Your guide to tax and payment compliance in construction
The building and construction industry is a heavily regulated sector. It’s subject to laws, licences, insurances and workplace health and safety requirements set by the federal government and state, territory and local governments.
While some compliance regulations are applicable to all businesses, others are requirements specifically for the construction industry. This guide will outline some examples:
Compliance requirements applicable to all businesses
Single Touch Payroll
All companies need to report to the Australian Taxation Office (ATO) on the salaries and wages, pay as you go (PAYG) withholding, and the super contributions they make for their employees. With Single Touch Payroll Phase 2-compliant software, reports are automatically generated and sent to the ATO each time the employer processes payroll.
Business Activity Statements (BAS)
All businesses with income over a threshold level must lodge BAS statements. This is usually done quarterly and helps companies not only report on, but also pay their:
Goods and services tax (GST)
PAYG withholding tax
Making these payments at regular intervals throughout the year helps to reduce the tax liability at the end of the financial year.
Annual tax return
All companies need to pay tax on their income and lodge an annual tax return with the ATO. When lodging, they also need to provide BAS information and business records to substantiate their claims around income and expenses.
Payroll taxes are a state or territory tax on a company’s taxable employee wages. Payroll taxes apply when company wages reach a certain threshold. Payroll tax rates and thresholds vary around the country. Businesses that operate in and have employees in multiple states must register and pay payroll tax in each of those jurisdictions if:
Payroll totals are equal to or above the threshold levels for that state or territory;
A company’s total payroll amounts are equal to or above the current nationwide threshold of $1.3 million.
Additional compliance requirements for construction sector businesses
Taxable Payments Annual Reports
If building and construction companies earn at least 50% of their income from the services of contractors, they need to lodge a taxable payments annual report (TPAR) with the ATO by 28 August each year that declares all contractor payments for labour and materials.
The ATO developed TPAR reporting to deter contractors from under-reporting their income. Businesses from various industries and government agencies may need to lodge a TPAR.
Security of Payment laws
Security of Payment laws protect contractors, sub-contractors, consultants, and suppliers involved in providing goods and services in the construction industry. The laws are in place in each state and territory and provide a framework for resolving progress payment disputes as quickly and cost-effectively as possible – and typically without lawyers and court hearings.
Before the laws were introduced, payment delays could leave trades people and businesses struggling with cashflow and without many options or rights for recouping what was owed to them. This additional financial pressure increased their risk of insolvency.
Under Security of Payment laws, the process in each state and territory is that the business carries out the work as per their contract and issues their payment claim, which needs to include:
Details of the work done and/or the goods and services supplied.
The amount the contractor is claiming.
A statement declaring that the claim is made under the relevant legislation. This wording varies according to the state or territory that applies and in some states is not required.
The contracting party or respondent (the party required to pay) needs to respond to all payment claims received. They can either pay the amount in full on or before the due date, OR if they don’t agree that the work has been carried out as per the contract, they need to prepare and serve:
A payment schedule (if the project is in VIC, NSW, QLD, SA, WA, TAS, ACT) or
A Notice of Dispute (if the project is in NT).
Payment schedules need to include the following information:
Details of the payment claim to which it relates
The amount they are willing to pay (if any)
Amounts that should be excluded from the payment claim
All the reasons for withholding part or full payment
The respondent only has 10-15 business days (depending on the state or territory that applies) to respond to the progress claim with a payment schedule, or they’ll become liable for the full amount. A shorter timeframe may also apply if this is specified in the construction contract.
Trust account framework (QLD)
Principals and head contractors who operate in Queensland need to be aware that a trust account scheme applies to the building and construction industry in that state. This legislation mandates the creation of a project trust account for each eligible project and retention trust account for certain parties involved in those projects.
Project trust accounts
The scheme has been progressively rolling out since 1 March 2021 with the requirements currently applying to all private sector and local government construction projects valued at $10 million or more and all State Government projects valued at $1 million or more. Eventually all construction projects valued at $1 million or more (except small-scale residential work), will need a project trust account.
Project trust accounts are a type of statutory trust designed to protect payments to subcontractors. They must be set up and administrated by the head contractor for eligible projects, with each project requiring its own bank account to support the trust.
The legislation is designed to safeguard contractor payments as with trusts, funds can only go to the nominated beneficiaries. The head contractor can only use these funds to pay the sub-contractors who carried out the work and can’t use this money for other purposes. When all the sub-contractors have been paid, the head contractor can pay themselves.
Retention trust accounts
Further, Principals and Head Contractors need to set up a retention trust account to hold any cash retentions withheld from payment to their contractors. These funds remain in the retention trust account until practical completion when a proportion of funds can be released. The remaining funds are to be paid at the end of the defects and liability period if all is complete and as per the contract. Eventually, any parties that are withholding cash retentions on eligible projects will need a retention trust account.
Retention trust scheme (WA)
From 1 February 2023 to 31 January 2024, all new construction contracts over $1 million (including GST) that require the holding of retention monies as performance security will be required to hold the funds in a retention trust account.
From 1 February 2024 onwards, all new construction contracts over $20,000 (including GST) that require the holding of retention monies as performance security will be required to hold the funds in a retention trust account.
This scheme is designed to protect sub-contractor money from misappropriation or should the head contractor become insolvent. Each trustee (party withholding money) only requires one retention money trust account, so a single account can hold retention amounts across many projects. They are, however, required to maintain detailed account records and make these available to the beneficiary if requested.
Read more: Retention Trust Scheme – Commerce WA
Simplify payment compliance with MYOB
With MYOB Advanced Construction, your accounting and tax is integrated with your other key workflows – your projects, customers, employees, suppliers, and finance. This means you can generate reports at the click of a button and lodge this information directly with the ATO.
For businesses who need to meet Queensland's trust account compliance obligations, MYOB Advanced Construction also provides smart tools to support those requirements. Built with industry consultants, the platform helps you manage multiple ledgers, supports risk identification, and simplifies reporting across multiple accounts and projects.
Get in touch to find out more about MYOB can support your current and future business needs.
Disclaimer: This guide is intended to provide general information in summary form. It is only current at the time of publication and does not constitute legal advice. You should seek legal or other professional advice tailored to your circumstances rather than acting or relying on the contents of this guide.