New financial reporting obligations have arrived in Queensland
The building and construction industry has endured a spate of construction-related insolvencies in recent years. According to the Australian Securities and Investments Commission (ASIC) almost one fifth of all corporate insolvencies in the 2016-17 and 2017-18 financial years were construction-related companies1. Although failures in construction are not a new phenomenon given the traditional boom and bust economic cycles, it has prompted regulators and licensing authorities to further tighten the industry's regulations.
Each state/territory has its own builders' licensing legislation and administration.
As part of the Queensland Government's building industry fairness reforms, new laws on 1 January 2019 strengthen the minimum financial requirements (MFR) for licensing, which are being introduced in two phases. Interestingly, in 2014 the licensing reporting requirements were reduced. However, since then, numerous high-profile insolvencies have called for the Queensland Building and Construction Commission (QBCC) to:
- better monitor licensees' financial situations
- take appropriate action where a licensee may not be operating a financially sustainable business.
On 1 January 2019, phase 1 began through the new Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 and:
- re-introduced mandatory annual reporting for most licensees
- required more stringent reporting of decreases in the assets of higher-risk licensees
- clarified how assets are treated.
Phase 2 is expected to begin on 1 April 2019 and will introduce higher reporting standards for category 4–7 licensees (larger, higher risk licensees i.e. revenue over $30 million), which involves repealing the existing MFR Board Policy and placing its provisions in a regulation.2
Stronger reporting requirements
- provide financial information to the QBCC annually
- report significant decreases in net tangible assets (20% for categories 4–7; 30% for other licensees: self-certifying licensees (1 and 2) and category 1-3 (between $600,000 and $30 million in revenue)
- provide additional and more detailed financial information (for higher revenue licensees).
Additionally, the upper revenue limit for self-certifying licensees (1 and 2) will increase from $600,000 to $800,000.
New criteria for licensee's assets and revenue now include:
- Personal recreational and unregistered vehicles cannot be used to meet minimum asset thresholds.
- Clarification about when money in project bank accounts can be classed as an asset or revenue.
Data quality and availability for the QBCC
Improvements to the licenses and MFR include:
- QBCC will get better independent verification of an MFR report and recover costs.
- If an accountant makes 'material changes' to an MFR report, they must clearly identify them and support those with updated financial information.
- If a licensee relies on a deed of covenant and assurance, they must give the QBCC detailed financial information about the covenantor to show they can honour their agreement.
- Similar requirements to the above will be introduced for related-entity loans, so the QBCC can assess whether these loans are collectable.
Penalties for non-compliance
New penalties and offences will apply for failing to comply with the requirements e.g. failing to provide financial information annually, providing false or misleading information, or refusing to supply financial information at the QBCC's request. The existing penalties also continue to apply. Under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIFA), the QBCC can place conditions on a licence, or take steps to suspend or cancel the licence.
To help motivate all parties involved in running a licensed company to meet the new MFR, Phase 2 will include executive officer liability and escalating penalties. QBCC's Commissioner, Brett Bassett recently stated that almost half of all financial documents submitted to QBCC are either incorrect or require clarification. "Our data from the last financial year shows that when the QBCC's investigators receive financial documents from licensees, in 43 per cent of cases the information is either incorrect or needs clarification".3
Further distress in an already troubled industry is inevitable given tighter regulations, the contraction in the availability of credit, and the continued slowdown in the construction industry nationally (as recently reported by the Australia Bureau of Statistics for the December 2018 quarter4).
With 29 partners and over 100 staff in 27 locations across Australia, Worrells has both the experience and resources to assist businesses in the construction sector experiencing financial distress. Your local Worrells Partner is available to talk through the options available to your clients in the building industry.
1 ASIC's Insolvency statics- series 1A Companies entering external administration by industry
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