A building company should treat each progress payment as its own supply for GST. On a cash basis, GST is due when the client pays; on an accruals basis, it is due when you issue the progress claim or invoice, even if payment hasn’t arrived. Either way, set the GST aside from every payment as it lands, and structure invoices so retentions don’t trigger GST before you’ve been paid.
How Progress Claims, Retentions and Cash Flow Affect a Builder’s GST
Your GST accounting method is the biggest lever. Businesses with aggregated turnover under $10 million can choose to account for GST on a cash basis, which means you only report GST on progress payments actually received in that BAS period. On an accruals basis, you report GST on the full claim in the period you issue it, so a large claim late in a quarter can create a GST bill before the money is in the bank.
The paperwork sets the timing. A payment claim served under the NSW Security of Payment Act can be treated as an invoice for GST purposes, so on an accruals basis the GST clock can start when you serve the claim, not when the client approves or pays it. It’s worth knowing exactly which document in your process triggers GST.
Retentions are where builders most often pay GST early. If your progress claim shows the full value of the stage and the client holds back a retention, GST on an accruals basis is generally payable on the whole amount, retention included. Invoicing the retention separately when it falls due, usually at practical completion or the end of the defects period, keeps GST in step with your cash.
The cost side needs the same care. Variations are taxed the same way as the base contract, so each variation claim should carry its GST. You can only claim GST credits on subcontractor work when you hold a valid tax invoice, which is why many builders use recipient-created tax invoices (RCTIs), where the builder issues the invoice on the subcontractor’s behalf under a written agreement.
The habit that prevents most GST problems is simple: move the GST component of each progress payment into a separate account when it arrives. For a construction company moving from owner-run to manager-run, a monthly look at claims issued, cash received and GST owing keeps the quarterly BAS from becoming a surprise.
Reviewing GST Across Your Building Projects?
If you’d like a second look at how your progress claims, retentions and BAS fit together, our accountants for construction companies can review your setup and explain the options in plain language. MYC Partners Accountants is a CA ANZ chartered firm with Registered BAS Agents, and you’re welcome to get in touch to book a free discovery call.