________________________________________________________________________________ GST- Retention Payments (June 2017) © The Institute of Certified Bookkeepers Page 1

What is a Retention Payment? Retentions are used in the Building and Construction industry to secure performance of a project. Retention is money held back from contract fees to protect against defects which could develop and the contractor fails to fix. This amount is usually 5% of the full contract fee though this can be 3% for larger work. The retention value is reduced from the Progress Invoice raised for each stage of the Contract. The percentage, proprietor’s right to retain these amounts and the builder’s entitlement for the release of these funds are usually outlined in an agreement between both parties prior to commencement of works stating what the conditions of the retention are. What are the GST Implications of Retentions? Once the retention amount is released to the builder GST applies in the same way as it would to progress payments under the building contract. It is not considered a separate supply but part of the original supply under the original contract. If the retention amount is not paid to the builder then the amount withheld is considered a reduction of the supply in the original contract. As a bookkeeping entry this would be considered a bad debt. Click here for more information on the ATO: Goods and Services Tax Ruling GSTR 2000/29 30. Retention payments If a supply is made under a contract where the recipient has retained part of the contract price pending full and satisfactory performance of the contract, or until the end of a defects liability period, the price of what is supplied is the total consideration payable including the retention amount. The tax invoice must contain enough information to enable the total price of this supply to be clearly ascertained. However, the tax invoice can also show the net amount payable while still satisfying this requirement. For example, the tax invoice may set out the price of what is supplied, separately show the retention amount, and show a net amount payable. 100. The effect of the particular attribution rule is to defer attribution of the part of GST payable or the part of input tax credit that relates to the retention amount until the amount is actually received or provided, or a document notifying an obligation to pay the retention amount is issued in relation to that amount following expiry of the defects liability period. Bookkeeping Process Scenario Bob the Builder has signed an agreement with a building company to build a new office. The total cost of the work to the building company will be $100,000 ex GST. A retention payment of 5% being $5,000 is to be withheld for a period of 6 months after completion of the building.

Retention Payments

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Set up New Account You need to set up three new accounts:

1. Liability – Deferred Retentions 2. Income – Less Retentions 3. Asset – Retention Debtors

Follow up Diary Contact Recommend to create a re-contact diary entry to follow up the retention value after the expiry period to withhold the retention. Create the Sale Less Retention The invoice to the client will differ to the bookkeeping entry required for retentions. It is recommended to create the sale for the client and print and send and then return to the sale and add the additional transactions for the retention movement. The GST doesn’t need to be paid until the retention has been paid so how do you allocate that within your invoicing especially if you are accrual based? Invoice Example

Invoice Bookkeeping Entry This would be split into three account groups as per below. Edit the above invoice and add the retention accounts.

! Line 1 – CR full amount of contract ! Line 2 – DR negative figure of the 5% retention value allocated to new income retention

account ! Line 3 – CR deferred retention value to be withheld ! Line 4 – DR retention debtors ! Leaves the total value of contract + GST on value less retention

Invoice Account Credit Tax Code Project X Contract Building (Full Contract Value) Income $100,000 GST Less: 5% Retention Withheld Income -$5,000 GST Plus GST $9,500 No Tax Total $104,500

Invoice Bookkeeping Entry Account Debit Credit Tax Code Contract Building (Full Contract Value) Income $100,000 GST Less: Retentions Withheld Income $5,000 GST Deferred Retention Withheld Liability $5,000 No Tax Retention Debtor Asset $5,000 No Tax Trade Debtors Asset $104,500 No Tax GST Collected Liability $9,500 No Tax Total $114,500 $114,500

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By entering the invoice as above your receivables only shows the amount owing excluding the retention. Your GST collected account will also only reflect the GST collected on the contract fees less the retention. The retention owed will then show in the asset and liability section of your balance sheet. Recommend to add a Job to the Retention transaction to provide additional reporting for reconciliation purposes and Job information in the memo field if available. The same journals apply it you are invoicing for an interim or progress payment. Invoicing and Allocating for the Retention Once the contract has been finalised and the retention period has expired you need to invoice for the retention. You would just do a sales invoice as normal and ensure that you use the GST code to account for the GST on the retention which was not accounted for previously. This will now show in your Debtors reports. Retention Invoice Example

The next step is to clear the figures in the balance sheet. Return to the above invoice and add the retention clearing values:

! Line 1 – Full amount of retention add GST to income retention account ! Line 2 – Negative figure of the 5% retention value to liability deferred retention account ! Leaves to total value of GST retention

If you are the company paying the building the same above will apply except it will be a reversal of the journals. Write Off Retentions If for some reason the retention is not paid, then the outstanding retention should be written off as a bad debt from the receivables.

Invoice Bookkeeping Entry Account Credit Tax Code Outstanding Retention from Project X Income $5,000 GST Plus GST $500 Total $5,500

Journal to Clear Retention Value Account Debit Credit Tax Code Contract Building – Retention Income $5,000 GST Retentions Withheld (Add Name of Contract)

Liability $5,000 No Tax

Retention Debtor Asset $5,000 No Tax Trade Debtors Asset $5,500 No Tax Total $10,500 $10,500

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References

! ATO – Attribution Rules for Retention Payments