GST issues registers

Property and construction

Section 02 - building contracts

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.

2.2 Renovations and second-hand materials

For source of ATO view, refer to:

•

the general principles in GSTR 2000/8 - Goods and services tax: special credit for sales tax paid on stock

•

the general principles in GSTR 2006/4 - Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose

•

paragraphs 58 to 83 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

•

paragraphs 20 to 22 of GSTR 2005/3 - Goods and services tax: arrangements of the kind described in Taxpayer Alert TA 2004/9 - exploitation of the second-hand goods provisions to obtain input tax credits.

A builder, registered for GST, buys a house to renovate and sell as part of an enterprise of selling renovated houses. The house is renovated with second-hand materials bought by the builder from someone who is not required to be registered for GST.

(a)

Is the sale of the renovated house a taxable supply?

(b)

Is the builder entitled to an input tax credit for the purchase of the house?

(c)

Is the builder entitled to an input tax credit for the purchase of the second-hand materials?

ATO position

(a) Sale of renovated house

Whether the sale of the renovated house is a taxable supply depends on whether the house was renovated to such an extent that it became 'new residential premises'. If the renovated house is new residential premises, its sale by the builder will be a taxable supply. If the renovated house is not new residential premises, its sale will be an input taxed supply under section 40-65 of the GST Act.

(For more information about when a sale of residential property is a supply of new residential premises, see GSTR 2003/3.)

(b) Input tax credit for purchase of house

The builder would be entitled to an input tax credit under Division 11 of the GST Act for the purchase of the house if it had been a taxable supply (but not under the margin scheme - see section 75-20 of the GST Act) to the builder; and the builder later sells the renovated house as a taxable supply. An input tax credit would not be available if the sale of the renovated house is an input taxed supply (paragraph 11-15(2)(a) of the GST Act).

(c) Input tax credit for second-hand building materials

As the second-hand building materials were acquired from an entity that was not registered for GST, no GST would have been payable on the supply of those materials to the builder. Therefore, no input tax credits are available for the purchase of the second-hand materials.

Subdivision 66-A of the GST Act, which allows an input tax credit for acquisitions of second-hand goods, does not apply. This is because for Subdivision 66-A to apply, the second-hand goods must be acquired for the purposes of sale or exchange (but not manufacture) in the ordinary course of a business (section 66-5(1)). This requirement is not met as the purchase of the second-hand building materials were not acquired for the purposes of sale or exchange as goods. The materials, when incorporated into the renovated house, become part of the house which is real property. They no longer retain the character of goods.

2.3 You operate a business building concrete swimming pools. Sales tax is currently paid quarterly on the basis of the area of the pool. Sales tax is due after the pool has been concreted. Many new pools remain on new building sites half completed until clients are ready to move. As at 1 July 2000, you have partly completed pools on which sales tax has been paid.

For source of ATO view, refer to:

•

the general principles in GSTR 2000/8 - Goods and services tax: special credit for sales tax paid on stock

•

paragraphs 32 and 33 and the general principles in GSTR 2000/14 - Goods and services tax: transitional valuation of work-in-progress for head contractors in the building or civil engineering industries.

(a) How is a pool concreted before 1 July 2000 but completed after 1 July 2000 affected by GST?

(b) If such a pool has already been subject to sales tax, is it exempt from GST?

ATO position

(a) In-ground pool partly complete as at 1 July 2000

As a general principle, GST applies to supplies made on or after 1 July 2000. Supplies generally occur when the item is made available to the recipient, or in the case of services, when the services are performed in accordance with section 6 of the GST Transition Act.

A special rule is contained in section 19 of the GST Transition Act for construction contracts entered into before 1 July 2000 but not completed by that date. The rule ensures that not all of the value of work and materials under such contracts is subject to GST. In the absence of this special rule, the entire value of a contract completed after 1 July 2000 may be subject to GST even though some of the work may have been undertaken prior to 1 July 2000. The special rule provides that goods or real property supplied in the construction of a building or civil engineering work in accordance with a written agreement made before 1 July 2000 and made available on or after 1 July 2000 is only subject to GST on the value of the work completed after 1 July 2000.

The supply and installation of an in-ground swimming pool falls within the types of works covered by this rule. To take advantage of the special rule, a valuation must be made as at 1 July 2000 of all work and material permanently incorporated on the site in accordance with the agreement. GST will only be payable on the difference between the total value of the supply and the value as at 1 July 2000. ATO Public Ruling GSTR 2000/14 explains how and when the valuation must be done. Consequently, where the construction of an in-ground swimming pool started before 1 July 2000, however, was not completed until after that date, the GST payable on the supply of the completed swimming pool will be based upon the value of the work done on or after 1 July 2000.

