21st June, 2022
For building and construction businesses in Queensland there are new rules around how to manage project funds coming into play. And it may not be long before we see similar rules around the country.
In 2017, the Queensland State Government announced the Queensland Building Plan, which includes a range of reforms that aim to improve the quality of building projects, resolve licensing issues and increase security of funding for those projects.
When it comes to payment security, a key element of the Queensland Building Plan is the Building Industry Fairness (Security of Payment) Act 2017 (BIF Act), which it’s main purpose is to help people working in the building and construction industry in being paid for the work they do.
Trust account requirements form part of the security of payment measures introduced by the BIF Act. Project bank accounts were initially required for certain State Government projects valued between $1 million to $10 million and secured subcontractor payments. To simplify the requirements, amendments were made to the BIF Act and a new trust account framework commenced in March 2021.
This new framework has a phased rollout, impacting more projects and parties over time.
When full implementation occurs in late 2023, these requirements will impact the majority of building and construction projects above $1 million in Queensland.
As the rollout continues, businesses with building and construction projects in Queensland will need to get up to speed on whether or not these new rules impact them. Supporting services such as auditors, accountants and lawyers with construction clients in Queensland will also need to be familiar with these changes.
Some other states have different trials and variations of the trust account requirements and may soon follow suit with broader trust account requirements for the building industry.
Under the new trust account framework, the head contractor is required to establish a separate project trust account per eligible project.
An overarching retention trust account is also required for parties withholding cash retentions on a project trust project.
But how does requiring these accounts help improve trust and payment security in Queensland’s building industry?
The trust account requirements add more rigor and help to quarantine payments to subcontractors in the project trust account, while retention amounts are withheld for any party in the retention trust account. They safeguard these payments in a separate account until they are due and payable to contracted parties.
For a project trust account, the project owner must deposit funds directly into this account and the head contractor must organise for subcontractor payments to be made from this account. It is only if all subcontractors have been paid that a head contractor may pay themselves from this account.
For a retention trust account, the contracting party must transfer cash retentions withheld from payment into the account at the time they are withheld. These funds must remain in the retention trust account until practical completion of the project, at which point a portion can be released. The remaining retention amounts are released at the end of the defects liability period if there are no errors or omissions with the contracted work.
There are strict rules and requirements for trust accounts and they must be set up with an approved financial institution. Significant penalties and consequences apply for non-compliance and mismanagement of trust funds and each contractor must maintain detailed records, complete mandatory training and regular audits of the accounts.
While the initial pilot applied to State Government contracts only, trust accounts now apply more broadly across the sector.
As of 1 January 2022, project trust accounts are required for State Government, hospital and health service projects valued at $1 million or more and Local Government and private sector projects valued at $10 million or more.
Retention trust accounts are currently required for owners/developers and head contractors that are withholding cash retentions on these projects.
The next phase is due to commence on 1 April 2023, when the Local Government and private sector project value threshold will drop down to projects valued at $3 million or more.
The final phase, scheduled for 1 October, 2023, will see all projects above $1 million (with the exception of small-scale residential work*), requiring a project trust account. The retention trust account requirements will also extend to all subcontractors. This will mean any parties withholding cash retentions on a project trust project will need a retention trust account.
A key callout here is the new rules don’t apply to small-scale residential projects on dwellings with one or two living units only. Anything of a commercial nature or residential projects that include three living units or more will be impacted and may require a trust account.
You can find out more on exemptions and other scenarios requiring a trust on the Queensland Building and Construction Commission (QBCC) website.
While the new legislation is designed to protect both building project clients as well as contractors working on them, it also introduces new compliance cost as a result.
The biggest challenge for anyone required to hold a trust account will be the flow-on impact to their cashflow, as they won’t be able to access those funds, and move them around at will, as they may have previously.
For the head contractor, that means if a job isn’t going well, it won’t be a simple case of pulling funds from one project to another to balance the books. As a result, any operator with projects in Queensland and their accountants and bookkeepers are advised to familiarise themselves with these new rules, to assess how it might impact the way they manage projects and to take action to ensure their projects have sufficient cashflow ahead of time.
When it comes to reporting, additional requirements will see contractors and their advisors maintaining a separate ledger for every trust account they’re required to maintain, as well as a record of deposits and withdrawals, with all documentation pertaining to the accounts stored for a period of seven years. There are a number of new notification requirements introduced by trust accounts too.
If successfully planned for and taken into account, the new rules and responsibilities under the trust account framework will only serve to improve and stabilise building industry payments and enhance trust between businesses that operate within it.
The changes it brings will require not only administrative and recordkeeping changes within impacted organisations, but it will also likely trigger the need for the software providers they use for accounting and recordkeeping purposes to introduce new features as well.
If you think you may be impacted by this legislation in any way, now is the time to visit the QBCC website to find out more, or you can even reach me directly via email email@example.com for a confidential discussion.
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