Property of Pitcher Partners February 2018

FEBRUARY 2018

PROPERTY OF PITCHER PARTNERS

© Pitcher Partners 2018 Inside Cover: The Coworking Evolution, see page 7 for full article Front Cover: Middle density living, see page 6 for full article

CONTENTS 5

WELCOME

6 AUSTRALIA IS TRENDING TOWARDS MEDIUM DENSITY LIVING 8 STRUCTURING INVESTMENT IN AUSTRALIAN REAL PROPERTY – MANAGED INVESTMENT TRUSTS 10 PROPERTY DEVELOPERS AND INVESTORS LOOK TO ALTERNATIVE SOURCES OF FUNDING 11 CGT MAIN RESIDENCE AND WITHHOLDING REFORMS FOR NON-RESIDENTS 12 THE INCREASING COMPLEXITY OF PROPERTY SALES IN AUSTRALIA – GST WITHHOLDING 14 CHANGES TO THE QUEENSLAND BUILDING INDUSTRY REGULATORY ENVIRONMENT

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PROPERTY OF PITCHER PARTNERS / DECEMBER 2014

WELCOME By Andrew Beitz, Pitcher Partners, Adelaide At Pitcher Partners we have a passion for the property industry. We are attuned to the needs of all contributors in this complex and exciting sector – owners, developers, investors, builders, values, agents and of course debt/equity participants. We have a well-established and proven track record in contributing to our clients’ success based on our extensive knowledge and our intimate approach to servicing our clients. This issue of Property of Pitcher Partners will have a focus on investing in Australian Real Property Tax Structuring. Firstly, Knight Frank will take a look at how Australia is trending towards medium density living and how the global search for yield has driven Australian commercial markets to new highs. Phil Shepherd of our Adelaide office takes a look at structuring investment in Australian real property through Managed Investment Trusts. Cole Wilkinson from Brisbane provides a comprehensive overview of the changes to the Queensland building industry regulatory environment. Melbourne Pitcher Partners’ Andrew Clugston discusses the alternate sources of funding available to Property developers and investors. Across in Perth, Joshua Haque looks at the pending removal of the CGT main residence exemption for non-residents which is designed to curtail property tax concessions for non-residents. He reviews the current rules and the sting in the proposed legislation. Finally, Scott McGill of Pitcher Partners Sydney writes about the increasing complexity of property sales in Australia, due to the new GST withholding tax regime which will apply to purchasers of new residential premises and new residential subdivisions for contracts entered into from 1 July 2018. We welcome your feedback – if you have any suggestions on articles you would like us to cover in future editions please send them through to [email protected]

PROPERTY OF PITCHER PARTNERS / FEBRUARY 2018

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AUSTRALIA IS TRENDING TOWARDS MEDIUM DENSITY LIVING As housing affordability remains an issue in many major Australian capital cities, purchasers are now opting to buy into the townhouse market, or upgrading to a townhouse as the next best option when priced out of the standalone, low density, dwelling market. Owning a piece of land, although potentially under an Owner’s Corporation and a traditionally smaller allotment of land than an average landed dwelling, is becoming a standard compromise for many Australian families. This concept of freehold land ownership has also become more attractive for offshore buyers, often unattainable in their home country. The medium density market is also being driven by local suburban downsizers, those who don’t necessarily seek a full-time tree-change, or sea-change, rather looking at a lower-maintenance home in a similar location, close to a familiar community and amenities. The trend towards medium density development has been evident in the types of sites being purchased by developers across Australia. In 2014/15 the portion of medium density development sites was 3%, by value, of all residential development sites sold and tracked by Knight Frank. Two years later, in 2016/17, this has increased to a 13.8% share of total disclosed sales. This trend away from high density development dominating the market has been most in evidence within Greater Sydney and Greater Melbourne, where medium density residential development sites accounted for 13.8% and 15.5% of sales by value respectively in 2016/17. In contrast, two years ago in 2014/15, medium density sites accounted for 1.3% in Greater Sydney and 3.5% in Greater Melbourne. The increase in the total value of Greater Sydney medium density site sales over recent years has also been reflected in the rise of medium density development approvals. The number of dwelling units approved in medium density residential buildings (one and two-storey semidetached, row or terrace houses & townhouses, plus flats, units or apartments in a one, two or three-storey block) in NSW increased 79% over the past five years, according to the Australian Bureau of Statistics.

