Market update

The New South Wales (NSW) market continued its growth trend towards the end of the year with residential property prices rising in Sydney by 2.7% in the September quarter to see yearly growth of 14.6%. The commercial property market in Sydney is achieving positive results with office rental yields rising by 1.6% in Sydney for the year to September 2014. The industrial and retail property markets are performing as expected for the year. It’s expected that the positive trends we saw throughout the 2014 year will continue in 2015. 

Construction retention trust scheme

The NSW Government is proposing the establishment of a construction retention trust scheme through the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2014. The scheme sets out to reduce the impact of insolvency on subcontractors and end the widespread industry practice of using subcontractors’ trust money for the head contractor’s working capital. The retention scheme will be the first of its kind in Australia.

NSW Fair Trading recently released a draft Regulation and Regulatory Impact Statement for public comments. In line with the recommendations and responses to the Collins Inquiry, which addressed reasons for insolvency within the business industry, the draft Regulation aims to:

  • protect subcontractor retention monies
  • improve transparency of payments to subcontractors; and
  • minimise red tape

The Regulation will initially apply to head contractors and their direct subcontractors for projects valued at $20 million plus those that are entered into after the Regulation commences. Even if a contract falls short of the $20 million threshold at the time of signing, it may become subject to the Regulation as a result of any variation which increases the overall contract value. However, the State NSW Government is looking into reducing this cap for smaller contracts over the upcoming years. 

Payments for subcontractors will be protected by requiring construction companies to hold retention money in a trust fund. Head contractors will be responsible for holding retention money in their own accounts, and these trust accounts will be subject to audit (within one month of the financial year) to ensure trust accounts are being maintained as required. The trust account money must be held with an authorised deposit-taking institution and such an account is to be established as a separate trust account for:

  • retention money held in respect of a particular subcontractor
  • all retention money held in connection for a particular project of the head contractors; or
  • all retention money held in connection with two or more projects of the head contractor

Penalties are also set in place for failure to comply with this retention scheme, resulting in construction companies being fined up to $22,000. The NSW State Government is looking further into making directors personally liable for any breach of their responsibility in complying with this scheme. The Department of Fair Trading have advised that they will be looking over audit reports to ensure that the head contractors are holding retention money in their own accounts in attempts to monitor this new cash retention trust scheme.

NSW Fair Trading took submissions from the industry in January 2014 and following a review of submissions and some tweaking of the Draft Regulations, the new regulations will have an effective commencement date of 1 May 2015.