In brief - Draft Regulation would require head contractors to deposit subcontractors' retention money into trust accounts

A draft of the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2014 ("the draft amending Regulation") was recently released by the NSW government for public comment. The draft amending Regulation outlines proposed trust account requirements for retention money of subcontractors held by head contractors under contracts entered into from 1 February 2015.

Draft Regulation open for public comment until 8 January 2015

On 19 November 2013 we reported in our article Retention money to be held in trust for subcontractors under security of payment laws in NSW on an amendment to be made to the Building and Construction Industry Security of Payment Act 1999 ("the Act") which would allow a trust account scheme for subcontractors' retention money to be created by regulation.

New section 12A of the Act commenced on 21 April 2014, but it was not until early December 2014 that the draft amending Regulation outlining details of the proposed trust account scheme was released, along with an accompanying Regulatory Impact Statement.

The proposed trust account requirements outlined in the draft amending Regulation are open for public comment until 8 January 2015, after which the draft amending Regulation may be amended to take into account the comments received. It is expected that the final version of the draft amending Regulation will be released prior to the anticipated commencement date of 1 February 2015.

New trust account requirements for subcontractor retention money

Subject to any amendments which may be made after the public consultation process concludes in January 2015, the draft amending Regulation will amend the Building and Construction Industry Security of Payment Regulation 2008 ("Regulation") by inserting requirements relating to the trust account(s) to be established by head contractors (defined in section 4 of the Act).

Head contractors to hold money in trust for subcontractors

There is a requirement under new clause 6 that head contractors holding retention money must hold that money in trust for the subcontractor(s) from whom the money has been retained in a trust account ("retention money trust account") established with an authorised deposit-taking institution (ADI). Such an account is to be established as:

  • a separate trust account for retention money held in respect of a particular subcontractor;

  • a separate trust account for all retention money held in connection with a particular project of the head contractor; or

  • a separate trust account for all retention money held in connection with two or more projects of the head contractor.

ADI and Chief Executive of the Office of Finance & Services to be notified

There are requirements under new clause 7 that the head contractor ensure that:

  • the name and description of the retention money trust account includes the name of the head contractor and the words "Trust Account";

  • the approved ADI is notified in writing that the account is a trust account required to be established under the Regulation; and

  • the Chief Executive of the Office of Finance & Services (CEOFS) is notified within seven days of account establishment of relevant details of the account (including the opening balance).

Circumstances in which retention money can be withdrawn

There is a requirement under new clause 8 that retention money not be withdrawn by a head contractor from a retention money trust account except:

  • to pay money in accordance with the terms of the contract under which the money was retained;

  • as may be agreed in writing between the head contractor and subcontractor; or

  • in accordance with an order of a court or tribunal;

with any such withdrawals being by way of cheque or EFT only.

Overdrawn retention money trust accounts

There is a requirement under new clause 11 that a head contractor must notify the CEOFS in writing if the retention money trust account becomes overdrawn. Such notice is to be given within five days of the head contractor becoming aware of the account becoming overdrawn.

Closure of retention money trust accounts

There is a requirement under new clause 12 that a head contractor must notify the CEOFS when a retention money trust account is closed. Such notice is to be given within 14 days after closure of the trust account.

Penalties for non-compliance

Each of these new clauses provides for a maximum penalty of $22,000 for non-compliance.

The new requirements also make clear that retention money held by a head contractor is not available for payment of the head contractor's debts (or liable to be attached or taken in execution for satisfying a judgment against the head contractor).

New record keeping and annual reporting requirements

The Regulation will also be amended (subject to any changes following public consultation) by inserting requirements relating to trust account records and annual reports, including the requirement under new clause 13 that a head contractor must keep records showing the amounts deposited or withdrawn from a retention money trust account. That requirement is to continue for a period of at least three years after the closure of the account.

In addition, there is a requirement under new clause 15 that a head contractor operating a retention money trust account in a financial year must provide the following to the CEOFS within one month after the end of the financial year:

  • An account review report given by a registered company auditor in which the auditor certifies that in his/her opinion, the retention money trust account operator has complied with all of the requirements of part 2 of the Regulation during the financial year for which the report is given.

  • A retention account statement for the account in the prescribed form in Schedule 2 to the Regulation.

  • A fee to accompany the account review report and retention account statement, the amount of which is yet to be determined.

Each of these new clauses provides for a maximum penalty of $22,000 for non-compliance.

New power of Chief Executive to require information

The Regulation will also be amended (subject to any changes following public consultation) by empowering the CEOFS to issue directions to head contractors, subcontractors and any ADI requiring the provision to the CEOFS, within seven days or such longer period as may be specified or allowed, of any information relating to the value of any contract between a principal and head contractor, retention money retained by a head contractor under a subcontract and the retention money trust account established by the head contractor.

A statutory offence has been created (maximum penalty of $22,000) where a person provides information to the Chief Executive knowing the information to be false or misleading in a material particular.

Application of changes relating to retention money trust accounts

Subject to any changes following public consultation, the amendments to the Regulation will apply to retention money held by a head contractor where:

  • the head contractor's contract with the principal has a value of at least $20 million; and

  • that construction contract with the principal was entered into after the commencement of Part 2 of the Regulation (which is anticipated to commence on 1 February 2015).

The amendments provide that for the purpose of determining the value of the head contractor's contract with the principal, the value is to include any variations to the contract after the contract is entered into.

This has the consequence that if the value of variations results in a contract value of at least $20 million, retention money already retained will become subject to the retention money trust account requirements, even though the requirements were not initially applicable when the contract was entered into.

Head contractors need to implement processes to comply with new retention money trust account requirements

It is anticipated that, subject to any amendments following public consultation, the new retention money trust account requirements will commence on 1 February 2015. 

Head contractors should implement the appropriate processes to comply with the new trust account requirements for subcontractor retention money as soon as possible if they have not already done so.


 

This note just speaks broadly and for general information and is not intended to be comprehensive. You should not rely on this as a final statement or as advice about your own situation.

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.​

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