Development site sales by density

Total volume, by value, by potential density

2016/17 2015/16 2014/15 0% Low density

20%

40%

Medium density

60%

80%

100%

Higher density

SYD & MEL sales $5M+; BNE, PER & GC sales $2M+ Source: Knight Frank Research

Global search for yield has driven Australian commercial markets to new highs With the US, Canada and the UK increasing official interest rates during 2017, the dominant question for the Australian property market is how this will impact the pricing of risk, global wholesale cost of funds and the timing of official interest rate increases in Australia. At the time of writing the market is pricing a 25 basis point increase to the RBA target cash rate in Q1 2018 with positive signs from the economy being somewhat counteracted by lower wages growth and benign inflation. To date, rather than directly move interest rates, the RBA and APRA have been cooling the residential investment and development market through influencing the enforcement of more stringent lending criteria, boosting investor interest rates and disincentives for interest only loans on residential investment.

The global search for yield has seen Australia continue to be a favoured destination for capital with the relatively higher yields and stable market a drawcard for investors. This weight of money has seen yields fall below 5% for prime assets, lower than in 2007, as risk has been The NSW Department of Planning and Environment has further re-weighted given the quantum of investment demand; particularly for prepared a draft Medium Density Design Guide, identifying the “missing prime or trophy assets in the gateway cities of Sydney and Melbourne. middle” to encourage more low-rise medium density housing to be built Offshore purchasers are expected to account for approximately 40% of in NSW. It is proposed the Design Guide will be used for both complying total non-residential transaction activity in 2017, on a par with previous developments and development applications to promote greater years. However, despite the strong demand for assets and high pricing, housing choice and more housing affordability outcomes for medium the total transaction turnover for 2017 is expected to be lower than in density housing types across NSW. 2015 and 2016 with relatively fewer assets available for sale. In Victoria the number of medium density dwelling units approved has Solid fundamentals ensured the office market remained the focus of risen by 61% over the five years to June 2017. More recently medium investment activity, however, with demand for investments largely density dwellings approved increased by 0.5% in the Year ending June outweighing assets available for sale, investor demand has spread to 2017, defying the decrease in all approvals of 3%. all asset classes including retail, industrial, hotel/tourism and student accommodation. Additionally the build-to-rent residential development The shift from developers relying on higher density sites for market is anticipated to launch in the short-to-medium term with development projects towards medium density projects, which are a significant weight of funds seeking this inelastic, steady-income considered lower risk for delivery of sales and construction, is likely investment class, although the regulatory environment remains to continue over the coming years with demonstrated high market somewhat hostile to this sector. acceptance from both owner occupiers and investors alike.

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Where to Next Disruptors to watch include the oversight of capital leaving China, the entrance of Amazon and the adoption of more flexible office workplaces (see ”The Coworking Evolution”). Formal announcement of increased scrutiny over capital leaving China for offshore investment was long-expected and predictably lowered activity in H2 2017 as investors erred on the side of caution rather than test the regulators. As this is bedded down Chinese based investors are already returning to significant real estate investments, however some highly speculative activity is likely to remain curtailed and the recycling of capital already offshore will be enhanced. The long-awaited entrance of Amazon to Australia will compound pressure already felt in the traditional retail space, with further attrition likely of brands out of touch with multi-channel retailing. There is greater churn in retail brands than ever before and large retail centres have needed to adapt, further enhancing themselves as entertainment destinations. This means a greater reliance on food & beverage tenants but also encompasses other leisure and entertainment activities, more flexibility to embrace pop-up brands and large showroom users such as car retailers. Amazon will also have an impact on the industrial market by showcasing new pick and pack technologies and shaking-up the business – consumer delivery chain (also known as “the last mile”), with the current courier platform from a centralised depot becoming relatively inefficient. Overall, despite political shocks, potential global conflicts and much posturing about the end of expansionary central bank monetary policy, investment markets remained relatively benign during 2017. The weight of funds, relatively affordable debt and search for yield has seen new markets and benchmark low yields embraced by investors. Will 2018 be the year that volatility returns to the investment sphere or will improving global economic fundamentals continue to pave the way for new investment highs?

