18.1 GST Tag and Report (18010m)

1. Calendar Year
2. Month
3. Company - All/Selection

Exceptional the Muli Treatment of Retention & GST

For source of ATO view, refer to:

• Paragraphs 172 to 189 of GSTR 2000/29 - Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25

• Paragraphs 121 to 123 of GSTR 2000/35 -Goods and services tax: Division 156 - supplies and acquisitions made on a progressive or periodic basis

ATO position

What are retention amounts?

Building and construction contracts commonly provide for a percentage to be retained from each progress payment made to the builder. The amount is retained as security for adequate performance under the contract. These amounts are commonly referred to as 'retention amounts'. A proprietor's right to retain amounts from progress payments, and the builder's entitlement to the release of the retention money is generally outlined in the agreement between the parties. A builder may be entitled to the release of part of the retention amounts held upon practical completion of the construction, and the release of the balance upon expiration of a defects liability period. Most agreements allow the proprietor recourse to the retention monies in the event that the builder is liable to the proprietor for a default under the contract. The builder may default by failing to complete work to a required standard or by failing to rectify defects. Retention amounts may therefore be used to offset the liability of the builder. As such the builder may not receive the full amount retained from the progress payments. For example, if a builder fails to rectify certain defects, the proprietor may pay a third party to do so, using part of the retained amounts.

How does GST apply to retention amounts?

If the retention amounts are released to the builder, GST applies in the same way as it applies to the progress payments under the building contract. The release of the retention amounts is not consideration for a separate supply made by the builder – it forms part of the consideration for the supply of services under the building contract. This is regardless of whether or not the builder is required to perform rectification work. (For information about how the GST payable on retention amounts is attributed, see paragraphs 172 to 189 of GSTR 2000/29 and paragraphs 121 to 123 of GSTR 2000/35.)

If the retention amounts are not fully released to the builder, the amount withheld is treated as a reduction in the consideration for the supply made under the building contract.

How GST applies to an amount retained before 1 July 2000 but released to the builder on or after that date is explained in paragraphs 37 to 43 of GSTR 2000/18.

The application of this safeguard on our system:

A builder may enter into a sub-contractor for the supply and installation of services which may take months to complete. The sub-contractor is entitled to make progress claims which the builder may assess, revising the subby’s claim if he does not agree that the stage of completion claimed is correct.

Accordingly, the Tax Invoice submitted may be changed to reflect the value of work to date as assessed, usually downwards.

In parallel with this the builder has a contract with the owner which states that retention must be held against any supplier and sub-contractor to mitigate loss in the event that the sub-contractors may either fail to complete the works the subject of the contract or else fail to maintain and remedy any defects in the works after completion is achieved.

Let’s say a builder engages an air-conditioner to supply and install a system for $200,000 – most air-conditioners could not carry that sort of money when they are required to purchase goods and carry out the installation. They make a progress claim of $50,000 based on the assessment of work to date, and the builder agrees with that figure, but is required to retain 1% of the claim against satisfactory completion.

Therefore, the builder’s records indicate:-

A Tax Adjustment (credit note) could have been requested/ issued but this does not reflect the liability which has already arisen and also distorts the assessment of works carried out to date. This is part of the reason why the ATO accepted the premise that a special regulation was required for the building back at the time of inception of the GST in 1999.