What Happens If I Fail QBCC’s MFR?

Initially you will receive a notice from the QBCC informing you of an MFR compliance breach. This is your signal to start gathering your financial information and begin preparing for further action.

Before launching into a full audit, the QBCC may request your business’ management accounts as an interim step, allowing for a preliminary review of financial health. By submitting up-to-date management accounts you can sometimes pre-empt the need for a more invasive audit if they satisfy the QBCC’s concerns.

QBCC may then conduct a thorough investigation through an MFR audit allowing them to review and verify your financial status against the MFR requirements. This is likely to occur if you cannot demonstrate that you comply with the QBCC’s MFR in previous steps. As part of the audit you will be required to produce an MFR Report, completed by a qualified accountant, that demonstrates you are complying with MFR.

QBCC may then issue a serious warning of their intention to suspend your licence. Whilst not suspended, this is your last opportunity to prove to QBCC that you are compliance, which again is done via submitting an MFR Report. The standard time to respond in this situation is 21 days.

Failure to act or satisfy the QBCC that you meet the MFR can then lead to a temporary suspension of licensable activities. Receiving a QBCC suspension means your business must immediately stop all building and construction work.

A ‘Notice of Intent to Cancel’ may be simultaneously issued with the suspension. This notice will inform you that your licence will be cancelled within 21 days unless you can give the QBCC reasons why that should not occur. This is your final opportunity to demonstrate compliance with MFR.

If compliance is not demonstrated, your licence may be officially terminated. If your licence is cancelled you will need to apply for a new licence, either in that same entity or through a new entity. If your business is insolvent you will be personally excluded from holding a licence for three years. If you are excluded twice you will receive a lifetime ban from holding a QBCC licence.

Early and proactive engagement with the QBCC can avoid escalation at any of these stages. It is particularly important to respond within the given timeframes presented by them, usually 21 days. MFR failures are a serious threat to your business and it is crucial to address them promptly. If you disagree or object with the QBCC action you may request an internal review within the QBCC and/or take the matter to QCAT (Queensland Civil and Administrative Tribunal) for an independent review.

Lodging your Annual Financial Report can be a common trigger for QBCC to highlight where you have failed QBCC MFR and may trigger further review. Triggers resulting from your annual report can include:

• Exceeding your Maximum Allowable Turnover (MAT): When your business activity increases significantly, revenue may surpass the Maximum Allowable Turnover by more than 10%.
• Insufficient Net Tangible Assets (NTA): This is caused by a drop in assets or an increase in liabilities, often caused by adverse trading conditions, an increase in material and labour cost or lack of profitability. Your NTA can only drop by a maximum of 30% and exceeding this may trigger a review.
• Failed Current Ratio: If you owe more to short-term creditors (less than 12 months) than the current assets you hold (cash or assets that are easy to turn into cash), this may indicate potential financial struggles to the QBCC. This can sometimes happen when a business is facing challenging trading conditions.

Monies owed complaints can arise at any time, independent of annual reporting cycles, and may trigger a QBCC financial review. Complaints may include disputes over a final payment or interim billing issues and need to be addressed promptly to avoid escalation.

Monies owed complaints can prompt the QBCC to take a closer look at your financials to ensure there are no underlying financial issues that warrant further investigation. Multiple complaints, especially three or more in a short time frame, can often trigger an MFR audit. This concentration of complaints can indicate to the QBCC that there may be a pattern of financial mismanagement in your business and they are likely to investigate further.

It is essential to manage your financial obligations carefully and ensure you keep open lines of communications with your clients and suppliers to prevent complaints. Ensuring you are clear with your financial transactions and that your contracts are explicit about your payment terms may help reduce complaints. If you do find yourself facing a dispute, it is essential to handle it promptly to help reduce the risk of triggering a QBCC review and to help maintain your reputation in the industry.

Trusts are often suggested by accountants as a way to protect personal assets, like the family home, and to distribute income to family members at lower tax rates.

While they are a common tool, they can pose challenges for QBCC licence holders due to limitations in the MFR on including trust-related assets in your Net Tangible Assets.

Properly setting up trusts is crucial to minimise these issues. One effective structure may be to have your QBCC licence and other assets held in a Pty Ltd trading company, with the shares of that company held by the family trust. The trading company is then able to pay dividends to the family trust with income distributed to beneficiaries at potentially lower tax rates.

Complexities around trusts and QBCC compliance underscores the importance of working with specialised QBCC accountants who understand the MFR and can help you navigate these issues effectively without exposing your licence and business to unnecessary risk.

Related Party Loans are assets and must be tested according to QBCC regulations. Often they cause tests to fail because they affect the current ratio tests.

Related party loans add another layer of complexity to financial management, emphasising the need for thorough testing and careful consideration when including them in financial reports.