Accounting for Retentions for Builders

What it is

Retention is money the payer keeps back as security. The structure across residential construction is 5 per cent of each progress payment, halved to 2.5 per cent at practical completion, with the balance released at the end of the defects liability period.

The legal and insolvency angle is covered in retention-and-security-release-risk-aus. This entry is the accounting: when the GST falls due, when the income is derived and what the money is worth on your balance sheet.

The GST attribution point, where builders get it wrong

Retention is part of the consideration for the supply. It is not a separate supply, and withholding it does not reduce the contract price. But it is not payable yet, so there is a specific rule for it.

The Goods and Services Tax: (Particular Attribution Rules for Retention Payments) Determination 2017, made under subsection 29-25(1) of the GST Act, splits the claim in two:

• GST on the non-retained part is attributable at the earlier of consideration received or invoice issued.
• GST on the retention amount is attributable at the earlier of the tax period in which the retention is invoiced or the tax period in which it is received.

The determination defines an invoice for the retention amount as a document notifying an obligation to pay that amount, issued once the contract conditions are met or after the defects liability period expires.

Read that twice, because the money is in it. You do not remit GST on retention when you issue the progress claim. You remit it when you invoice the retention at release, or when it lands, whichever comes first.

The common error is to push the whole progress claim including retention through the June BAS. On a $500,000 progress claim carrying 5 per cent retention, that is $25,000 held back with about $2,270 of GST inside it, remitted on money the builder will not see for two years. Repeat that on every job and the builder is permanently financing the ATO on cash nobody has paid them.

Two conditions. The rule applies only if you do not account on a cash basis, because a cash-basis builder already attributes on receipt. And it does not override subsection 29-10(3) or Division 156.

Income tax on retention

Separate question. On accruals, an amount is derived when you have a recoverable debt, meaning a present entitlement to payment. Retention that is not yet payable because the contractual condition has not been met is generally not derived yet. On cash, it is income when received.

The instruction is the same either way: do not let the tax on retention run ahead of the retention.

Retention as an asset

Retention receivable is the least reliable asset on a builder balance sheet, so carry it honestly.

• Age it. Retention held past its contractual release date is not a current receivable. It is a dispute you have not had yet.
• Provision against it where the DLP is long, the holder is slow or the relationship has soured. A retention ledger full of 3-year-old balances at full value is a balance sheet telling you a story.
• Track it per contract against both release dates, not as one lump.

Trust accounts, from the accounting side

Where retention must sit in trust it is not your money, and it does not belong in your cash position.

Jurisdiction	Threshold
NSW	Head contracts of $20 million or more
QLD	Private, local government, statutory authority and GOC contracts of $10 million or more; Queensland Government contracts of $1 million or more
WA	New construction contracts of $20,000 or more including GST

The Queensland reductions to $3 million and $1 million, planned for March and October 2025, were paused and never commenced. The threshold is still $10 million.

WA looks alarming at $20,000, and for a builder-developer it is. But read the exclusions. Small-scale residential contracts sit outside the scheme irrespective of value: a head contractor to subcontractor contract for work on a single dwelling and associated structures such as a granny flat, shed, patio, deck, carport or pool. Contracts direct with a homeowner for home building work of $500,000 or more are also excluded, unless the work is for a residential development business or covers two or more dwellings on separate lots. So a builder putting up one house and holding retention from subbies is generally not caught. A builder running a townhouse development is.

If retention is in trust it is off your working capital and safe. If it is not, and the holder collapses, you are an unsecured creditor and the receivable is worth whatever the liquidator says. That is the accounting consequence of the legal point.

What to do

Put both retention release dates in the ledger the day you sign, not the day you remember. Then invoice the release. The GST clock and the cash both start with that invoice, and nobody else will raise it for you.