Avoiding GST Mistakes on Progress Payments, Subcontractors & Retentions
What Builders and Tradies Need to Know About Progress Payments, Subcontractors, and Retentions
GST compliance in the building and construction industry can be tricky — especially when it comes to subcontractors, progress payments, and retention money. Get it wrong, and you could overpay tax, miss out on credits, or trigger an ATO review.
Progress Payments and GST Timing: Accrual vs Cash Basis
When it comes to GST, timing matters — especially if you're working on projects with progress payments. The time you report and pay GST depends on whether your business uses the cash or accrual method of accounting.
Cash Basis
If you're on a cash basis, you only report GST when you receive payment. This method is often used by smaller businesses because it's easier to manage cash flow.
Example:
You issue a $10,000 progress invoice (including GST) in June, but the client doesn’t pay until July.
You report the $909.09 GST in July, when the money actually hits your bank account.
Accrual Basis
If you're on an accrual basis, you report GST when you issue the invoice — regardless of when you're paid. This is the more common method for larger businesses or those using accounting software with automated invoicing.
Example:
Using the same $10,000 invoice issued in June and paid in July, you report the $909.09 GST in June, because that's when the invoice was sent.
Common Trap: Reporting GST in the Wrong Period
Many builders and tradies get caught out by reporting GST too early or too late, especially when issuing multiple progress claims. If your BAS doesn’t match your accounting method, it could raise red flags with the ATO.
Quick Tip:
Make sure your invoicing and payment tracking lines up with your accounting method. If you’re unsure whether you’re using cash or accrual, ask your accountant or check your ATO registration details.
GST When Using Subcontractors: Are You Doing It Right?
It’s common for builders and tradies to hire subcontractors, but when it comes to GST, mistakes in this area can lead to incorrect BAS reporting or even penalties.
One of the biggest issues? Not knowing whether your subcontractor should be charging GST in the first place.
When Does a Subcontractor Need to Charge GST?
Whether a subcontractor includes GST on their invoice depends on their GST registration status — not the type of work they do.
Here’s the rule:
- If a subcontractor’s GST turnover is $75,000 or more per year, they must register for GST with the ATO.
- Once registered, they must add 10% GST to their invoices.
- If they earn less than $75,000, they can choose not to register. In that case, they cannot charge GST, and you cannot claim it as a credit.
A Common Misunderstanding
Some sole trader subcontractors assume that because they’re “just one person” or “don’t earn much yet,” they don’t need to charge GST. That’s only correct if they’re not registered and their GST turnover is less than $75,000 per year.
But what if they include GST on their invoice without being registered? You could end up claiming GST you’re not entitled to, and the ATO may require you to repay it, plus interest and penalties.
How to Protect Your Business
Before you pay a subcontractor, make sure their paperwork is in order. This not only helps you stay compliant, but ensures your GST credits are valid.
Subcontractor GST Checklist:
- Do they have an ABN?
An ABN is required for invoicing and checking their GST status. - Are they registered for GST?
Check using the ABN Lookup Tool to confirm registration status on the invoice date. - Have they provided a proper tax invoice?
A valid tax invoice must include:
- The words "Tax Invoice"
- Their ABN
- Invoice date
- Description of goods/services
- GST amount shown clearly (if applicable)
Don’t assume subcontractors are handling GST correctly. Take a few minutes to verify their details, especially for new suppliers or sole traders. It could save you from costly BAS adjustments down the track.
If in doubt, check with your accountant before claiming GST on any subcontractor invoice.
Retention Payments and GST: Don’t Pay Tax Too Early
Retention payments are standard practice in the building and construction industry. But if you're not careful, they can cause accounting headaches, and potentially lead to paying tax or GST earlier than you need to.
What Is a Retention Payment?
Retention is a withheld portion of a contract payment, held back by the customer until the job is complete and free of defects. It’s a form of security to make sure the work meets the agreed standard.
The retention amount is usually paid after the defects liability period has passed, which can be months or even years after practical completion.
The GST Trap
The GST treatment of retention payments depends on your accounting method. If you're registered for GST on an accrual basis, you're generally required to report the full amount of GST when you issue an invoice or receive any part of the payment.
If your business accounts for GST on an accrual basis, you’re required to account for GST on the full invoice amount — including any retention — in the period you receive any part of the payment or issue the invoice (whichever comes first).
This means that if you invoice for the total contract value, including retention, you must report and pay GST on the entire amount in that BAS period, even if the retention won’t be paid until much later.
If you report on a cash basis, you only need to remit GST when the money is actually received. This can help smooth out cash flow if you're dealing with long delays in retention payments.
Common Mistake: Invoicing the Full Amount
One mistake many businesses make is invoicing for the entire contract value upfront, including the retention. The customer pays the invoice minus the retention, and the unpaid balance sits in accounts receivable for months or years.
This causes two problems:
- GST is reported and paid on the full amount immediately, even though some of that money hasn’t been received.
- The full value is treated as income, even though you're not yet entitled to it.
If the retention is never paid (for example, because of defects or disputes) you’ve already paid tax on income you never received.
Retention Payments: Why Your Accounting Method Matters
Retention payments are common in construction, but they can cause headaches if not handled properly in your accounting system.
If you treat the full contract amount — including the retention — as income upfront, you could end up paying GST and tax earlier than necessary. Worse still, if that retention is never paid, you may have overstated both your income and your GST obligations.
The way retention is recorded can also affect:
- The timing of your BAS reporting
- How accurately your profit and loss reflects the job
- Whether your balance sheet is showing the right receivables
The best approach? That depends on your accounting method, how your contracts are structured, and the software you’re using.
This is where an accountant can help.
We can review how you're currently handling retention payments and set up a more accurate and compliant process, so you’re not paying GST or tax earlier than you should.
If you're unsure whether your current setup is right, it's worth having a conversation. Getting it wrong could cost you more than just admin time.
Need help avoiding hidden GST traps?
From progress payments to subcontractor invoices and retention accounting, getting it wrong can cost you in tax, cash flow, and compliance. If you're not 100% confident your GST reporting is spot on, let's talk.
Get in touch with us and we can make sure your setup works for the way you do business.
