This update follows on from our National Cladding Update September 2018 Alert which outlined the state of developments across Australia as at September 2018. Since then, a number of important developments have occurred.

In summary:

• the Senate Inquiry into Non-Conforming Building Products has issued its Final Report into non-conforming building products, including cladding materials
• the Victorian Building Authority has completed its second cladding audit of over 1,300 buildings
• the Australian Taxation Office has ruled that cladding works are not 'repairs' and are not tax deductible for commercial buildings
• amendments to the Building Act 1993 (Vic) have included a statutory power for the Minister to ban cladding in Victoria, although the Minister has not yet used this power
• the cladding registration portals have now gone live in NSW and QLD
• in Victoria, the Minister for Planning has appointed the VBA as the municipal building surveyor to a current total of 44 Victorian buildings
• the UK parliament has introduced a cladding ban set to commence on 21 December 2018

A more in depth dive into each of these developments is set out below.

Senate Inquiry into Non-Conforming Building Products – Final Report Delivered

On 4 December the Commonwealth Senate Economics References Committee released their final report:
Non-conforming building products: the need for a coherent and robust regulatory regime

The report concerns non-conforming building products generally, including cladding. The report made nine recommendations that impact directly upon non-compliant cladding, 5 of which they consider require urgent action. The recommendations focus on trying to achieve regulatory consistency nationally, better reporting mechanisms and greater accountability to prevent the use of non-compliant cladding.

The five recommendations that should be considered for urgent action are as follows.

1. States and territories should pass legislation similar to Queensland's Building and Construction Legislation (Non-conforming Building Products—Chain of Responsibility and Other Matters) Amendment Act 2017 in order to spread accountability for non-compliant cladding along the supply chain.
2. The Terms of Reference for the Senior Officers' Group and the Building Regulators Forum should be amended to include annual reporting requirements on progress to address non-conforming building products.
3. The Building Ministers' Forum should expedite its consideration of a mandatory third-party certification scheme for high-risk building products and a national register for these products.
4. The Building Ministers' Forum should examine international approaches—including the European Union's regulations and processes—for testing of high-risk products prior to import and determine if they can be suitably adapted to benefit and enhance Australian requirements.
5. In principle, there is support for each jurisdiction establishing a building information database that provides a centralised source of building design and construction documentation.

The final report also adopts a number of recommendations from the Senate Inquiry's interim report into non-compliant cladding, including:

1. making all Australian Standards freely available;
2. consulting with industry stakeholders to determine the feasibility of developing a national database of conforming and non-conforming products;
3. imposing a penalties regime for non-compliance with the National Construction Code such as revocation of accreditation or a ban from tendering for Commonwealth funded construction work and substantial financial penalties; and
4. requiring manufacturers, importers and suppliers to hold mandatory recall insurance for high-risk building products.

Victorian Building Authority completes Second Cladding Audit

The Victoria Building Authority has conducted and completed its audits of 1316 buildings in classes 2, 3 and 9. The buildings that fall within those classes are apartments, hotels, motels and student accommodation above 3 storeys, as well as hospitals, schools and aged care facilities above 2 storeys.

As a result of the audit, in some cases, building notices and emergency orders under the Building Act 1993 have been issued by municipal building surveyors.

Similarly, around Australia building authorities have conducted cladding audits in South Australia, Western Australia and the Australian Capital Territory. 

Australian Taxation Office Rules that Cladding Works are not 'Repairs'

The ATO has ruled that cladding rectification works to commercial office buildings do not classify as 'repairs' and such works are considered to be a capital improvement.

The ATO ruled that removing and replacing the external cladding of a commercial high-rise building will not be treated as a repair under section 25-10 of the Income Tax Assessment Act 1997.

The ATO considered that meaning of 'repair' and relied on a previous ruling in stating that a repair is a 'mere replacement' of a part of something or a correction of something that is already there and has become worn out or dilapidated. The ruling states that cladding rectification works constitute an improvement which created a ‘new function’ on a building. The ATO justified this ruling by stating that the new ‘function’ is making the building’s exterior non-combustible and fire resistant.

The effect of this ruling is that commercial building owners may not be able to deduct the cost of non-compliant cladding rectification works, and instead will have to depreciate the cost over a number of years.

Where works are done to commercial buildings that produce income, the cost of cladding rectification works may be deducted as a depreciating asset over a 25-year period as 'capital works'.

Victorian Building Act Amendments – Minister's Power to Ban Cladding

On 26 September 2018, amendments to the Building Act 1993 (Vic) came into effect which permits the Minister for Planning to declare the use of high risk cladding products to be prohibited.

We note that while the Minister has the ability to declare the use of high risk cladding products to be prohibited, that power has not yet been exercised by the Minister.

These amendments empower the Minister to make declarations prohibiting the use of high risk external wall cladding products where satisfied that such products cause or will likely cause risk of:

• death or serious injury to building occupants or members of the public; or
• severe property damage.

External wall cladding product is defined as 'any product or material that is, or could be, used on or in the external wall of a building (including an attachment or ancillary element), but excluding any product or material that the regulations state is not an external wall cladding product'.

Cladding registration portals now open in NSW / QLD

New law passed in NSW and QLD this year impose reporting requirements on building owners of certain types of buildings. Private building owners of certain types of buildings in both NSW and QLD are required to report and register their buildings online by the following dates:

• NSW via the Cladding Regulation Online Portal – 22 February 2019
• QLD via the Safer Buildings Website – 29 March 2019

The information required in each of the two States differs slightly:

• Queensland - private building owners are required to record the fire-safety of their buildings and complete an online checklist for their buildings.
• New South Wales - building owners are required to inform the Department of Planning and Environment with details of any buildings where external combustible cladding has been identified:
  • for existing buildings already being occupied, prior to 22 February 2019; or
  • all other cases, within 4 months after the building is first occupied.

A more detailed summary of the registration requirements and which buildings are caught can be found in our previous Alert for NSW and QLD.

Buildings referred to the Victorian Building Authority to act as Municipal Building Surveyor

Following the Victorian Building Authority's second cladding audit, the VBA identified 44 buildings were considered to be in a high-risk category.

As a result, on 5 October 2018, by Ministerial Declaration, the Minister for Planning appointed the VBA to act as municipal building surveyor for those 44 buildings.

This Ministerial Declaration allows the VBA to ensure a consistent response to non-compliant cladding and to enforce building standards for these high-risk buildings.

UK parliament introduces cladding ban to commence on 21 December 2018

In the United Kingdom, the Building (Amendment) Regulations 2018 was laid before the UK Parliament on 29 November and is set to come into force on 21 December 2018.

The amendments introduce a prohibition on combustible cladding on all new high rise buildings above 18 metres as well as hospitals, residential care homes, dormitories and student accommodation.

For these types of buildings, the ban prohibits the use of cladding products that do not satisfy the European fire rating of Class A1 or A2.

In Australia, products that meet AS 1530.1 (the BCA test for non-combustibility) are likely in most cases to satisfy the European fire rating of Class A1. However, in Australia we do not have an equivalent to the European fire rating of Class A2.

The ban does not extend to existing buildings or current projects in certain circumstances. However, the ban will apply to buildings where there is a material change in use.