GST on Retention and Progress Claims Explained for Australian Builders

Executive summary

Australian builders often issue progress claims that include a retention amount held back until defects are rectified or the defects liability period ends. The GST treatment is straightforward in principle but easy to misapply in practice. The ATO confirms that GST generally follows the tax invoice or payment timing rules, yet retention money has a special attribution rule that can defer GST on the retained portion until it is actually received or a document demanding payment is issued after the defects period. This article explains the difference between progress claims and retention money, how GST attribution works for each, and what to document so your BAS is correct and cash flow is protected.

What is a progress claim and what is retention money

A progress claim is a formal request for payment based on work completed at agreed milestones. It may be issued monthly or at key stages of a project. Retention money is a percentage withheld from each progress payment to secure performance and cover defects. Many construction contracts retain 5 percent or 10 percent, with part released at practical completion and the balance released after the defects liability period.

Progress claims are commonly treated as the taxable supply for GST purposes. Retention money is not a separate supply, yet it can have different GST attribution timing under the GST law.

The GST basics you must get right

GST in Australia is generally 10 percent on taxable supplies. For builders, GST is typically attributed to the tax period when any of the following occurs:

• You issue a tax invoice
• You receive payment, whichever happens first

This is the standard accrual basis rule. Cash basis taxpayers attribute GST when they receive payment. The key point is that your GST outcome depends on your attribution method and whether the retention amount is subject to special rules.

The special GST rule for retention money

ATO guidance in the GST Issues Register on the property and construction industry recognises that retention amounts are withheld from progress payments. The GST law contains specific attribution rules for certain retention amounts in building and construction contracts. These rules can defer attribution of GST on the retained portion until one of the following happens:

• The retained amount is actually paid to the supplier, or
• A document is issued after the defects liability period that notifies the payer of the obligation to pay the retention amount

Tax advisers, including RSM Australia, explain this as a deferral of GST on the retention portion even if the progress claim is issued earlier. The practical effect is that you may attribute GST on the main progress claim when invoiced, but hold back GST on the retention portion until it is released or formally claimed after defects.

Progress claims and retention money in one example

Assume a builder issues a progress claim for $110,000 including GST for work completed. The contract allows a 10 percent retention.

• Gross progress claim: $110,000
• Retention held: $11,000
• Amount payable now: $99,000

GST on the progress claim is $10,000. Under the special retention attribution rule, the GST attributable now may be $9,000, with $1,000 deferred to the period when the retention is released or claimed after defects. The exact treatment depends on whether the retention qualifies for the special rule and on the tax invoice and payment timing.

This is why your invoice design and bookkeeping setup matter. The retention amount should be clearly identified on the progress claim so it is visible in your accounting system and in your BAS workpapers.

Progress claim versus tax invoice

A progress claim is a claim under the contract. A tax invoice is a GST document. Many builders issue a progress claim that also satisfies the tax invoice requirements. That is fine if it contains the required tax invoice details. If it does not, you might be triggering the contract payment process without creating the GST document you need for attribution or for your customer to claim credits.

Best practice is to ensure the progress claim states that it is a tax invoice, includes the GST amount, the ABN, the date, and the description of work. Where retention applies, list it as a clear deduction on the same document.

Common questions builders ask

Do I charge GST on the retention amount? Yes, retention is part of the taxable supply. The question is when GST is attributed. The retention portion can be deferred under the special rule until paid or formally claimed after defects.

What if the client never pays the retention? If a retention amount is ultimately not payable because of defects or set offs, the GST outcome needs adjustment. This is one reason to track retention separately so you can adjust GST correctly.

Do I still report the full progress claim in G1 on the BAS? Usually yes. G1 reflects total sales. GST payable at 1A depends on attribution timing, so G1 and 1A can differ where retention is deferred.

Does the rule change if I am on cash basis? Cash basis taxpayers generally attribute GST when payment is received. Retention under cash basis is naturally deferred because you have not received the retained amount. The special retention rule is most relevant to accrual basis taxpayers who otherwise would attribute GST when invoicing.

Documentation and system setup that prevents mistakes

1. Separate the retention line clearly. If the retention line is not visible, you are more likely to overstate GST in the period of the progress claim.
2. Track retention balances by project. Use a retention receivable account to keep the balance visible and to manage follow up.
3. Issue a document at release. When retention is released, issue a statement or invoice that clearly notifies the obligation to pay. This helps with GST attribution and audit evidence.
4. Reconcile at BAS time. Tie retention balances to project schedules and confirm GST on retentions is attributed when paid or claimed.

Gaps in public guidance and practical tips

Web guidance often explains retention from a legal or cash flow standpoint, yet it does not clearly show how to split GST between the progress claim and the retention portion in bookkeeping systems. Another gap is the handling of partial releases or set offs, which can create GST adjustments that are rarely documented in step by step guides.

To close these gaps, builders should implement a simple retention register and use accounting software reports that show retention balances by job. This ensures the GST on retention is only recognised when the retention is released, while still keeping overall revenue on track.

Key sources you can rely on

• Australian Taxation Office GST Issues Register for property and construction, which discusses retention amounts and GST attribution.
• RSM Australia guidance on GST implications of retentions and bank guarantees, which summarises the attribution rule and provides practical examples.

Conclusion

Retention and progress claims are normal in Australian construction, but the GST timing is easy to misapply. The safest approach is to clearly identify retention on every progress claim, attribute GST on the retained portion only when it is released or claimed after defects, and keep clean documentation to support your BAS.

Key takeaways

• Progress claims generally trigger GST, but retention can have special attribution timing.
• Clear documentation and a retention register protect your GST reporting and cash flow.
• Review your contract terms and attribution method to confirm the correct GST treatment.