The Crisis Facing the Construction Industry

The construction industry in Australia has been subjected to a significant number of challenges in recent times, with global materials shortages, labour shortages, trailing fixed-price contracts, rising prices and diminishing access to finance. It’s no wonder that for the first half of 2022, the construction industry has faced a greater rise in formal insolvency appointments than other industries since the lockdowns from COVID-19.

Current State of Play

In the August 2022 release of the Australian insolvency statistics by the Australian Securities and Investments Commission (ASIC), formal insolvency appointments to the construction industry for the period January to June 2022 totalled 717, representing 27% of all companies entering into external administration during that period. For the same half-year period during the 2020 and 2021 years, construction-related insolvency appointments totalled 489 and 517 respectively.

By way of further comparison, the accommodation and food services industry – which as we all know was severely impacted by repeated lockdowns – had formal insolvency appointments totalling 407 in the January to June 2022 period and 305 from January to June 2021.

Whilst it may be that some other industries are performing better in the current economic climate, or they are experiencing the same or relatively similar challenges to the construction industry but are delaying the appointment of external administrators, the significantly larger and rapidly increasing number of appointments originating in construction, is concerning.

Construction Businesses and the ATO

From all accounts, the Australian Taxation Office (ATO) is only just beginning to ramp up its debt collection activity, having put it on hold during the peak of the COVID-19 pandemic. This means that those companies – and individuals / sole traders as they too are not immune to construction industry woes – who may have delayed payments to the ATO over the past two (2) years in favour of keeping suppliers and financiers happy, may shortly be faced with some real recovery action from the ATO. Some company directors may have experienced this already, with the ATO issuing some 30 to 40 Director Penalty Notices a day in early 2022.

Director Penalty Notices issued to a director allow the ATO to collect a company’s unpaid Pay As You Go (PAYG), Superannuation Guarantee Charge (SGC) and Goods and Services Tax (GST) debts from the director personally. These notices are serious and should never be ignored.

It is likely that the ATO will shortly commence a level of wind-up activity in relation to some of the worst tax-avoidance offenders. With some $7.2billion owed to the ATO from construction entities, there is a more than reasonable chance that the construction industry will be of significant focus.

Directors of construction companies that may be struggling with payment of required taxation obligations need to ensure they:

1. Keep their ATO lodgments up to date, to allow the best possible chance of the ATO accepting a proposal for a payment arrangement rather than commencing winding up proceedings.
2. Don’t avoid conversations with, or warning letters from the ATO regarding outstanding debts. Those who ignore attempts at contact will likely be among the first ones ultimately subjected to winding up proceedings.
3. Speak with their trusted advisor, to seek information on and gain assistance with the best option/s for them in dealing with their circumstances.

The View of the QBCC

The Queensland Building and Construction Commission (QBCC) also closely monitor the financial performance of construction companies and business owners, to ensure public confidence in its licensing system and promote security of payment in the building and construction industry.

The anti-phoenix provisions contained within the Queensland Building and Construction Commission Act 1991 (the QBCC Act) prevent a person from holding a QBCC contractor, nominee supervisor or site supervisor licence, or being in a position of control or influence for a QBCC licenced company if they are an individual who is:

1. An undischarged bankrupt or a debtor the subject of a Part IX or Part X agreement under the Bankruptcy Act 1966 (Cth).
2. A director, secretary or other influential person for a construction company that experiences a company failure.

Under the QBCC Act, bankruptcy or company failure are referred to as insolvency events. There is an automatic period of exclusion following the occurrence of an insolvency event.

An excluded individual is someone who is a director, secretary or influential person for a construction company at any time up to two (2) years prior to an external administrator being appointed to the company. An individual also becomes excluded if they become bankrupt or enter into a Part IX or Part X agreement.

The period of exclusion for the excluded individual is three (3) years from the date of the insolvency event. A person involved in two (2) or more separate (i.e., unrelated) relevant insolvency events may face a life exclusion from holding a valid QBCC licence.

The effect of being an excluded individual is that their licences will be cancelled and they will not be able to reapply for a new licence until their period of exclusion has come to an end.

A company will become an excluded company if an excluded individual is a director, secretary or influential person for the company. In that event, the company’s QBCC licence will be cancelled unless that individual ceases acting as a director, secretary or influential person for the company.

To assist its members, the QBCC has released a Fact Sheet on the Assessment of Solvency. The Fact Sheet steps through:

• insolvency event definitions;
• solvency and insolvency definitions;
• the two (2) main solvency tests under common law (the balance sheet test and cash flow test);
• the main indicators of insolvency; and
• evidence requirements to satisfy the QBCC of solvency for licencing purposes.

Download the Fact Sheet.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.