The Coworking Evolution In Australia, the expansion of coworking has gathered significant momentum with the industry now occupying 193,190m² across six capital cities, equating to 0.6% of total office stock. Melbourne accounts for almost 50% of the area occupied followed by Sydney at 38%. Internationally, Central London has 836,000m² of coworking space, representing 4% of total office stock while Manhattan, New York has 560,000m² of coworking space, which is 1.2% of total office stock. This indicates that despite the quick expansion of coworking in Australia, global benchmarks indicate the potential for greater market penetration. The primary drivers for coworking space exist at opposite ends of the business spectrum. According to the ABS between 83% and 89% of businesses located across the five major Australian capital cities employ four people or less. These smaller companies are seeking greater flexibility than traditional office leases and a more collaborative and open experience than that provided by traditional serviced offices. At the other end of the scale, major corporates are increasingly embracing coworking facilities as another option for their corporate occupancy strategy as coworking spaces allow corporates to scale up, or scale down, at any point in time and can also provide a focussed alternative destination for specific projects. The year of 2017 will be recognised as the break-out year for coworking in Australia with 34% growth in the floorspace occupied from the 53 new coworking spaces covering 66,555m². To a large extent this was driven by the arrival of WeWork. Opening its first Australian operation in October 2016, WeWork grew quickly to have five locations covering 26,260m² by mid-2017, and with continued expansion, is expected to occupy almost 45,000m² by the start of 2018. IBM has recently agreed a deal to take all desks at WeWork’s 88 University Place facility in New York, the first reported case of a single corporation taking an entire coworking facility. This scope for corporates to outsource more of their office requirements to coworking spaces has the potential to be a game-changer for the office market across Australia. To further explore the generational shift which has driven workspace design and initiated the coworking culture see Culture Clash: Flexible workspace, Coworking & The Future by Kimberley Paterson & John Preece. http://research.knightfrank.com.au/wscwf2017.pdf

KnightFrank.com.au/research Latest content in the palm of your hand

Contacts Jennelle Wilson Senior Director Research, Knight Frank Australia [email protected] Michelle Ciesielski Director Residential Research, Knight Frank Australia [email protected]


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STRUCTURING INVESTMENT IN AUSTRALIAN REAL PROPERTY – MANAGED INVESTMENT TRUSTS

By Phil Shepherd, Principal, Pitcher Partners Adelaide Despite the growth rate of Australian property prices easing in recent months, Australian real estate continues to be a desirable investment option for many foreign investors with returns well in excess of what can be achieved overseas (particularly in Asian property markets). However, when calculating the effective return on an investment, the tax payable will often represent a substantial cost to the investor. Some of the factors that will dictate the effective tax rate on a property investment include:

The MIT regime was established to provide a favourable investment vehicle to attract foreign capital into Australia.

The particular benefits of the regime are: • a low tax rate of 15% on trust distributions to investors who are resident in a country with which Australia has an exchange of information agreement • an election to treat certain gains on assets on capital account.

• The nature of the gains generated (i.e. revenue or capital)

There are strict eligibility requirements which must be met to qualify as a MIT. These include:

• How the investment has been funded (i.e. debt or equity)

• An Australian residence test

• The legal structure in which the investment is held

• The requirement for the trust to undertake most of its investment activities in Australia

• Timing at which income and deductions arise and • The country of residence of the investor While the tax cost associated with an investment return should be given due consideration, good commercial sense should always take precedence over trying to achieve a low (or no) tax outcome. So what structure should you use to acquire Australian real estate? The answer is, “it depends.” A non-resident individual looking to acquire a residential investment property is likely to have a very different structure to that of a multinational corporate group looking to acquire a commercial property to facilitate the expansion of its Australian operations. In both these scenarios, the foreign resident investors can most likely achieve a suitable tax result. However, where the circumstances permit, a Managed investment Trust (MIT) can achieve a great tax outcome for its investors.

