NeatSum
Retention money for subcontractors: how to invoice it and keep your debtors list honest
On many construction contracts the head contractor keeps back part of each progress payment, often 5%, as security for your work. This is retention money. Some of it is usually released at practical completion, and the rest after the defects liability period, often 12 months later.
Retention causes two bookkeeping problems:
- Your debtors list looks worse than it is. If you invoice the full claim and the head contractor pays it less retention, the retention sits on the invoice as unpaid. Months later every accounting system, NeatSum included, shows it as overdue, even though the contract says it isn't due yet.
- GST can be reported too early. For businesses that report GST on an accrual (non-cash) basis, the ATO has a specific rule for retention. The GST on the retained amount is reported when the retention is invoiced after release, or when it is paid, whichever comes first. It is not reported with the progress claim.
This guide sets out a simple way to handle both problems in NeatSum today. It is general information, not tax or legal advice. Contracts differ, and your accountant or registered BAS or tax agent should confirm the approach for your business.
The short version
- Invoice each progress claim for the amount payable now: the claim less the retention.
- Keep a list of the retention held for each customer and project, with its release dates.
- When retention is due to be released, invoice it as a separate invoice, with GST, due on the date the contract allows.
Done this way, your debtors list only shows money that is actually due. GST lands in the right period on either the cash or the accrual basis.
1. Invoice the progress claim, less retention
Say your third progress claim is $20,000 plus GST, and the contract retains 5%.
| Amount | |
|---|---|
| Progress claim 3 | $20,000.00 |
| Less 5% retention | −$1,000.00 |
| Amount payable now | $19,000.00 |
| GST | $1,900.00 |
| Invoice total | $20,900.00 |
In NeatSum, create the invoice for $19,000 plus GST. Put the details in the line description so you and your customer can both see them, for example:
Progress claim 3: $20,000.00 less 5% retention $1,000.00 (retention released per contract clause 12)
Use the due date your contract sets for progress payments. If the head contractor pays $20,900, the invoice is paid in full and nothing is left on your debtors list.
2. Keep a list of the retention held
Retention you haven't invoiced yet isn't in your accounts, so keep a simple register of it. A spreadsheet is fine. For each claim, record:
- customer and project
- claim number and date
- retention amount (excluding GST)
- release dates, for example 50% at practical completion and 50% after the defects liability period
- date released and invoice number, once you invoice it
Put the release dates in your calendar. Retention that nobody remembers to claim is retention that often isn't paid.
3. Invoice the retention when it is released
When the contract says the retention (or part of it) can be released, create a new invoice in NeatSum:
| Amount | |
|---|---|
| Release of retention, progress claim 3 | $1,000.00 |
| GST | $100.00 |
| Invoice total | $1,100.00 |
Date it on the day you issue it, and set the due date your contract allows for releasing retention. From then on it ages and gets reminders like any other invoice, which is now correct, because the money really is due.
How the GST works
- Cash basis: GST is reported when you are paid. The $1,900 is reported when the progress claim is paid, and the $100 when the retention is paid. NeatSum's BAS does this automatically.
- Accrual basis: GST on the amount payable now is reported in the period of the progress claim invoice (or the payment, if that comes first). GST on the retention is reported in the period you invoice the released retention, or the period it is paid, if that comes first. Invoicing the retention separately at release lines this up with your NeatSum BAS without any adjustment.
The ATO's rule for accrual-basis businesses is a legislative instrument: the Goods and Services Tax: (Particular Attribution Rules for Retention Payments) Determination 2017, available on the Federal Register of Legislation. Your registered agent can confirm how it applies to your contracts.
Things to avoid
- Invoicing the full claim and leaving the retention unpaid. The retention will show as overdue for a year or more. Reminders may chase your customer for money that isn't due. On the accrual basis, the GST on the retention is reported earlier than the ATO's rule requires.
- Raising the retention invoice early so it "sits" in your debtors list until release. On the accrual basis, an invoice for the retention is what triggers the GST, so an early invoice can bring the GST forward.
- Changing an old progress invoice to take the retention out after it has been reported on a lodged BAS. Talk to your agent first.
If you hold retention from your own subcontractors
The same rules apply in reverse. On the accrual basis, the GST credit on retention you hold is claimed when the retention is invoiced or paid, not with the progress claim. The simplest match is to enter each subcontractor bill for the amount payable now, and the retention as its own bill when you release it.
Some states also require head contractors to hold retention in a trust account, for example on most contracts over $20,000 in Western Australia and on large projects in New South Wales and Queensland. Check your state's security of payment rules, or ask your adviser.
Where NeatSum fits
NeatSum is AI-powered Australian cloud accounting software for small and medium businesses. It prepares the BAS from your invoices and bills on a cash or accrual basis, and its aged receivables report, reminders and dashboard all use the invoice's due date. Invoicing retention when it is released, as above, keeps all of them accurate.
For more on the tax itself, read how GST works for Australian businesses and what a BAS is.