Security deposits, rental bonds, and performance bonds share a common accounting characteristic: they represent cash held that doesn't belong to the holder yet. Despite this, they're frequently coded to income when received or to expense when paid — errors that distort the balance sheet and can trigger GST problems. Here's how to handle them correctly.
The Fundamental Principle
A security deposit is a financial instrument, not income or expense. The cash changes hands, but the underlying obligation doesn't. Whoever holds the deposit owes it back (subject to any valid claim deductions), so it must sit on the balance sheet:
- Deposit paid by your client → Asset (money owed back to them)
- Deposit held from someone else → Liability (money they can reclaim)
Treating a received bond as income at the start of a lease is one of the most common miscodings in property-related bookkeeping.
Rental Bonds (Residential and Commercial)
Residential Tenancies
For residential tenancies in most states, landlords cannot hold bonds directly — they're lodged with the relevant state authority (NSW Fair Trading, RTBA in Victoria, RTA in Queensland, etc.). The landlord never has custody of the funds. From the landlord's perspective, no accounting entry is required at bond lodgement because no cash passes through the landlord's hands.
Commercial Leases
Commercial bonds are paid directly to the landlord and held in trust or in the landlord's account. For the landlord (entity receiving the bond):
DR Cash / Bank $X,XXX
CR Security Deposit Held (liability) $X,XXX
When the lease ends and the bond is returned:
DR Security Deposit Held $X,XXX
CR Cash / Bank $X,XXX
If there's a legitimate deduction (unpaid rent, damage):
DR Security Deposit Held $X,XXX
CR Cash / Bank (returned to tenant) $X,XXX
CR Rental Income (deducted amount) $XXX
For the tenant (entity paying the bond):
DR Bond / Security Deposit (asset) $X,XXX
CR Cash / Bank $X,XXX
When returned:
DR Cash / Bank $X,XXX
CR Bond / Security Deposit $X,XXX
If part is legitimately forfeited:
DR Cash / Bank (amount returned) $X,XXX
DR Lease Expense / Repairs Expense $XXX
CR Bond / Security Deposit $X,XXX
Performance Bonds and Bank Guarantees
Performance bonds appear frequently in construction, government contracts, and supply agreements. A contractor may be required to lodge a cash bond or bank guarantee of, say, 5–10% of the contract value.
Cash Performance Bonds
Treated identically to commercial rental bonds from both parties' perspectives. The depositing party records an asset; the recipient records a liability. The bond shouldn't be recognised as income until any right to retain it is established (typically on breach of contract or contract expiry with a valid claim).
Bank Guarantees
A bank guarantee is a contingent liability for the business providing it, and a contingent asset for the recipient. Neither party records a balance sheet amount unless the guarantee is called upon. When called:
DR Bank Guarantee Expense (depositor) $X,XXX
CR Cash / Bank $X,XXX
and for the recipient:
DR Cash / Bank $X,XXX
CR Bank Guarantee Income $X,XXX
Note: fees paid to the bank for establishing a bank guarantee are a financial services charge, deductible in the period incurred.
GST Treatment
The Key Rule
Security deposits are not consideration for a taxable supply when first received. No GST arises on receipt of a bond — it's a financial arrangement, not payment for goods or services. This is confirmed in ATO's GST Ruling GSTR 2006/2.
When GST Applies
GST only applies to the extent the deposit is applied as consideration for a taxable supply. If a landlord retains $5,000 from a commercial bond for unpaid rent (which is taxable), the retention is treated as rent received and GST must be accounted for if the landlord is registered.
Retained from bond: $5,500
GST component: $500 (one-eleventh)
Net rent income: $5,000
If the retention is for damage repair (which may be an input-taxed supply between the parties), the GST treatment is less clear — seek a private ruling if the amounts are material.
Input Tax Credits
A tenant paying a bond gets no ITC on the bond itself (it's not a payment for acquisition of anything). If part of the bond is later forfeited and treated as rent, the tenant may be entitled to an ITC on that component, assuming the premises were used for creditable purposes.
Current vs Non-Current Classification
The balance sheet classification of security deposits depends on when they're expected to be returned:
- Bond returnable within 12 months: Current asset/liability
- Bond returnable beyond 12 months: Non-current asset/liability
For a tenant with a 3-year commercial lease and a bond due on lease expiry, the bond is non-current for the first two years and flips to current in the final year. Update the classification at each reporting date.
Common Errors
Error 1: Coding a received bond to income The most frequent mistake. The result is overstated revenue in the period of receipt and understated income when the bond is legitimately retained (if ever). It also creates a GST problem if the income is included on the BAS.
Error 2: Expensing a paid bond immediately Some businesses expense the bond as a "lease cost" when paid. This understates assets and understates profit in the period of payment, with no corresponding income when returned.
Error 3: Failing to reclassify from non-current to current Bonds sitting in non-current assets for the life of a lease are fine until the last year — at that point, they should be reclassified so working capital ratios and loan covenants aren't distorted.
Error 4: Missing GST on bond retention When a bond is retained for unpaid rent or service fees, the GST obligation on the retained amount is easy to overlook. It should be included on the BAS for the period of retention.
Tracking in ReconLink
Security deposit movements are straightforward to manage in ReconLink. Create a dedicated transaction coding rule for deposits paid (asset) and deposits received (liability) keyed to the counterparty name. When the return or retention appears in the imported transactions, the rule will flag it for review rather than auto-coding to income — which is the correct default behaviour for balance sheet items that need human confirmation of the final treatment.