GST on Variations and Retentions in Australian Construction

May 27
8 min read

The GST traps that cost AU builders cash flow they didn't budget for

Most Australian construction operators get GST broadly right at the BAS level. The 10% comes in, the 10% comes back out, the net is paid. Where it goes wrong is the timing — and in construction, timing is everything.

GST on a variation that was recognised in March but invoiced in April. GST on retention you've recognised but won't collect for 18 months. GST on dayworks performed Monday and billed Friday three weeks later. Each of these has a specific ATO position. Most builders miscalibrate, the ATO doesn't notice for a few BAS cycles, then a desk audit finds the gap and assesses penalty interest.

This is the tactical guide. Specific scenarios, specific journal entries, specific BAS rows. Built on the principles in the Construction Accounting Australia cornerstone piece.

The core GST principle for construction

Under A New Tax System (Goods and Services Tax) Act 1999, GST is payable on a taxable supply at the time of supply — which is the earlier of when the invoice is issued OR when payment is received (for entities on accruals basis, which is the standard for AU construction businesses above the cash-accounting threshold).

For most AU construction operators above $10M revenue, you're on accruals (you must be — the GST cash-accounting threshold is $10M turnover). That means:

GST liability arises when you ISSUE the invoice for the underlying supply
OR when you receive payment, whichever is earlier
You can't push GST into a later BAS period just because cash hasn't been received

The complication in construction: the AASB 15 revenue recognition timing (cost-to-cost percentage of completion) is often EARLIER than the invoice date for progress claim work, and the invoice date is often EARLIER than the cash receipt date for retentions. That creates three time points — and the GST attaches to the invoice point.

GST on progress claims — the normal case

You raise a progress claim invoice for $1,100,000 (incl GST = $1,000,000 supply + $100,000 GST). The invoice goes out on day 5 of the month. The customer pays on day 35.

GST is payable in the BAS period that includes the invoice date. If you raise the claim on 5 April, GST is in the April BAS. If you're on monthly BAS, that's due 21 May. If you're on quarterly BAS, that's due 28 July (for the April-June quarter).

The cash you collect on day 35 may not even land before BAS is due — which is normal. You manage the cash flow gap.

GST on retention — the painful trap

Now the harder case. The progress claim includes 5% retention. So $1,000,000 supply value (ex GST), of which $950,000 is collectible now (95%) and $50,000 sits as retention.

What's the GST liability?

The full $100,000 (10% of $1,000,000 supply value). NOT $95,000 (10% of cash collectible).

The ATO position: GST is on the supply, valued at the consideration the recipient has agreed to provide. The retention is consideration — it's a deferred payment, but it's still part of the agreed consideration. So GST applies to the gross supply, payable at supply.

Worked BAS example

Progress claim raised 5 April for $1,100,000 (incl GST):

Cash collected by head contractor on day 35: $1,045,000 (= $950k ex GST + $95k GST + $50k retention − but the $50k retention is withheld AFTER GST, so the cash includes $95k of GST not $100k)
Retention held: $55,000 (= $50k value + $5k GST)

April BAS — what you report:

G1 (Total sales): $1,100,000 (or $1,000,000 depending on whether your software reports inclusive or exclusive)
1A (GST on sales): $100,000

You owe $100,000 in GST on the April BAS, even though you've only received $95,000 of GST in cash. The remaining $5,000 of GST sits in retention asset on your balance sheet — it's been remitted to the ATO out of working capital, recoverable only when retention is released.

When retention is released

Practical completion reached on 15 December. 50% of retention released: head contractor pays $27,500 (= $25k retention + $2.5k GST).

December BAS:

NO additional GST liability. The original supply's GST was already reported in April.
The $27,500 cash arrives as a recovery of the contract asset balance, not a new sale.

Journal:

Dr  Cash                       $27,500
    Cr  Retention asset             $27,500

No GST entry — that was all done at supply date.

GST on variations — same principle, sharper timing

Variations have a defined approval workflow:

Variation order requested by head contractor
Builder priced + submitted
Head contractor approves with VOC number
Work performed
Variation invoice raised
Cash collected

GST liability arises at step 5 — when the invoice is raised. Not step 4 (when work performed) and not step 6 (when cash collected).

The trap

You perform variation work in March. Variation invoice raised on day 25 of April. GST liability is in the April BAS (when the invoice is dated), not the March BAS.

BUT — for AASB 15 revenue recognition, the variation revenue IS recognised in March (when the work was performed, applying the variation constraint test from AASB 15 step 3). So you have an asymmetry:

March: variation revenue recognised. Contract asset / unbilled revenue increases.
April: variation invoice raised. GST liability arises. Cash receivable.
May (or whenever): cash received.

The accounting handles this naturally if you separate the variation accrual journal from the variation invoice journal. The issue is when finance lumps them — booking GST in March (per AASB 15) instead of April (per GST Act).

Worked BAS example — variation

Variation #14 approved, work performed in March, $44,000 value (incl GST = $40,000 supply + $4,000 GST). Invoice raised 24 April. Cash received 18 May.

March journals (AASB 15 revenue recognition):

Dr  Contract asset (unbilled variation)    $40,000
    Cr  Variation revenue                          $40,000

No GST entry in March.

