Verified for 2026 Tax Year

Construction & Retentions GST

Progress payments, BCTIs, and the vital rules for delaying GST on retention money until it's actually released.

The construction industry in New Zealand has unique cash flow challenges. You get paid in "Progress Payments" as the job proceeds, often with a "Retention" amount held back until the end of the defects liability period.

The Retentions Trap (Critical Risk)

If you issue a Tax Invoice for the FULL contract amount upfront (including the retention percentage), you will owe the IRD the GST on the FULL amount in your next return.

But you haven't been paid the retention yet! This can destroy your cash flow.

The Correct Retentions Flow

1. Issue a "Payment Claim" (Not a Tax Invoice)

2. Main Contractor issues "Payment Schedule"

3. Issue Tax Invoice for the Certified Amount ONLY

4. Issue Final Invoice for Retentions (e.g. 12 months later)

How to Handle Retentions Correctly

To avoid paying GST on money you haven't received, follow this method:

1.
Issue a "Payment Claim": This is a request for payment under the Construction Contracts Act. Because it is clearly marked "This is not a Tax Invoice", no GST is triggered yet.
2.
Wait for "Payment Schedule": The payer reviews the work and certifies the amount they agree to pay (less the required retentions).
3.
Issue Tax Invoice for Certified Amount: Only issue your official tax invoice for the exact amount the payer has agreed to release right now.
4.
Final Tax Invoice: Issue a separate tax invoice for the retention amount ONLY when it is officially released (often 12 months later).

Buyer Created Tax Invoices (BCTI)

Often, large construction companies or head contractors will generate the invoice for you (a BCTI). This simplifies things immensely, as their accounting software automatically calculates the progress payment and holds back the retentions correctly.

Important Rule: If you agree to use BCTIs, you (the sub-contractor) must NOT issue your own tax invoice. That would double up the GST liability with the IRD.

Cashflow Pro-Tip: Payments Basis

If your annual turnover is under $2 million, consider using the Payments Basis for GST accounting. This ensures you only pay GST to the IRD on the progress payments you actually receive in your bank account, not the ones you've invoiced but are waiting 60+ days for the head contractor to pay.

Frequently Asked Questions

Do I have to pay GST on retention money before I receive it?

No, you should not pay GST on retention money until it is actually released or invoiced. If you invoice for the full amount upfront (including the retention), you will owe the GST on the full amount immediately. To avoid this, only issue a Tax Invoice for the certified amount being paid, not the retention.

What is a Payment Claim vs a Tax Invoice?

A Payment Claim is a request for payment under the Construction Contracts Act. It does not trigger a GST liability. A Tax Invoice is the official document that triggers the GST liability on the invoice basis.

What is a Buyer Created Tax Invoice (BCTI)?

A BCTI is when the buyer (usually a large main contractor) creates the tax invoice on behalf of the supplier (sub-contractor). If a BCTI is used, the sub-contractor must not issue their own tax invoice, as this would duplicate the GST liability.

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