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In general, commercial building and construction contracts contain a provision by which the client is entitled to withhold (or ‘retain’) a certain amount from each progress payment they make to the builder. In the HIA Medium Works Commercial Contracts any retention monies are to be set out in Item 6 of the Schedule of Particulars.
The purpose of retaining these payments is for the client to secure the proper performance of the works by the builder.
The client may use part or all of the retained sums to offset the builder’s liability in the event that the builder does not carry out the works in a proper and workmanlike manner or fails to carry out rectification of defects within the period required under the contract.
The Medium Works Contract provides for release of retention moneys as follows:
If the retention amounts are not released then this is a matter which can be dealt with under the dispute resolution provisions of the Contract, which includes mediation or arbitration of the dispute (see clause 28 of the Contract).
The Australian Taxation Office has made rulings in relation to supplies and acquisitions made under a contract that provides for the client to retain part of the progress claim pending the end of a defects liability period under the contract.
The rulings state that GST is not payable on the retention sum until the retained amount is actually released. For example, if you make a progress claim for $20,000 and the client is contractually entitled to retain 5% of each progress claim, then this would be handled as follows:
Deduct retention of 5%: $1000
Net amount to be paid: $19,000
Add GST to net amount: $1900
Total amount to be invoiced: $20,900
The retention amount of $1000 plus GST of $100 on this amount would then be invoiced to the client at the time when the retention amount is due to be released under the contract.
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