Andrew Kelly and Tom McKillop

Goodbye project bank accounts, we barely got to know you

Andrew Kelly and Tom McKillop

12 March, 2020

Building and construction contracts

Changes are being made to the way accounts need to be established for Queensland building and construction projects. The changes should be reviewed carefully to avoid exposure to heavy penalties.

The Queensland Government introduced a project bank account (PBA) regime with the commencement of the Building Industry Fairness (Security of Payment) Act 2017 (the Act) in late 2018. The roll-out of the new rules has already commenced, PBAs have been implemented on government projects valued between $1 million and $10 million tendered after 1 March 2018 and were set to expand across the building industry in the coming years.

In December 2019, we reported that the Queensland Government had accepted a range of recommendations made by a pair of independent reports into the Building Industry Fairness reforms. In response to these recommendations, on 5 February 2020, the Queensland Government introduced the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020 (Qld) (Amendment Bill) to overhaul Chapter 2 of the Act and replace PBAs with ‘Project Trusts’. The Amendment Bill is touted as a simplified version of the existing PBA system, but the new reforms go far beyond a name change.

What are Project Trusts?

The Project Trusts model requires the establishment of two trust accounts for eligible building contracts (instead of three accounts under the old regime):

  1. a project trust account (PTA); and
  2. a retention trust account (RTA).

It also establishes a range of new powers for the commissioner to oversee and investigate trust account activity.

Project trust account

A PTA is required for any eligible contract (that is not exempt under the Act) and must be opened by the contracted party (for example, the Head Contractor) within 20 business days after the first subcontract is entered into. The PTA must be:

  • held at an approved financial institution;
  • held under a name that includes the trustee’s name and the word ‘trust’; and
  • electronic records must be kept for all deposits and withdrawals from the PTA.

The Head Contractor is both the trustee and a beneficiary of the PTA, and the subcontractor is a beneficiary of the PTA. The beneficial interest in the PTA is broken down as follows:

  • a subcontractor has a beneficial interest in any amount it is entitled to be paid under the subcontract; and
  • the Head Contractor has a beneficial interest in the remainder.

All payments from the contracting party (for example, the Principal) are to be paid into the PTA. The Head Contractor must pay its subcontractors out of the PTA and a subcontractor’s right to payment takes priority over the Head Contractor. This means that the Head Contractor, as trustee over the PTA, must not withdraw an amount unless there would still be a sufficient amount remaining in the PTA to pay all amounts owed to subcontractors at the time of withdrawal.

The Amendment Bill has prescribed strict penalties for contraventions of the rules governing PTAs.

Retention trust account

A RTA must be created to hold money that has been withheld from payment under the contract, for example, an amount retained under the contract to make up a security. An RTA must be created before any money is actually retained but a contracting party can use the same RTA across all of its contracts. The RTA must be:

  • held at an approved financial institution;
  • held under a name that includes the trustee’s name and the word ‘trust’;
  • remain open until all retention amounts have been released or the account has been transferred to an alternative financial institution; and
  • electronic records must be kept for all deposits and withdrawals from the RTA.

The contracting party (for example, the Principal) is both the trustee and a beneficiary of the RTA, and the contracted party (for example, the Head Contractor) is a beneficiary of the RTA. The beneficial interest in the RTA is broken down as follows:

  • the Head Contractor has a beneficial interest in all retention amounts held in the RTA that were withheld from them; and
  • the Principal has a beneficial interest in all amounts held in the RTA after subtracting the Head Contractor’s beneficial interest.

The Amendment Bill imposes restrictions on payments to and from a RTA, additional notification and training requirements also apply. Strict penalties apply for non-compliance with these provisions.

Roll-out and application

Project Trusts will be rolled-out over four phases:

  1. From 1 July 2020, Project Trusts will apply to eligible government and Health and Hospital Services’ building contracts of $1 million or more.
  2. From 1 July 2021, Project Trusts will be extended to the private sector and local government for eligible building contracts valued at $10 million or more.
  3. From 1 January 2022, Project Trusts will cover eligible building contracts worth $3 million or more.
  4. On 1 July 2022, Project Trusts will be required for all eligible building contracts valued at $1 million or more.

Project Trusts will not apply to:

  • contracts between the State and a state authority;
  • contracts for small scale residential construction work (i.e. residential construction work for less than three units);
  • contracts for maintenance work (testing, taking samples, deterioration, prevention or restoration works);
  • contracts for building work services (administration, advisory, management or supervisory services); or
  • contracts with less than 90 days until practical completion.

Oversight powers

The Amendment Bill introduces a range of broad oversight powers to be exercised by the commissioner including:

  • the power to maintain a register of notified Project Trusts and publish information;
  • the power to demand the following information:
    • trust account records;
    • the contract to which the trust account relates;
    • deposits and withdrawals from the trust account;
    • details of the financial institution at which the trust account is held;
    • the beneficiaries’ contact information;
    • details of the beneficiaries’ private bank accounts; and
    • other information the commissioner considers reasonably necessary to exercise their powers;
  • the right to apply to the Supreme Court for directions about an amount held in a Project Trust;
  • the power to appoint a special investigator with broad powers of their own;
  • in the event of termination, insolvency, or if the commissioner reasonably suspects a Project Trust is not being used in accordance with the Act, the commissioner has the power to direct a trustee to:
    • not withdraw an amount without the commissioner’s written approval; or
    • give the commissioner an account review report for the trust account.

Auditing requirements

The Amendment Bill creates new auditing requirements for trustees to engage an independent auditor to carry out a review of trust accounts. These audits must be carried out at times prescribed by regulation (which is yet to be released). The trustee must provide all trust records to the auditor for the production of an account review report. A copy of this report will be given to the trustee and the commissioner. The auditor must notify the commissioner within 5 days of forming the belief that a Project Trust is not in accordance with the Act, or an irregularity exists. Strict penalties apply for any contravention of the auditing requirements.

Summary

In advance of the roll-out of the Project Trust model, all players in the Queensland building and construction industry should review the changes carefully to avoid exposure to heavy penalties.

If you have any questions about the Amendment Bill or Project Trusts, please contact us.

Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au

Tom McKillop | Senior Associate | +61 7 3338 7530 | tmckillop@tglaw.com.au