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• The trust must not carry on or control an active trading business (i.e. it must be a passive investment) • The trust must be a ‘Managed Investment Scheme’ within the definition under the Corporations Act • The trust must be “widely-held” (i.e. generally at least 25 unrelated members) • The trust must be operated and managed by an appropriately regulated entity (generally an AFSL holder). A MIT is therefore most appropriate where there is a broad spectrum of investors pooling their funds into a common investment pool.


To demonstrate how effective the MIT structure can be in practice, consider the following example:

Flow of Funds

MIT

Investors

Rental Income

$100.00

-

1

MIT acquires an Australian property for $1,000

Interest Expense – Bank

($30.00)

-

2

Funding is provided by way of:

Cash Profit

$70.00

-

$600 bank debt at 5% p.a. (interest $30 p.a.)

Interest – Investors

($18.00)

$18.00

$200 loan from investors at 10% p.a. (interest $20 p.a.)

Withholding Tax (10%)

($2.00)

-

$200 equity injection from the investors

Cash Distribution

($48.50)

$48.50

3

Tax depreciation on the property and fixtures is $40 p.a.

Withholding Tax on Taxable Distribution1

($1.50)

-

4

Gross rental income is $100 p.a.

-

$66.50

Net Cash 1

By making use of the benefits under the MIT regime and the tax deferral of depreciation deductions, the effective Australian tax rate during the holding period is only 5% (being $3.50 total tax out of a $70 cash profit).

Qualifying investors

The tax deferred distribution of $40 relating to depreciation will not be subject to withholding taxes, however, it will reduce the cost base of units held by the investors. When the property is eventually sold, any gains (including the recoupment of depreciation deductions) will be subject to a 15% withholding tax.

OFFSHORE AUSTRALIA Distribution

$50

WHT

($1.50)

Cash

$48.50

Equity $200 + Debt $200

MIT

15% on Taxable Income of $10 ($100 [rent] – $50 [interest] – $40 [depreciation] = $10)

Interest

$20

WHT

($2)

Cash

$18

The real world application of the MIT rules is complex and investors should obtain personal financial and taxation advice before investing in such a structure. However, there are some fantastic outcomes that can be achieved in the right circumstances.

Contact

Bank loan $600 Interest $30

Property

Phil Shepherd Principal, Pitcher Partners Adelaide 08 8179 2800 [email protected]


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PROPERTY DEVELOPERS AND INVESTORS LOOK TO ALTERNATIVE SOURCES OF FUNDING BORROWING OFFSHORE IS NOT WITHOUT ITS RISKS By Andrew Clugston, Partner, Pitcher Partners Melbourne Australia’s property market has experienced strong growth in recent years, with offshore demand contributing to a surge in prices across all sectors of the market. Overseas interest in Australian real estate comes from various sources including individual investors, family groups, property developers, pension funds, and real estate investment trusts. In its 2015-16 annual report, the Foreign Investment Review Board, Australia’s foreign investment regulator, stated China was the largest source of foreign investment approvals, predominantly in real estate, although recent regulatory changes in the Asian country are likely to limit that demand. Such has been the rapid growth in housing prices, the Reserve Bank of Australia and the banking regulator, the Australian Prudential Regulation Authority (APRA), concerned with the mounting risk of a housing bubble, have voiced concerns about Australian bank mortgage lending standards. Earlier this year, APRA introduced additional supervisory measures to “reinforce sound residential mortgage lending practices in an environment of heightened risk”. These measures included limiting the flow of interest-only residential mortgages and reducing loan-to-value ratios. APRA’s intervention appears to have had the desired effect with a marked slowdown in lending by Australian banks to property developers and investors. Not to be deterred, developers and investors are looking elsewhere for capital with foreign banks, debt funds, and non-bank lenders stepping in to fill the funding void left by Australian banks. More readily available funding from foreign banks and, in some cases, lower interest rates, can make them an attractive alternative to Australian banks. However, borrowing offshore is not without its risks. Exposure to currency risk needs to be carefully managed, and there can be an additional cost in the form of interest withholding tax.