(b) Sales tax and GST

A pool that has been partly completed before 1 July 2000 and has been subject to sales tax would be included in the value of work completed as at 1 July 2000 and would not be subject to a further GST liability (GSTR 2000/8 and paras 32-33 GSTR 2000/14)

The provision (section 16 of the GST Transition Act) that allows a special credit in relation to sales tax already paid does not apply as an in-ground swimming pool does not qualify as goods on hand because it is affixed to the land.

2.4 What is the GST treatment of payments for building projects where the consideration is paid on a progressive basis?

For source of ATO view, refer to:

•

paragraphs 105 to 114 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 30 to 34 of GSTR 2000/35 - Goods and services tax: Division 156 - supplies and acquisitions made on a progressive or periodic basis.

ATO position

The GST treatment of payments for building projects will depend on whether or not the supply is a progressive supply. The GST Act allows for GST to be attributed on a progressive basis where the relevant supply is made on a periodic or progressive basis and consideration is provided on a periodic or progressive basis. An advance payment for materials, for example, would not satisfy these elements. The building contract may be treated as a progressive supply where it meets the characteristics of such a supply as illustrated in Example 2 below. Further guidance on this can be found in GSTR 2000/35 at paragraphs 105 to 114. For more information about attribution of the GST payable on a progressive or periodic supply see paragraphs 30 to 34 of GSTR 2000/29.

Examples

A supply of a building project contracted for a total consideration of $110,000,000. The completion date is 1 July 2002 and the project commenced after 30 June 2000.

Example 1. Basic attribution (not a progressive supply)

The first payment of $20,000,000 to be made on 10 August 2000, the balance to be paid on completion of the project.

(a) Builder accounts on a non-cash basis and has monthly tax periods

The builder issues a tax invoice for the first payment of $20,000,000 on 1 August 2000. The GST that the builder must include in their BAS for the tax period of August 2000 is $10,000,000 (1/11th of the total consideration for the project). The entire GST attributable to the total consideration for the project will be triggered by the first payment in accordance with the basic attribution rules. The builder will have to attribute the GST to this tax period, even if they had not received the payment, as GST is triggered by the earlier of invoice or any payment.

(b) Builder accounts on a cash basis

In this case the GST attributable on the supply is 1/11th of $20,000,000 in accordance with the basic attribution rule. The balance of the GST payable on the total consideration for the project would be attributable to the tax period(s) in which the rest of the payment was received.

Example 2. Special attribution rule (progressive supply)

Progress payments are to be linked to stages of completion of the project. Four equal payments of $27,500,000 are to be made based on agreed stages.

(a) Builder accounts on a non cash basis

GST of 1/11th of $27,500,000 will be attributable to each of the earlier tax periods in which the builder issues an invoice or receives any payment. Where the relevant supply is made on a progressive basis and consideration is also provided on a progressive basis, the building contract may be treated as a progressive supply. The GST Act allows for GST to be attributed on a progressive basis.

(b) Builder accounts on a cash basis

GST will be attributable to each of the tax periods in which the builder receives any payments. If the builder only receives the four progressive payments, GST of 1/11th of $27,500,000 will be attributable to each of the tax periods in which the builder receives the payments.

2.5 If a builder incurs costs related to taxes and charges that are GST-free under the Treasurer's Division 81 Determination; and invoices a client separately for those costs, is the builder liable for GST?

For source of ATO view, refer to:

•

the general principles in GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law

•

paragraphs 8 and 9 of GSTD 2000/10 - Goods and services tax: are outgoings payable by a tenant under a commercial property lease part of the consideration for the supply of the premises?

ATO position

A tax, fee or charge listed in the Treasurer's Determination under Division 81 of the GST Act is not consideration for a taxable supply and therefore, not subject to GST. If that tax, fee or charge is incurred by the builder, and is included in the price of supplies made by the builder, it no longer has the character of a tax, fee or charge that is subject to the Treasurer's Determination under Division 81. So, it does not matter if the builder invoices a client separately for these costs - they still form part of the price of the supplies made to the client. The builder will be liable for GST if those supplies are taxable supplies.

For example, a builder incurs a fee for the supply of a building permit from the council and seeks to recover this cost by including it in the price of the construction services to the client. The supply to the builder is not subject to GST because of Division 81 of the GST Act. But the builder will be liable to pay GST on the price of the services supplied to the client if the requirements of section 9-5 of the GST Act are satisfied.

