Construction and trade businesses are among the most complex clients a bookkeeper can service in Australia. The combination of subcontractor payments, progress billing, retention clauses, PAYG withholding for ABN-less contractors, TPAR reporting, and the GST treatment of construction contracts creates a set of compliance requirements that don't arise in most other industries.
This guide covers what bookkeepers and BAS agents need to handle construction clients competently.
Contractor vs employee: why it matters more in construction
The construction industry has a higher rate of misclassification between employees and contractors than almost any other sector. The ATO actively reviews construction businesses because the risk of misclassification — and the associated underpayment of super guarantee and PAYG withholding — is significant.
The ATO's tests for employment vs contracting in construction:
A worker in construction is more likely to be an employee if they:
- Work regular or set hours
- Work primarily for one principal contractor
- Use equipment and materials provided by the principal
- Have no risk of loss or ability to profit from the arrangement
- Cannot subcontract the work to others
A worker is more likely to be a genuine contractor if they:
- Quote on specific jobs
- Have their own ABN, tools, and materials
- Work for multiple clients simultaneously
- Bear financial risk (their own workers' compensation, public liability)
- Have a business structure separate from their personal activities
Bookkeepers managing construction clients should review any worker who is paid on a regular ongoing basis — if they look more like an employee, flag for the client and tax agent to review. The cost of misclassification includes back payment of SG, PAYG withholding, and penalty interest.
PAYG withholding for ABN-not-quoted contractors
Under the Tax Administration Act, if a contractor does not provide an ABN, the paying business must withhold 47% of the gross payment before paying the contractor. This is distinct from the superannuation guarantee — it's a cash withholding remitted to the ATO.
Construction businesses working with subcontractors frequently encounter new workers who:
- Are new to subcontracting and haven't yet registered an ABN
- Have allowed their ABN registration to lapse
- Are working under an incorrect ABN (another family member's or employer's)
The 47% withholding rule exists to prevent income from going completely unreported. It catches contractors who are working off the books.
Bookkeeping for 47% withholding:
- Check every subcontractor invoice for a valid ABN before payment
- Verify the ABN on the ATO's ABN Lookup tool (abnlookup.gov.au) — it must be active and registered to the business entity paying you
- If no valid ABN: withhold 47% of the gross invoice
- Pay the subcontractor the net amount (53% of gross)
- Report and remit the withheld 47% through the activity statement (W1/W2 labels)
- Report the payment in the TPAR
Progress billing and retention
Construction contracts typically involve progress billing — invoices raised at defined stages of completion rather than at project end. The bookkeeping considerations:
Revenue recognition: Under Australian accounting standards (AASB 15), revenue is recognised when (or as) performance obligations are satisfied. For construction contracts, this is typically over time as the work is performed. The timing of invoice issuance does not always match revenue recognition.
Retention amounts: Most commercial construction contracts allow the client to withhold a percentage (typically 5–10%) of each progress payment as retention until practical completion. This retention is held by the client to cover defect rectification.
Bookkeeping for retention:
- Raise the invoice at the full contract amount for the progress claim
- Code the retention deduction to a "Retention Receivable" account (asset) — it is owed to the business but not yet paid
- When the retention is released and paid, move it from Retention Receivable to bank
Common error: coding the full progress invoice but not tracking the retention receivable separately, causing the accounts to show income for which cash has not been received and may not arrive for 12 months.
GST on construction contracts: important nuances
Standard taxable supplies: Most construction work is taxable at 10% GST. Residential construction, commercial construction, renovations, and trade work all attract GST.
New residential premises: The first sale of new residential premises is taxable (the developer charges GST on the sale). Buyers can claim an ITC only if purchasing for business/investment purposes. Purchasers who are buying for personal occupation cannot claim the ITC — the GST is effectively embedded in the purchase price.
The margin scheme: Under the margin scheme, a developer who sells new residential premises may calculate GST on the margin (selling price minus acquisition cost) rather than the full selling price. This requires mutual agreement between buyer and seller and proper election. Bookkeepers for property developers must know whether the margin scheme applies, as it changes how GST is calculated on sales.
Construction contracts that straddle multiple periods: A 12-month building contract results in GST liabilities as progress invoices are issued. Each invoice creates a BAS liability in that quarter — ensure the progress billing schedule is reflected in BAS lodgements.
TPAR for construction businesses
Construction is one of the original TPAR industries. Any building or construction business that makes payments to contractors must lodge a TPAR by 28 August each year.
The scope is broad: a builder who subcontracts electrical, plumbing, framing, and landscaping must report payments to all of those subcontractors. A sole trader plumber who subcontracts overflow jobs to another plumber must also report.
TPAR data collection for construction clients:
For every subcontractor paid during the year, maintain a record of:
- ABN
- Business name
- Address
- Gross payments (including GST)
- GST component of payments
Update this record at each reconciliation — don't wait until August. Construction businesses often have 10–30 subcontractors per year. Reconstructing records from 12-month-old invoices wastes significant time.
Cash businesses and GST reconciliation
Construction has a higher proportion of cash transactions than most industries — particularly sole traders and small building firms. The ATO's benchmarking data flags construction businesses whose gross profit margins deviate significantly from industry norms, which can indicate either high cash transactions or coding errors.
ATO construction benchmarks (2025): Gross margins for trade services typically range from 20–45% depending on trade. Labour-only contractors typically have higher margins (70–80%); material-and-labour contractors have lower margins.
If a client's reported margins are outside benchmark ranges, review whether:
- Cash receipts are fully reported (all jobs, including cash)
- Material costs are properly coded (not mixed with other expenses)
- Subcontractor costs are correctly classified
Plant and equipment: construction assets
Construction businesses have significant capital expenditure in plant and equipment — excavators, scaffolding, vehicles, power tools. The instant asset write-off, vehicle luxury car limits, and depreciation pool rules all apply.
For large equipment (excavators, cranes): these are typically above the instant write-off threshold and must be depreciated. For tools and small equipment under $20,000: immediate deduction available.
Construction vehicles are subject to the luxury car limit for the business use portion deductible under instant write-off. Any vehicle component above the limit must be depreciated.
This article was last reviewed on 27 May 2026. ATO construction industry benchmarks and contractor withholding rules change periodically. Always confirm current requirements at ato.gov.au. This is general guidance, not specific tax or legal advice.