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In search of greater returns, investors have also funnelled equity into debt funds, which in turn lend to real estate projects, often at higher loan-to-value ratios than the banks but, to compensate for the increased risk, at higher interest rates as compared to senior debt. Pitcher Partners has assisted with the establishment of several pooled and multi-class debt funds. Recent changes to the Australian tax laws have provided greater clarity and certainty in relation the taxation of managed investment funds and their investors, making such funds an increasingly attractive asset class. We have also assisted many property investors and developers in setting up funding structures to facilitate borrowing from foreign banks and from other alternative sources of finance such as debt funds. There are a range of commercial and tax issues to navigate, and every property investment or development has its own particular nuances that require special consideration. For example, some foreign banks will only lend to a company that is incorporated in the same country. That company may the on lend to the developer or investor in Australia, which may require a host of Australian and foreign tax issues to be carefully navigated. These include the transfer pricing rules, which require cross border loans between related parties to be on arm’s length terms, double tax treaties, and withholding tax provisions. The current Australian real estate lending market provides opportunities for alternative lenders, and property investors and developers, but the commercial and taxation issues need to be carefully considered in accessing these sources of finance.

Contact Andrew Clugston Partner, Pitcher Partners Melbourne 03 8610 5309 [email protected]


CGT MAIN RESIDENCE AND WITHHOLDING REFORMS FOR NON-RESIDENTS

So what are the current rules and what is the sting in the proposed legislation? Currently residents and non-residents alike can apply a CGT exemption to disregard any capital gains made on the sale of their main residence. This exemption generally applies to a single property at any one time, and to use it, the person must have established the property as their main residence by having previously resided in the property. If a person does not use the property for income-producing purposes, the exemption could be utilised indefinitely. However if the property was used for income producing purposes, the maximum period the dwelling can be treated as a main residence is six years. If used beyond that six year period, only a partial main residency exemption may be obtained in relation to the sale of that property. The proposed legislation would remove a foreign tax resident’s ability to use the main residence exemption. It is planned to be applied for any sale contract entered into on or after 9 May 2017, unless the transitional measures apply.

By Joshua Haque, Senior Manager, Pitcher Partners Perth The pending removal of the CGT main residence exemption for non-residents is the most recent item in a list of reforms designed to curtail property tax concessions for non-residents. The change was first announced by the government as part of the 2017-18 budget and is one measure the government hopes will assist to increase housing affordability. Treasury has now released draft legislation and with the consultation period closed, implementation of this reform is now heading towards Parliament.

If a non-resident holds an existing property at 9 May 2017 the transitional measures permit the use of the main residence exemption provided the contract for sale is entered into prior to 30 June 2019. Under the proposed rules, the partial main residence exemption would no longer apply, if, at the time of the CGT event, the individual is nonresident. The proposed change would also have an impact for trustees of a deceased estates if, at the time of death, the deceased was nonresident. Determining ones residency status under Australian tax rules can be a complex exercise with the outcome heavily dependent upon the individual circumstances of each case. The proposed changes mainly affect Australian citizens living abroad on an indefinite basis. Under the proposed rules, the crucial time to consider the tax residency of the vendor is at the time the sales contract is signed. The government has also recently passed an increase to the foreign resident capital gains withholding rate from 10% to 12.5% while also reducing the threshold for which it applies in relation to direct property transfers to $750,000. All vendors who dispose of properties after 1 July 2017 are required to provide a tax clearance certificate to the buyer which confirms their residency status at the time of sale. If a foreign resident is intending to utilise the transitional CGT main residence measures, a withholding variation is required to be made. While it could be said the removal of the CGT main residence exemption for non-residents may incentivise people to sell their home prior to departing Australia, it is also no secret that in the context of a fiscally tight budget, non-residents represent an easy target for revenue raising measures. When combined with the removal of the CGT discount in 2012, the government is slowly eroding the tax concessions previously provided to non-residents. With such changes now being implemented, it is critical for people working outside Australia to have a clear understanding of how/when their residency status will change and what impact this will have on the assets they hold.