However, if a builder pays, as an agent for a client, a tax, fee or charge, and is reimbursed by the client for the payment, the reimbursement will not be subject to GST. This is because the reimbursement is not consideration for a supply made by the builder. In this situation, the tax, fee or charge is effectively incurred by the client, rather than by the builder.

2.6 How does a builder claim a credit for Wholesales Sales Tax (WST) when he does not know the amount of WST which has been charged?

Non-Interpretative - straight application of the law

ATO position

Public ruling GSTR 2000/8 Goods and Services Tax: special credit for sales tax paid on stock states at paragraph 118 that where goods have been purchased from a retailer and the invoice does not show the amount of WST, the following method may be used to calculate the amount of Sales Tax:

Purchase Price × 50% × the sales tax rate


This method reduces the total purchase price by 50% to arrive at an estimated taxable value on which tax would have been charged. Please also refer to page 11 of GSTR 2000/1.

2.7 Am I responsible for ensuring that a supplier's quoted ABN is correct?

This issue has been withdrawn. For information about issues such as this, see No ABN withholding - questions and answers on the ATO website.

2.8 If a registered subcontractor makes a taxable supply to a builder and fails to remit the GST to the ATO, can the builder (in the absence of fraud or collusion) be liable to pay this GST to the ATO?

Non-Interpretative - straight application of the law

ATO position

The entity making the taxable supplies is liable for paying GST. Therefore, if the subcontractor is making taxable supplies it is liable for paying the GST on those supplies.

2.9 If a subcontractor with an ABN does work for a builder and is paid all monies owing for that work, and the subcontractor subsequently fails to pay a PAYG income tax instalment to the ATO, can the builder be liable to pay the subcontractor's income tax?

This issue has been withdrawn. For information about PAYG obligations, please refer to PAYG withholding essentials on the ATO website.

2.10 A subcontractor who is in breach of a construction contract pays liquidated damages to the head contractor. Is the payment of liquidated damages by the subcontractor consideration for a taxable supply?

Non-Interpretative - straight application of the law

ATO position

No. For an explanation of the reasons for the answer, see paragraphs 110 to 114 of. GSTR 2001/4 - Goods and services tax: GST consequences of court orders and out-of-court settlements.

2.11 Is a subcontractor who pays liquidated damages to a contractor entitled to an input tax credit for the payment?

For source of ATO view, refer to paragraphs 110 to 114 of GSTR 2001/4 - Goods and services tax: GST consequences of court orders and out-of-court settlements.

ATO position

No. The payment is not a creditable acquisition under section 11-5 of the GST Act because it is not consideration for a taxable supply: see the answer to Issue 2.10 above.

2.12 If there is an obligation on a subcontractor who is in breach of a construction contract to pay liquidated damages to the contractor, is the payment made by the subcontractor's insurer in settlement of the contractor's claim consideration for a taxable supply?

For source of ATO view, refer to:

•

the general principles in GSTR 2006/10 - Goods and services tax: insurance settlements and entitlement to input tax credits

•

paragraphs 110 to 114 of GSTR 2001/4 - Goods and services tax: GST consequences of court orders and out-of-court settlements.

ATO position

Payment by the insurer in settlement of the claim will either be made:

(a)

to the subcontractor, in reimbursement of the amount paid, or to be paid, by the subcontractor to the contractor by way of liquidated damages; or

(b)

to the contractor direct by way of liquidated damages due by the subcontractor.

If payment is made by the insurer to the subcontractor, who is the insured, section 78-45 of the GST Act will apply and the payment will not be treated as consideration for a supply made by the insured.

Although this will be the situation in most cases, the payment will be treated as consideration for a supply made by the insured if:

1.

the insured paid all or part of the premium

a.

was entitled to an input tax credit for the premium paid

b.

did not, at or before the time a claim was first made under the insurance policy since the last payment of a premium, inform the insurer that the insured was entitled to the input tax credit.

If the insured understated the entitlement to an input tax credit to the insurer, then the payment is treated as consideration to the extent the entitlement was understated. If the payment is made to the contractor direct (a third party) then the payment will not be treated as consideration for a supply to the insurer by the contractor.

If the subcontractor, having settled its claim with its insurer under the relevant policy of insurance, makes payment of liquidated damages in discharge of its liability to the contractor, the payment will not be treated as consideration for a supply to the subcontractor by the contractor in accordance with the ATO view set out in Issue 2.10 above.