April journals (invoice raised):

Dr  Trade receivables                        $44,000
    Cr  Contract asset (unbilled variation)         $40,000
    Cr  GST payable                                  $4,000

April BAS: $4,000 GST in 1A.

May journals (cash received):

Dr  Cash                                     $44,000
    Cr  Trade receivables                            $44,000

No new GST. Clean.

GST on dayworks

Dayworks are time-and-materials work performed at the head contractor's instruction. Same GST principle: payable on the BAS for the period the daywork invoice is dated.

The trap: dayworks performed week-by-week often get invoiced weekly OR consolidated into a monthly variation invoice. Whatever the invoicing pattern, GST follows the invoice date.

What kills builders is forgetting to invoice daywork — work performed, daywork sheet signed, invoice never raised. The work is recognised as revenue (AASB 15) but no GST liability is triggered because no invoice exists. The auditor finds this at year-end; the BAS adjustment back-dates GST plus penalty interest.

BAS reporting tactics for construction

Monthly vs quarterly

Most $2M-$10M operators are on quarterly BAS by default. Above $20M turnover, monthly is mandatory.

For construction operators between $10M-$20M who CAN choose, monthly often makes more sense:

Monthly close timetable already aligns with monthly BAS
Smoother cash flow (smaller quarterly bumps)
Earlier surfacing of any GST issues

The downside is more lodgements. If your bookkeeping is on Xero / MYOB and the close is disciplined, monthly is no extra effort.

What goes where

BAS row	Construction context
G1 (Total sales)	Progress claim invoices + variation invoices + daywork invoices + retention release notices (the underlying supply value)
G3 (Other GST-free sales)	If you sell ACCUs / STCs as part of the business — see ACCU pillar for treatment
G10 (Capital purchases)	Plant + equipment + vehicles >$1k — separately captured
G11 (Non-capital purchases)	Subcontract invoices + materials + site overheads
1A (GST on sales)	10% of G1 (excluding GST-free items)
1B (GST on purchases)	10% of G11 + G10 (where GST-able)

The reconciliation trap

Each BAS quarter, reconcile:

Total G1 sales reported on BAS = Total revenue in P&L for the period (less any GST-free / retention release / non-revenue items)
Total 1A GST on sales = Total GST collected per the GL
Total 1B GST on purchases = Total GST paid per the GL

If those three don't reconcile, the BAS is wrong. The reconciliation should run monthly as part of close, not quarterly at lodgement time.

Common GST mistakes in construction

Mistake 1 — Net of retention on the BAS

Builder reports G1 as cash actually received (excluding retention) instead of gross supply value. Under-pays GST. ATO finds it eventually; back-pays with interest.Fix: G1 = gross supply value (incl retention). 1A = 10% of that. Retention release later → no further GST.

Mistake 2 — GST on variations in the wrong BAS period

Variation revenue recognised in March (per AASB 15); GST mistakenly reported in March BAS too (when invoice not raised until April).Fix: GST follows invoice date, not AASB 15 recognition date. Separate the accrual journal from the invoice journal.

Mistake 3 — Dayworks never invoiced

Daywork performed but invoice never raised. Revenue recognised; GST not. Year-end audit finds the gap.Fix: Variation register includes a separate column for dayworks "invoiced y/n". Any line aged >30 days without invoice = escalation.

Mistake 4 — Subcontract GST in wrong period

Subbie's invoice dated 28 April received by you on 5 May. You record it in May and claim the GST input credit in the May BAS — but the invoice's tax date is April. The ATO can reject the input credit if the invoice tax date is in a different period.Fix: GST input credits follow the supplier's invoice date, not your receipt date. Adjust to the correct period.

Mistake 5 — Margin scheme on developer land

Residential developers selling property where land was acquired pre-2000 may qualify for the margin scheme. Different GST calculation. Easy to miss the eligibility test if you're not specifically looking.Fix: Annual review of any property held with pre-2000 acquisition. Get a margin scheme tax opinion before sale exchange.

The monthly GST checklist (for inclusion in close timetable)

Reconcile G1 (total sales) to GL revenue for the period — variances explained
Confirm retention split on each progress claim invoice — full supply value in G1
Confirm variation invoices in the right period (invoice date, not work-performed date)
Daywork register checked — any unbilled daywork in the period escalated
Subcontract invoices coded to the period of their tax date (not receipt date)
Capital purchases >$1k separated to G10
BAS lodged on time (28 of month after period end, with the deferral if eligible)

When this is a specialist conversation

If your business has ever had:

A material BAS adjustment or ATO audit finding
A retention dispute where GST treatment was contested
A variation-heavy contract with messy GST timing
A margin scheme question on land

...the GST exposure analysis is CPA-led work, not bookkeeper-level. At TechEdge, the GST policy review is included in Financial Controller tier engagements ($4,950/month) and we run a quarterly GST reconciliation as part of monthly close.

TL;DR for the busy founder

GST is on supply value (incl retention), payable at invoice date.
Retention release later = no new GST.
Variations: GST follows invoice date, not AASB 15 work-performed date.
Dayworks: invoice them — or no GST trigger, but a revenue recognition gap.
Reconcile G1 / 1A / 1B / GL monthly, not quarterly.
Variation register tracks "invoiced y/n" — protects against the unbilled-daywork pattern.
Margin scheme: review annually for any pre-2000 land holdings.