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29 Apr 15
NSW head contractors must prepare for retention trust money reforms

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Changes commence 1 May 2015

WHO SHOULD READ THIS

  • Head contractors and subcontractors who operate or oversee projects in New South Wales

THINGS YOU NEED TO KNOW

  • Under a newly introduced Regulation, head contractors in New South Wales will be required to hold retention money on trust for projects valued at $20 million or more.

WHAT YOU NEED TO DO

  • From 1 May 2015, head contractors must be compliant with the new trust account requirements and reporting obligations under the Regulation.

From 1 May 2015, head contractors in New South Wales must establish trust accounts for retention money held under subcontracts for projects valued at $20 million or more under the new Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW) (Regulation).

Does the new Regulation apply to me?
The Regulation will apply to head contractors in New South Wales, who will be required to hold retention money on trust (with an approved deposit-taking institution (ADI)) where:

  • the head construction contract is entered into on or after 1 May 2015
  • the project is in New South Wales, and
  • the value of construction contract is equal to or greater than $20 million (including variations).

The Regulation will also apply where the initial value of the project is not $20 million but reaches the $20 million threshold at some later point during the project.

Changes to the reforms previously proposed
In our earlier Focus alert, The State Government's retention trust scheme set to protect subcontractors in New South Wales, we reported on a draft regulation released in late 2014 by the New South Wales government on the proposed trust account scheme for subcontractors' retention money in New South Wales.

Following a period of public consultation, a number of changes were made to the draft regulation which are now included in the Regulation.  The key changes include:

  • there are no longer any obligations imposed on an ADI under the Regulation
  • a new clause 5(4) has been included to clarify that the Regulation will apply when a project (including variations) reaches the $20 million threshold but only for subcontracts entered into after the $20 million threshold is reached
  • head contractors have fourteen days (instead of the previous seven days) after establishing a retention money trust account to notify the Chief Executive in writing
  • head contractors have three months (instead of the previous one month) after the end of the financial year to provide the Chief Executive with the required annual report, and
  • a $1,500 fee is to accompany an account review report and retention account statement.

Implications for the industry
As the Regulation starts on 1 May 2015, head contractors, must be in a position to comply with the Regulation.  Head contractors need to be familiar with the new trust account requirements and the reporting obligations under the Regulation.  They should be establishing suitable accounting processes, where necessary, to comply with the Regulation.

If not already completed, it will also be necessary for head contractors to review their contracts to consider what changes will be required to bring them into line with the Regulation.  This is important as penalties apply for non-compliance with the Regulation.

Subcontractors should also be familiar with the Regulation to ensure their rights are fully protected under head contracts where the Regulation applies.

The changes are also good news for banks and other financial institutions as the Regulation does not impose any further obligations on ADIs.  However, they will be watching how the regulation operates where there is an insolvent head contractor.  The Regulation states that retention is not available for payment of the debts of the head contractor but also provides that this does not affect any ‘just claim that a head contractor may have against’ retention.  In response to the draft regulation we suggested clarification of this clause of the regulation to replace ‘just claim’ with ‘rights’ under the head contract but this was not taken up.  It remains to be seen whether the use of the term ‘just’ results in courts taking into account matters additional to the rights under the head contract.
 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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Related publications

For details on the previous draft of the Regulation, please refer to: