Every construction contract in Australia seems to share one stubborn feature: a portion of every progress payment never hits the bank account on the first pass. That withheld slice, usually five to ten per cent of the contract sum, is called retention money. Principals and head contractors keep it as insurance that the finished work will be defect-free and compliant with the contract. For bookkeepers, CFOs and external accountants, that one line item opens a web of legal obligations, trust-account rules, revenue-recognition timing issues and Goods and Services Tax questions that differ from Brisbane to Broome. This guide unpacks the maze in plain language and stitches the rules, the accounting entries and the practical tools together so your books, your cashflow and your compliance record stay intact.
What retention payments really are – and why they matter
A retention payment is not a discount, a penalty or a performance bonus. It is an amount of consideration already earned by the contractor but temporarily withheld until the contractor satisfies a future performance condition, usually practical completion and then the end of a defects-liability period. Under Australian contract law the contractor retains beneficial ownership of the sum, yet has no enforceable right to receive it until the condition is met. In accounting terms, that subtle legal twist turns retention into a contract liability for the party that withholds it and a conditional receivable for the party that earns it. Cashflow modelling often ignores the delay, so businesses that live hand-to-mouth can run short when a run of large projects all reach completion at once and half their expected cash is still locked away for a year.
The legislative landscape: one Commonwealth, eight different rule books
Australia has no single federal Retention Act. Instead, the Australian Accounting Standards Board sets the revenue-recognition rules, the Australian Taxation Office rules on GST and income tax timing, and every state and territory runs its own security-of-payment regime that dictates how retention money must be held, reported and released. The table below summarises the position as at July 2025.
| State/Territory | Governing legislation | Mandatory trust account? | Typical cap on retention | Statutory release trigger | Maximum penalty for breach* |
|---|---|---|---|---|---|
| Queensland | Building Industry Fairness (Security of Payment) Act 2017, ch 3 | Yes for most contracts over $1 m | 10 % first half of contract, 5 % thereafter (QBCC guideline) | 50 % at practical completion, balance at end of defects period unless dispute | Up to $689,125 for corporations |
| New South Wales | Building and Construction Industry Security of Payment Act 1999 s 11 | Retention trust not mandatory but ledger and quarterly statements required | 5 % by industry practice, 10 % statutory cap on residential | Same as contract; must not be unreasonably withheld | $22,000 per contravention |
| Victoria | Building and Construction Industry Security of Payment Act 2002 s 9 | No trust, but unfair-retention provisions | 5 % usual, no statutory cap | Release as per contract, subject to “not unreasonable” test | Civil penalties by VCAT |
| Western Australia | Building and Construction Industry (Security of Payment) Act 2021 pt 4 div 2 | Yes for projects ≥ $1 m under 2024 rollout | 5 % common; legislative cap 10 % | Release dates set in written contract; default 12 months | $250,000 corporation fine |
| South Australia | Building and Construction Industry Security of Payment Act 2009 | No trust | Industry practice 5 % | Contract governs; adjudicator can order release | $20,000 fine |
| Tasmania, ACT, NT | Respective SOP legislation | No trust | 5 % common | Contract governs | Varies: civil claims only |
* Monetary figures convert each state’s penalty units into dollar equivalents at 2025 rates.
Legislation moves quickly. Queensland expanded its trust regime to cover almost all commercial construction work from 1 July 2024, and Western Australia finished phasing in its own scheme in February 2024. When a contractor works across borders, the safest approach is to open a separate retention trust that satisfies the strictest requirement among the states in which the business operates, then apply local reporting on top.
Accounting treatment: when revenue is earned, when cash arrives and how to book the gap
AASB 15, Revenue from Contracts with Customers, governs recognition for construction entities. Paragraph 105 instructs an entity to record a contract liability for consideration received – or withheld – before the entity transfers control of goods or services. For a head contractor, the retention it withholds represents cash received from the client but not yet earned by the subcontractor; for the subcontractor, the same amount sits as a contract asset or retention receivable. The journal entries look like this for a $100,000 progress claim with 5 % retention:
On issuing the claim (subcontractor books, GST on accrual):
Debit Contract assets (retentions receivable) $5,000
Debit Trade receivables $95,000
Credit Revenue $100,000
Credit GST payable $10,000
When the principal pays $95,000 cash:
Debit Bank $95,000
Credit Trade receivables $95,000
Once the defects period ends and the retention is released:
Debit Bank $5,000
Credit Contract assets $5,000
The head contractor mirrors the entry as a contract liability. If the defects period straddles two financial years, revenue stays recognised up front but the cash hit moves, so a clean reconciliation between the contract asset and the aged receivables ledger becomes essential for year-end reporting and audit sign-off. AASB 9 then requires an expected-credit-loss assessment on the retention receivable, especially if the principal’s solvency is in doubt.
Recording retentions in Xero, MYOB and QuickBooks
Software handles the numbers but only if it is configured correctly. Many construction audits uncover GST mismatches because retention lines ride on ordinary invoice templates. The comparison table below sets out the key steps.
| Feature | Xero Projects | MYOB Business | QuickBooks Online Advanced |
|---|---|---|---|
| Chart of accounts setup | Create “Retention Receivable” current asset and “Retention Liability – Clients” current liability | Add identical accounts or use built-in “Retention” codes in construction template | Custom asset/liability accounts; enable Projects add-on |
| Invoicing method | Split progress claim: 95 % as line item with GST, 5 % as separate line item coded to Retention Receivable | Same approach; MYOB allows negative line to net off cash portion | Use delayed charge for retention, then convert to invoice after release |
| GST handling | Both lines attract GST; cash reporting businesses adjust in Business Activity Statement when cash received | MYOB automatically includes GST on retention line; user can override if cash basis | GST follows invoice date; cash basis handled in BAS centre |
| Reports | “Receivable Invoice Detail” plus custom report showing Retention Receivable balance | “Job Retention Report” in construction pack | Custom reports filter by account |
| Limitations | Manual reminder needed to raise final invoice for retention release | Automatic reminder optional but not default | Multi-currency retention tricky; plugin may be required |
A best-practice approach is to save invoice templates labelled “Progress claim with retention” so project managers cannot forget the split. The trust-account obligation, where it exists, sits outside the software: funds must land in a dedicated bank account whose statement reconciles daily, then the general ledger mirrors the trust balance through the Retention Liability account.
Goods and Services Tax and income tax timing
The ATO’s ruling GSTR 2000/29 is blunt: retention amounts form part of the consideration for the taxable supply when the progress claim arises, even though the cash is withheld. In cash-basis BAS lodgements the GST on the retained amount becomes payable only when you actually receive the money, but most medium-sized builders report on an accrual basis. If you book sales on accrual and forget to accrue GST on the retention, you under-pay and expose yourself to penalties under section 284-75 of the Taxation Administration Act.
For income tax, revenue under long-term construction contracts generally follows the accounting standard, so taxable income includes the full progress claim irrespective of the retention delay. Builders sometimes hit a liquidity wall in June because they owe income tax on profit that is still sitting in the principal’s bank account. Cashflow forecasts must therefore carry two separate lines: work in progress revenue and cash inflow after retention release.
Managing retention trusts and documentation
Where trusts are mandatory, as in Queensland and Western Australia, the law treats the trustee contractor as a fiduciary. Funds must flow into an approved ‘project trust account’ within five business days of each payment. The contractor then produces a monthly or quarterly statement to every subcontractor showing opening balance, deposits, withdrawals, interest and closing balance. Queensland’s QBCC prescribes Form 2 for the annual independent audit, due 60 days after each trust year end. Failure to lodge on time attracts automatic fines before the regulator even opens the file.
Even in jurisdictions without compulsory trusts, prudent head contractors quarantine retention money to protect cashflow and demonstrate solvency to financiers. A simple approach is to open a business savings account nicknamed “Retention Holding”, transfer the withheld amount on the day you receive the client’s payment, and reconcile that balance to the Retention Liability account at month end. Auditors view such discipline as a strong internal control.
Paper trails still matter. A watertight retention file contains the executed contract clause, every payment schedule, the defects-liability inspection certificate and the subcontractor’s final claim with release trigger. Digital folders labelled by project code keep those documents ready for adjudication or litigation. Cloud storage linked to the job card in project-management software means one click can retrieve everything if the relationship sours.
Common challenges and real-life examples
A national civil contractor recently completed parallel projects in Queensland, New South Wales and Victoria for the same mining client. The Queensland portion required a statutory trust, the other two did not. When finance staff coded all receipts into one debtor ledger, the trust accountant could not reconcile the Queensland balance and missed the QBCC’s 30-June audit window. The regulator issued an infringement notice for $6,892 and flagged the licence for review. The fix was deceptively simple: separate debtor codes for each state and an automated bank rule that swept Queensland retentions into the trust bank account on the day of receipt.
Another case involved a boutique residential builder that ran Xero on a cash basis. The bookkeeper coded the full invoice, including retention, to Trade Debtors but triggered GST on the total value at issue date. The builder paid $14,000 more GST than necessary across three BAS quarters before the external accountant picked up the error. Because the statutory two-year amendment window had not expired, the ATO refunded the over-payment with interest, yet the builder’s overdraft had carried the cash cost for eighteen months. A simple system rule change – flagging the retention account as BAS-excluded – would have prevented the drain.
Crafting a proactive retention strategy
Retention money does not need to strangle a construction company’s liquidity if management treats it as an asset that requires its own plan. Forecast cashflows on a project-by-project basis, matching expected release dates against subcontractor payouts. Negotiate lower retention percentages for trades with limited defect risk and offer bank guarantees where statute allows them to substitute for cash. Conduct monthly reviews of open defects lists so certificates of completion issue early, then raise the release claim immediately. Embed those milestones in your project-management software so the accounts team receives automatic alerts.
Technology can now bridge the gap between site and finance. Mobile defect-punch-list apps sync completion status to Xero or MYOB workflow. When the last defect is closed, the system drafts the claim for the retained amount, triggers the debtor reminder schedule and updates the cashflow dashboard. Over a portfolio of jobs that automation can release hundreds of thousands of dollars several weeks sooner than manual tracking.
Final Recommendation
Retention money sits at the crossroads of law, accounting and project management. Treat it casually and the consequences ripple from overdraft spikes to regulator fines and lost tender opportunities. Treat it with the respect that AASB 15, the ATO and every security-of-payment act demand and it becomes a predictable, controlled element of working capital. Start by mapping your state obligations, build the correct chart-of-accounts structure, train your project managers to think beyond the next progress claim and, above all, keep every retention dollar exactly where it belongs until the day the contract says it can come home. With those disciplines in place, retention stops being a headache and starts acting like what it truly is: earned money just waiting for you to collect it.
