21 Nov 2013

Trust accounts for retention money foreshadowed with further amendment to SOP Act

by Frank Bannon, Mark Gillard

Head contractors will be required to pay retention money into a trust account.

The Building and Construction Industry Security of Payment Amendment Bill 2013 (NSW), which incorporates some significant changes to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act), has now passed and received Royal Assent – but with one important further change relating to requirements in relation to retention money.

Further amendment – trust accounts for retention money

The change empowers the making of regulations requiring head contractors to pay retention money into a trust account and to hold it on trust for the subcontractors entitled to the money.

"Retention money" is defined as "money retained by a head contractor out of money payable by the head contractor to a subcontractor under a construction contract, as security for the performance of obligations of the subcontractor under the contract". This broad definition should capture the types of retention arrangements common in many construction contracts.

As yet no regulations have been made. Until a draft of the proposed regulations is released, it is difficult to know exactly how the proposed trust accounts might operate and to what extent they will place an additional administrative burden on head contractors.

The Amendment specifically provides for the regulations to address:

  • the procedures to be followed in connection with the authorisation of payments out of a retention money trust account;
  • the keeping of records in connection with the operation of a retention money trust account and the inspection of those records by the Small Business Commissioner; and
  • the resolution of disputes in connection with the operation of a retention money trust account.

Finally, it is foreshadowed that, when made, the regulations may create an offence punishable by a maximum fine of $22,000 for any failure to comply with the requirements relating to trust accounts.

When will this come into effect?

The Act says it will come into effect on a day to be appointed by proclamation, but the Department of Finance and Services has indicated that the Amendment is currently projected to commence in April 2014. However, it should be noted that the Amendment will only apply to contracts executed after it has commenced. The proposed requirement for trust accounts for retention money will not commence until regulations are made in respect of this issue.

Further review of the SOP Act

The introduction of trust accounts for retention money was another recommendation of the Collins Inquiry into Insolvency in the NSW Construction Industry and represents a further step by the NSW Government in implementing recommendations of that inquiry.

The Government has also indicated that a comprehensive review of the SOP Act will be undertaken in 2015. That review will consider a number of other recommendations made by the Collins Inquiry and should provide industry participants and other stakeholders with an opportunity to make submissions both on their experiences with the Amendment and other proposed changes to the legislation. We will continue to keep you up to date with developments in this rapidly changing area.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.