Contact Joshua Haque Senior Manager, Pitcher Partners Perth 08 9322 2022 [email protected]


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THE INCREASING COMPLEXITY OF PROPERTY SALES IN AUSTRALIA – GST WITHHOLDING By Scott McGill, Partner, Pitcher Partners Sydney In the recent released exposure draft legislation by the Treasury, a new GST withholding tax regime will apply to purchasers of new residential premises and new residential subdivisions for contracts entered into from 1 July 2018. This is just one more addition to what has become a very complex process, and perhaps a boon as well as a headache for conveyancers. Eastern states already have different Duty treatment for residential property, with other states to follow, plus an onerous CGT withholding regime on purchase, that assumes buyers are foreign resident and subject to withholding until proven otherwise. It is now critical clients are not only properly advised on the GST treatment and contractual provisions, but also have all bases covered on GST and CGT withholding before exchanging contracts. The new GST withholding, at its simplest, requires purchasers to withhold 1/11 of the purchase price and pay directly to the ATO at settlement. As originally tabled subject only to a transitional period for contracts entered into before 1 July 2018 and settling before 1 July 2020. This measure is an attempt to address tax evasion arrangements where developers claim GST credits throughout the construction phase of residential property development, and fail to remit GST to the ATO when the new residential premises are sold. Where the development had not been successful, GST is one of the last things to be paid, and the Commissioner had on a number of occasions missed out of his due. The reality is that it was a very small percentage of developers that accused this issue, and arguably this response is a major administrative burden placed on both purchasers and sellers to control that small number of wrongdoers. It also provides the ATO priority on proceeds ahead of other creditors and financiers, who will now need to be more careful and developers are advised to manage their feasibility and cash flows closely.

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The exposure draft raised a number of concerns against the industry, and professional groups worked hard to provide comments in the very short consultation period.

Key concerns found include: • No variation mechanism is provided to reduce the withholding amount where the GST withholding would exceed the actual liability of the developer where, say, the margin scheme applies • The refund mechanism under the new rules is limited to quarterly BAS taxpayers who must apply to the ATO. Monthly BAS lodgers do not get this opportunity and must simply wait until their BAS is lodged. The motivation to report monthly is clear, however this will come at increased administrative cost that should be assessed • The complexity and lack of clear guidance on matters such as interaction with the margin scheme provisions and GST adjustments for rental guarantee payments made to the purchaser • There is ambiguity as to whether the vendor or the purchaser is liable for the GST where the purchaser fails to pay the GST withholding to the ATO, which presents challenges in resolving potential disputes. It is understood the effort of industry and professional groups in responding to these issues have not gone unheard and an updated bill should be tabled in the first sittings of parliament for 2018. The government has been firm that the withholding will apply broadly and that there will be no exceptions for taxpayers with a good record or larger established developers. It is expected however that the update will provide some further clarity on the transitional measures, notification and withholding mechanics and possibly scope with the potential for some limited business to business transactions to be carved out. There is also hope for a practical solution on margin scheme sellers, whose liability will be less than 1/11 or 9.09% with a more likely figure of 7% being touted.


Both purchasers and sellers however will need to be well advised and prepared. Contracts will change to deal fairly and practically with issues, and care should be taken on all new contracts where there is a risk they will not settle before 1 July 2018. For developers, managing cash flow and compliance challenges will be key and they will also need to be prepared for a different approach by financiers and higher scrutiny by their contractors and materials providers. This puts a barrier to entry for new developers and adds compliance costs for existing ones. Purchasers are similarly burdened and the capacity for things to go wrong on settlement are dramatically increasing, and it will not only be GST with interaction and expected flow on the CGT withholding. t least Duty should be straightforward... The reality is, nothing will be as straightforward as it was, and both purchasers and sellers will need to be properly advised and prepared.