2.13 Does section 12 of the GST Transition Act apply to services provided by architects, engineers and surveyors?

For source of ATO view, refer to general principles in:

•

GSTB 2000/4 - How you calculate and pay GST on a progressive or periodic supply that spans 1 July 2000

•

GSTD 2000/3 - Goods and services tax: transitional arrangements: to what extent is the supply of services made on or after 1 July 2000, where the supply spans that date?

ATO position

Where services are provided by architects, engineers, surveyors etc it is necessary to determine whether, under the terms of the agreement, the supply is for a particular task or whether it is a supply made for a period or progressively over a period.

Generally, a supply of services is made when those services are performed. This rule is modified where a supply spanning 1 July 2000 is made for a period or progressively over a period.

Where the supply is for a particular task, it will be necessary to determine the extent to which the services have been performed prior to 1 July 2000 as these services will not be subject to GST. Where a supply is for a period or progressively over a period that spans 1 July 2000, the supply is treated as having been made continuously and uniformly over the period. A supply is a progressive or periodic supply if it is made for a specific period (for example, a engineer on a retainer for 12 months, or a landscape gardener engaged under a 12 month maintenance agreement).

However, a supply will not be for a specific period merely because there is a stipulated completion date. This is because the agreement is for the undertaking of a task rather than a supply for a period. If the task is completed before the stipulated completion date, then the service is completed. For example, a painter who contracts to paint a house by a specified date is not agreeing to provide his services until that date. Instead he is agreeing to complete a task by that date so he is not making a supply for a specific period.

Example 1 Subsection 6(4) of the Transition Act

Kylie is a consulting architect who is registered for GST on 1 July 2000. On 15 June 2000 she enters an agreement to draw up architectural plans for Michael's house. The fee for the drawings is $8000 plus any GST. Kylie also agrees to provide to her client the additional service of supervising the construction. The fee for the additional service is $2000 plus any GST. The plans are completed on 15 July 2000, and the construction of the house commences. Kylie has kept timesheets showing the amount of work that she has done before 1 July 2000. Her time sheets indicate that 80% of the work in producing the drawings was performed before 1 July 2000. The GST payable by Michael to Kylie on the whole supply is $360 (20% × $8000 × 10% + $2000 × 10%).

Example 2 Section 12 of the Transition Act

Joe Garden is a sole trader who has his own landscaping business. He is registered for GST on 1 July 2000. On 1 April 2000 he enters into a 12 month maintenance agreement with Springfield Shire Council to maintain the council's lawns and gardens. The agreement commences immediately. Joe's fee for his services is $6000 plus any GST. This is a supply for a period to which section 12 of the Transition Act applies. Consequently, the supply is taken to be made continuously and uniformly over the 12 month period, despite the fact that Joe mows the lawns more often during the summer months. GST of $450.41 is payable on this supply (274/365 × $6000 × 10%).

GSTB 2000/4 and further expand on this issue.

2.14 Class of tax invoices that may be issued by the recipient of a taxable supply of construction work or related goods and services.

Non-Interpretative - straight application of the law

ATO position

An industry determination A New Tax System (Goods and Services Tax) Act 1999 Classes of Recipient Created Tax Invoice Determination (No 27) - Property and Construction sets out the requirements for Recipient Created Tax Invoices.

2.15 Where a manager (not being an employee of a principal contractor) is appointed to supervise the work of subcontractors and is entitled to receive a percentage (for example 10%) of the total value of the construction contract, will the manager now be entitled to claim 10% of the GST-inclusive value of the construction or will the manager's entitlement remain 10% of the GST-exclusive value of the construction contract?

Non-Interpretative - straight application of the law

ATO position

The question as to whether a manager is entitled to a given percentage of the GST-inclusive or GST-exclusive value of a contract is not a question that may be determined by reference to the Goods and Services Tax legislation. It is a question that may only be resolved by reference to the contract entered into between the manager and the party who appointed or engaged the manager for a given project. Accordingly, the Commissioner of Taxation is unable to provide any advice in relation to this contractual matter.

2.16 Will unaffixed materials that have been paid for before 30 June 2000 be included in the value of head contractors' work and materials as at 1 July 2000?

This issue has been withdrawn. For information about the GST implications of a supply of building work under a contract that spans 1 July 2000, see GSTR 2000/14 and GSTR 2000/18.

2.17 How are payments made pursuant to a building contract spanning 1 July 2000 treated for GST purposes?

This issue has been withdrawn. For information about the GST implications of a supply of building work under a contract that spans 1 July 2000, see GSTR 2000/14 and GSTR 2000/18.

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