With some types of businesses, you can simply press the GO button and you’re up and running.
For example, a photography business really just requires a camera and you’re good to go!
But, for residential builders, a number of unique steps must be worked through before you can accept and begin jobs.
As you’ll see below, business structure and licensing require some initial decision-making. Then there are important building construction insurance requirements to work through…
Decide on a structure for your construction business
Will you trade as a company or as a sole trader? The main differences are:
- As the director/shareholder of a company, your personal assets are generally protected from claims made against the company. This can be an invaluable source of comfort if you own your family home and other investments in your own name. As a sole trader, your personal assets are always at risk against claims made against the business.
- Companies can allow tax flexibility whereas a sole trader is simply taxed on the entire profit each year at individual tax rates, which can be costly if you have high profits.
- It will cost more to set up a company structure than operating as a sole trader. But, for successful businesses, this additional cost is usually recouped from tax benefits within the first year of trading.
Trusts are unable to obtain Home Warranty Insurance cover and should not be used. You can, however, establish a family trust to own your company – more details about the benefits of doing so in one of our blogs in the future.
Obtain a trade license
If you have chosen to set up a new company, you’ll need a Company Contractor License through Fair Trading.
It’s best to get onto this early as the process can take six to eight weeks.
Building construction insurance requirements in NSW: What you need to know
As a sole trader or a company, there are some unique building construction insurance requirements to be met before you can start working on projects.
It’s important to understand industry policy with this from the off. It varies from state to state, with mandatory insurance products required for all residential builders in Australia.
In NSW, the Home Building Compensation Fund (HBCF) comes into play. It’s also known as Home Warranty Insurance. It’s required if you’re planning projects in NSW and:
- Contracting with residential owners (including strata plans) for more than $20,000 incl. GST (structural or non-structural work); or
- Working directly for a developer or homeowner (even those acting as an owner-builder) for new homes, new low-rise apartment buildings of three stories or less, or home renovations.
HBCF cover must be in place before you start work or accept a deposit. To obtain this cover, you first need to prove eligibility.
Obtaining the necessary construction insurance in NSW
Building construction insurance requirements are quite complicated in NSW. We highly recommend that you work with an experienced insurance broker on getting the necessary details together.
Whether or not you are approved for this insurance cover will be based on you and your company having enough assets.
In simple terms, the insurer will ask you about:
- Number of open jobs – how many jobs you wish to be working on at any one time
- Individual job limit – the maximum value for a job you are expecting to build and how long construction will take
The insurer will then take this information and calculate an assumed turnover.
HBCF builder eligibility: Example scenario
Let’s say you wish to build residential homes of up to $450,000 each, with up to three jobs in progress at any one time. The build is expected to take six months.
The insurer may calculate an assumed turnover of $2,700,000:
$450,000 x 3 jobs x 12 months/6 months
The insurer uses this assumed turnover to test that you have enough assets.
The basic condition is your adjusted net tangible assets (a technical term, but when you are first starting this often means your bank balance) equals at least three percent of your assumed turnover.
Sole trader vs. company
In the above scenario, sole traders would simply need to prove that they have at least $81,000 of assets in their personal name (3 percent of $2,700,000).
This would include cash, vehicles, and other investments such as property.
In a company, you would need $81,000 deposited in the company bank account as share capital before being considered eligible. If you don’t have this cash in savings, then you may need to consider bank finance/refinance.
Most builders own a car and perhaps a property but might not have $81,000 cash; but building construction insurance requirements are generally easier to meet for sole traders.
Sole traders have all of their personal assets on the line if a claim is made versus a company, whereas in a company only the assets owned in the company name are on the line.
So the company must have the cash in its bank account before the insurance cover is granted.
If putting cash into the company is not achievable, you need to consider starting the business with a smaller number of jobs and/or smaller job values. This reduces the amount of cash deposit required by the insurer. You can slowly build up more HBCF eligibility over time.
Please note that HBCF builder eligibility assessments can take up to three weeks to process and another one to three weeks if the insurer has questions.
This may all seem quite complicated. However, if you work with an accountant and an insurance broker who understand these concepts, meeting all necessary building construction insurance requirements in NSW will be very achievable.
Don’t forget other insurances
As a new builder, you will likely need to obtain other insurance coverage such as workers compensation, contract works, and public liability insurance.
Factor these into your decision-making too.
Need help getting set up as a new home builder?
We really enjoy working with builders as we’ve been able to establish strong relationships with other professionals in this space, such as experienced insurance brokers.
We’re able to provide a comprehensive one-stop-shop for new builders, including covering all building construction insurance requirements.
Contact us today if you’re thinking of heading down this path.