Residential construction and property development sit at a convergence of complex accounting standards, GST compliance rules that changed materially in 2018, and ongoing TPAR obligations. The bookkeeping for a building company is qualitatively different from most trades and service businesses, and the errors that arise — particularly around revenue timing and GST withholding — are material enough to create real tax and cash flow problems.
Revenue Recognition Under AASB 15: Over Time or At a Point in Time
Under AASB 15, a home builder recognises revenue either at a point in time (on handover) or over time (as construction progresses). The determination depends on which party controls the asset as it is being built.
For standard residential construction contracts — where a builder constructs a house on land that the client already owns — the client has an enforceable right to the work in progress throughout the build (they own the land and cannot typically be ejected from the partly constructed asset). This means the client controls the asset as it is constructed, and the builder recognises revenue over time, typically using the percentage-of-completion (input or output) method.
For spec houses — where a developer-builder constructs dwellings on their own land and sells the completed house — the developer owns the land and the construction throughout. The buyer does not control any asset until settlement. Revenue is therefore recognised at the point of sale when the property is transferred at settlement.
This distinction generates fundamentally different accounting entries. Over-time contracts accrue revenue throughout the build; point-in-time contracts accumulate costs as WIP and recognise all revenue on a single settlement date. Applying the wrong model understates or overstates revenue in interim periods and can distort quarterly BAS obligations.
GST Withholding at Settlement
Since 1 July 2018, purchasers of new residential premises and potential residential land are required to withhold the GST component (generally 1/11th of the contract price, or 7% where the margin scheme applies) at settlement and remit it directly to the ATO. The builder or developer does not receive the GST from the buyer at settlement — the ATO receives it directly.
Before settlement, the vendor must provide the buyer with a written notification specifying whether the property is subject to GST withholding, the amount to be withheld, and the vendor's ABN and GST registration details. Failure to provide this notice is a civil penalty offence.
The practical cash flow impact on the developer is significant: instead of receiving the full contract price at settlement and remitting the GST to the ATO on the next BAS, the developer receives the net of GST price only, and the credit from the ATO for the withheld GST only appears when the BAS is processed. For a developer settling multiple properties in a quarter, the timing gap between settlement (and cash received net of GST) and the BAS credit creates a working capital requirement that must be planned for. Do not underestimate this — it can represent hundreds of thousands of dollars on a volume development.
The ATO credits the withheld GST against the developer's BAS liability. If the developer has construction input tax credits in the same BAS period, these can partially or fully offset the GST liability — but the offset only crystallises when the BAS is lodged and processed.
Construction Work in Progress Accounting
For spec developments where revenue is recognised at the point of sale, all construction costs are capitalised as work in progress (WIP) until the dwelling is sold. WIP is an asset on the balance sheet — not an expense. Costs that are capitalised include:
- Land cost (already held on balance sheet)
- Labour costs (direct construction staff or subcontracted trades)
- Materials
- Plant and equipment hire
- Subcontractor invoices
- Council fees, planning costs, and infrastructure contributions
Borrowing costs on construction finance are also capitalised as part of the cost of the qualifying asset under AASB 123 — Borrowing Costs. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale. Residential development projects almost universally qualify. Capitalising interest is mandatory under AASB 123 for entities that apply Australian Accounting Standards.
When the dwelling is sold, the accumulated WIP balance for that lot is transferred from inventory to cost of goods sold (COGS) in the P&L. The bookkeeper must maintain per-lot WIP records to ensure the correct cost is matched against each lot's revenue.
Subcontractor Payments and TPAR
Home builders making payments to subcontractors for building and construction services must lodge a Taxable Payments Annual Report (TPAR) by 28 August each year. This covers all payments to subcontractors engaged as contractors (not employees) including concreters, framers, bricklayers, carpenters, roofers, plumbers, electricians, plasterers, and tilers.
The TPAR requires: the subcontractor's ABN, name, address, total amount paid (gross), and total GST withheld (if any). Payments to subcontractors who provide an ABN but are otherwise validly engaged do not have GST withheld — the TPAR just records the total paid.
Where a subcontractor has not quoted an ABN, PAYG withholding at 47% (no-ABN withholding) must be applied at the time of payment. This is a common compliance failure on building sites where informal arrangements are made.
Government Grants and Subsidies
Government homebuilding incentive grants — including the Commonwealth's HomeBuilder program and various state-based first home buyer grants — are assessable income for the recipient in the year received. The character of these receipts is a government subsidy under s.6-5 or s.15-10 of the ITAA 1997. They are not contributions of capital or exempt income.
GST does not apply to government grants paid directly to the homebuyer or builder. If the grant is paid to the builder on the buyer's behalf, the builder still does not include GST on the grant receipt — the GST treatment of the underlying sale is determined by the contract price between builder and buyer, not affected by the grant payment channel.