Contact Scott McGill Partners, Pitcher Partners Sydney 02 8236 7880 [email protected]

THE REALITY IS, NOTHING WILL BE AS STRAIGHTFORWARD AS IT WAS, AND BOTH PURCHASERS AND SELLERS WILL NEED TO BE PROPERLY ADVISED AND PREPARED.


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CHANGES TO THE QUEENSLAND BUILDING INDUSTRY REGULATORY ENVIRONMENT By Cole Wilkinson, Partner, Pitcher Partners Brisbane

The South-East Queensland property and construction sector has been busy over the last three years with a significant amount of work being carried out, particularly in the residential apartment sector. Despite the high level of activity, it has proven to be a difficult environment to operate in for many head contractors and sub-contractors. This has been demonstrated by a number of high profile collapses over the last year with companies such as Bloomer Constructions, Rimfire Constructions and Cullen Group all shutting their doors owing significant sums to sub-contractors. In an attempt to protect the participants in the building industry, the Queensland Government introduced legislation designed to increase the regulation and oversight into the operations of head contractors and the payment of subcontractors. The Building Industry Fairness (Security of Payment) Bill 2017 (The Bill) was introduced into Parliament in August last year to provide for the following key changes to the regulatory environment: • Re-introduction of mandatory annual reporting to the Queensland Building and Construction Commission (QBCC) for building companies that was removed by the previous LNP Government in 2014 • Introduction of Project Bank Accounts • Strengthening the powers of the Government to prevent illegal phoenixing activity.

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DESPITE THE HIGH LEVEL OF ACTIVITY, IT HAS PROVEN TO BE A DIFFICULT ENVIRONMENT TO OPERATE IN FOR MANY HEAD CONTRACTORS AND SUB-CONTRACTORS.

In 2014 the LNP Government undertook to make some major changes to the building regulator including removing the requirement for building companies (including subcontractors) to report to the QBCC on a regular basis. Since 2014, companies are only required to report to the QBCC if their circumstances change or if they are looking to increase their allowable turnover. The QBCC was provided with the power to request information to be provided, but in practice this has rarely occurred. Under the proposed changes, the reporting framework will revert to a similar system to the one that was previously in place. This requires all entities carrying out building work to provide reports to the QBCC on an annual basis. The reporting requirements vary depending on the size of the entity but can range from self-assessed declarations, to Independent Review Report, to a full Audit report. The introduction of the project bank accounts is sure to be the most controversial part of the changes. The initial legislation (which is still undergoing consultation) provides for the introduction of project bank accounts (PBA) to be implemented in phases. The first phase being in relation to the Queensland Government contracts between $1m-$10m, and the second phase on all Queensland building contracts over $1m.

The general concept behind the operation of the PBA’s is as follows: • The PBA consists of a number of externally administered trust accounts • The principle deposits a progress claim payment payable to the head contractor into the PBA • If a subcontractor is entitled to be paid for work performed under the subcontract, then they are paid from the PBA • The head contractor able to be paid from the PBA when it is entitled to funds under the head contractor and no subcontractor is unpaid for the same work performed • Additionally, if there is a shortfall of funds in the PBA, or if there are disputed amounts under a subcontract, then the head contractor is required to contribute additional funds to the PBA. These measures are likely to put additional strain on the management of cashflow for head contractors and to result in significant amounts of additional administration when delivering on a project.

Contact Cole Wilkinson Partners, Pitcher Partners Brisbane 07 3222 8444 [email protected]


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Adelaide Andrew Beitz Telephone +61 8 8179 2848 [email protected]

Perth Leon Mok Telephone +61 8 9322 2022 [email protected]

Brisbane Cole Wilkinson Telephone +61 7 3222 8444 [email protected]

Sydney Scott McGill Telephone +61 2 8236 7880 [email protected]

Melbourne Andrew Clugston Telephone +61 3 8610 5309 [email protected]

Newcastle Greg Farrow Telephone +61 2 4911 2000 [email protected]

The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals and agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. © Pitcher Partners 2018 PrintPost Approved PP381827/ 0043 Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.