a CDD file, and the two do not substitute for each other.
The trigger is the money you control, not the cash you handle
Item 3 of Table 6 in the AML/CTF Act captures receiving, holding, controlling or disbursing a client’s money when you are assisting them to plan or carry out a transaction. Control is the word that matters. If settlement funds land in your trust account, sit there for a week, and go out to a third party on your instruction, you are receiving, holding and controlling that money. It does not matter that it moved as a bank transfer. This is one of the services that pull an accounting firm into Tranche 2.
The exception is narrower than people hope. Money you hold as payment for your own services, or money merely incidental to work that is not a designated service, is carved out by s 6(5C)(b). Your fee is safe. A retainer is safe. Holding a buyer’s deposit in escrow while a sale completes is not.
And once you provide that one service, the obligation is not confined to that file. It attaches to your firm. That is the part people underestimate. One captured engagement pulls your whole practice into the regime, and the enrolment and program obligations follow from there.
Your trust distribution file was built for a different job
When you prepare a distribution for a discretionary trust, you gather a lot. You read the deed for who is presently entitled. You draft the minute that decides who gets income this year. You collect beneficiary tax file numbers. You run the s 100A question and you watch the unpaid present entitlements for Division 7A. Every piece of that is collected to get the tax right under Division 6 of the 1936 Act.
None of it was collected to satisfy the AML/CTF Act. That matters for two reasons, and the second one is the one people miss.
First, collecting information is not the same as verifying it. The regime asks you to identify the customer and then verify identity against reliable and independent data. A tax file number sitting in your software is neither. I have written separately about why a tax file cannot double as a CDD file, and the same logic runs straight through trust work.
Second, and this is the sharp one, the people in your distribution minute are not the beneficial owners you are required to identify. Your minute records who received income this year. CDD asks who owns or controls the trust. Those are different questions, and they have different answers.
Beneficial owner is a control question, not a distribution list
For a trust, the beneficial owners you must identify are the natural people who ultimately own or control it. In practice that means every trustee, with at least one verified, and where the trustee is a company you look through to the individuals behind it. It means the settlor and any appointor, because the appointor is often where the real control sits. For a discretionary trust with no fixed entitlements, it means the class of beneficiaries named in the deed, documented clearly enough that you can show you understand who could benefit.
Read that against a distribution minute. The minute might send income to two adult children this year and nothing to anyone else. The appointor, who can replace the trustee tomorrow, might not appear in the minute at all. The corporate trustee’s real owner might be a person you have never named on any tax form. Your tax file can be complete while your CDD file is still empty of the people who matter.
Figure 1. One trust client, two files. The tax work and the CDD file answer different questions under different law.
When the two files meet: suspicion, reporting, and what you cannot say
Here is where the tax work and the AML work collide. Suppose you are holding settlement money for a client, so you are providing a designated service, and while preparing the trust distribution you notice something that does not sit right. Money routed to a beneficiary who sends it straight offshore. A structure with no commercial logic except to move funds. A story that keeps changing.
The moment that reaches a reasonable suspicion, s 41 is live. You do not need the transaction to complete, and you do not need proof. A suspicion on reasonable grounds is the trigger, and the report goes to AUSTRAC on the clock.
And now s 123 closes the other door. You cannot tell the client, the trustee or the beneficiary that a report has been made or is being considered, in a way that could prejudice an investigation. You can still ask ordinary questions, run your enhanced checks and tell a client you need more information. What you cannot do is tip them off. Getting that line right is the whole skill.
What this means in practice
Keep the two files apart on purpose. Let the tax file be the tax file. Build a CDD file that answers its own questions: who controls this trust, have I verified them against independent data, what is the money laundering risk here, and am I watching it. When you reuse a fact from the tax side, and sometimes you sensibly will, treat it as raw material that still has to meet the CDD standard, not as work already done.
The firms that get burned are not the ones that touch cash. They are the ones that assumed a fat tax file was a compliance file. It is not.
From the practice. I sat with a two partner firm last year that was certain Tranche 2 did not reach them. No cash, no real estate, just trusts and tax. Then we walked through one engagement where they held a client’s sale proceeds in their trust account for a fortnight before paying out a related party. That one arrangement was a designated service, and it pulled the whole firm in. What struck me was the gap on the other side. They had a beautiful tax file on the trust: deeds, minutes, tax file numbers, years of returns. They had never identified the appointor, who turned out to be the client’s brother in law overseas. The tax file did not need him. The CDD file could not do without him. We rebuilt the customer file from scratch, and it took a fraction of the time they feared, because the point was never volume. It was answering the right question.
Technical detail
Current as at July 2026.
Client money designated service. Item 3 of Table 6, subsection 6(5B) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 covers receiving, holding, controlling (including disbursing) or managing a person’s money, accounts, securities or other property when assisting them to plan or execute a transaction.
Exception. Paragraph 6(5C)(b) excludes money held solely as payment for the reporting entity’s services, or dealings reasonably incidental to a service that is not a designated service.
Related professional services. Creating or restructuring a body corporate or legal arrangement (item 6); acting, or arranging for a person to act, in a position such as trustee or nominee (items 7 to 8); providing a registered office or business address (item 9).
Tranche 2 timing. Newly regulated entities could enrol with AUSTRAC from 31 March 2026. Obligations commence 1 July 2026. Enrolment deadline 29 July 2026.
Customer due diligence. Initial CDD must be completed before providing a designated service to a new customer: identify the customer and its beneficial owners, and verify identity using reliable and independent data. AML/CTF Act ss 26F and 28. Collecting information and verifying it are separate obligations.
Beneficial owner. A natural person who ultimately owns or controls the customer, being 25% or more ownership or otherwise control. For a trust this includes trustees (verify at least one; look through a corporate trustee), the settlor, any appointor, and beneficiaries with a fixed interest of 25% or more. For a discretionary trust, identify the class of beneficiaries named in the deed.
Tax file number. Use is confined by the Privacy (Tax File Number) Rule 2015 under s 17 of the Privacy Act 1988 to tax, superannuation and assistance agency purposes, and a TFN cannot be used as a general identifier. Misuse can attract offences under ss 8WA and 8WB of the Taxation Administration Act 1953.
Suspicious matter reporting. AML/CTF Act s 41. A suspicion on reasonable grounds is the trigger and the transaction need not complete. Report to AUSTRAC within 3 business days, or 24 hours where the suspicion relates to terrorism financing.
Tipping off. AML/CTF Act s 123, replaced by the 2024 Amendment Act with an outcome based test from 31 March 2025. Maximum penalty 2 years imprisonment or 120 penalty units (120 x $364 = $43,680). Reasonable enquiries and standard requests for information are not tipping off.
Trust taxation reference. Division 6 of the Income Tax Assessment Act 1936; present entitlement s 97; reimbursement agreements s 100A; unpaid present entitlements and Division 7A.
Building and keeping that customer file is exactly what HP-KYC is for.
Frequently asked questions
When does holding client money become a designated service?
When you control money on behalf of a client rather than merely observing it move. Control is the test, not whose name sits on the account.
Is a trust account always captured?
No. Several exceptions apply, including money held as consideration for your own services, amounts held incidentally where you provide no other designated service, court or arbitration ordered amounts, and payments to or from government agencies.
Is my trust distribution file a CDD file?
No. A distribution file records entitlements for tax. A CDD file has to answer who controls the trust, which is a different question with a different answer.
Who is the beneficial owner of a discretionary trust?
Look at the trustee, the appointor, the settlor and the beneficiaries, and at who actually exercises control. Where no beneficial owner can be identified, you fall back to the senior managing official.
