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  • 2.1 What is the GST treatment of 'retention amounts'?

    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.

      Last modified: 12 Jun 2012QC 16479