In brief - Head contractors required to deposit subcontractors' retention money into trust accounts
The Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 ("the amending Regulation") was recently published by the NSW government. The amending Regulation outlines trust account requirements for retention money of subcontractors held by head contractors under contracts entered into from 1 May 2015.
New trust account requirements for subcontractor retention money
On 17 December 2014 we reported in our article Trust account scheme proposed for subcontractors' retention money held by head contractors as part of security of payment reforms in NSW on a draft Regulation released by the NSW government in early December 2014, along with an accompanying Regulatory Impact Statement, in respect of a proposed trust account scheme for subcontractors' retention money.
Following a period of public consultation, the draft Regulation was amended and recently published.
The amending Regulation amends 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).
Retention money to be held in a separate trust account
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; or
- 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.
Name, description and notification of relevant details of trust account
There is a requirement under new clause 7 for the head contractor to ensure that:
- the name and description of the retention money trust account includes the name of the head contractor and the words "Trust Account"; and
- 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 and Services (OFS) is notified within seven days of account establishment of relevant details of the account (including the opening balance).
Circumstances in which money can be withdrawn from the trust account
There is a requirement under new clause 8 that retention money can only be withdrawn by way of cheque or electronic fund transfer. Retention money may 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; or
- as may be agreed in writing between the head contractor and subcontractor; or
- in accordance with an order of a court or tribunal.
Notification if retention money trust account is overdrawn
There is a requirement under new clause 11 that a head contractor must notify the Chief Executive of the OFS 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.
Notification when a retention money trust account is closed
There is a requirement under new clause 12 that a head contractor must notify the Chief Executive of the OFS when a retention money trust account is closed. Such notice is to be given within 14 days after closure of the trust account.
Each of these new clauses provide for a maximum penalty of $22,000 for non-compliance.
Retention money not available for payment of head contractor's debts
The new requirements also make it 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 has also been amended by inserting requirements relating to trust account records and annual reports.
There is a requirement under new clause 14 that a head contractor must keep records showing the amounts deposited or withdrawn from a retention money trust account, with that requirement continuing for a period of at least three years after closure of the account.
There is also a requirement under new clause 16 that a head contractor operating a retention money trust account in a financial year must, within one month after the end of the financial year, provide the following to the Chief Executive of the OFS:
- 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 $1,500 fee to accompany the account review report and retention account statement
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 has also been amended by empowering the Chief Executive of the OFS to issue directions to head contractors, subcontractors and any ADI requiring the provision to the Chief Executive, 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
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 ("the $20 million threshold"); and
- that construction contract with the principal was entered into after the commencement of Part 2 of the Regulation (which commences on 1 May 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 first entered into.
This has the consequence of making a head contractor's contract subject to the retention money trust account requirements if the value of the construction project increases and reaches the $20 million threshold at some point in time after the head contractor's construction contract with the principal is first entered into.
In that circumstance, the head contractor will be required to hold retention money in trust for subcontractors where the relevant subcontract is entered into after the $20 million threshold is reached.
Head contractors need to implement processes to comply with new retention money trust account requirements
As the new retention money trust account requirements will commence on 1 May 2015 (and will apply to retention money held under head contracts entered into after that date and having a value of at least $20 million), head contractors should implement the appropriate processes, if they have not already done so, to comply with the new trust account requirements for subcontractor retention money as soon as possible.Charles Brannen
Construction and engineering
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