GST Traps with Progress Claims, Subcontractors & Retentions – What You Need to Get Right
GST compliance is a headache in construction. Between staged payments, subcontractors, and retentions, there are plenty of ways to get it wrong. And when you do, the ATO doesn't go easy. Here's a breakdown of the common pitfalls – and how to steer clear of them.
Progress Claims: Timing Is Everything
Whether you're on cash or accrual accounting changes how and when you report GST. Get it wrong and you could either overpay too soon or miss the liability and invite trouble.
Cash Basis
You only report GST when the cash hits your account. Simple and good for cashflow.
Example: You send a $100,000 invoice (incl. GST) in June but get paid in July. GST gets reported in July.
Accrual Basis
You report GST when the invoice is raised – even if the payment is delayed. More common for larger or system-based businesses. Same invoice? GST is reported in June.
Common mistake: Builders on accrual accounting still try to report GST when the payment clears. That's wrong – and will get picked up in a review.
Subcontractors and GST – Don't Assume They're Doing It Right
Hiring subcontractors is standard, but trusting their GST setup without checking? That's asking for trouble.
Key rule: GST depends on registration – not how small or casual the subcontractor is.
- If their GST turnover is $75,000+, they must register and charge GST.
- If under that, they don't have to – but if they're not registered, they legally can't charge GST.
Classic slip-up: A sole trader throws GST on their invoice without being registered. You claim it, the ATO checks, and boom – you're liable to pay it back, with interest.
Checklist Before You Pay a Subbie:
- Do they have an ABN?
- Are they registered for GST? (Use the ABN Lookup Tool)
- Is the tax invoice valid? It should include "Tax Invoice", show the ABN, and list GST clearly (if applicable)
Don't guess. Check.
Retentions: The Silent GST Killer
Retentions are where most builders and tradies get caught.
You do a job, issue an invoice for $110,000 (incl. GST), but the client holds back $10k as retention.
If you're on accrual accounting? You owe GST on the full $110,000 – even if you don't see the $10k for 12 months.
Why? Because the ATO says retentions are part of the taxable supply. Once the invoice is issued or part-paid, the GST on the whole thing becomes due.
If you're on cash basis? You only pay GST when you get the cash – including the retention when/if it's eventually paid.
The trap: Many tradies and builders invoice for the full contract value up front. GST gets triggered immediately on the lot – including money you haven't received and may never see. If the retention's never paid, you've already forked out GST on non-existent income.
Clean fix: Structure your invoices so that retention isn't included until it's due. Or make sure your books are set up properly to track and adjust.
Final Word
Subbies, progress claims, and retentions all affect GST in ways that aren't obvious. Getting it wrong won't just sting your cashflow – it'll open you up to audits, penalties, and messes that take hours to fix.
Need a hand sorting it? Let's talk. Better to fix it before the ATO does.