Goods and services tax: construction and building services which span 1 July 2000

This Ruling is about the treatment of supplies of construction and building services [F1] which commence before 1 July 2000 and finish on or after that date. It explains how much of the supply will be performed before 1 July 2000 and therefore not subject to Goods and Services Tax ('GST').

This Ruling applies to construction and building services you make under an agreement: (i) with a head contractor, where your supply forms part only of the construction, major reconstruction, manufacture or extension of a building or civil engineering work (for example, as a subcontractor in the construction of a building); or (ii) where your supply does not form part of the construction, major reconstruction, manufacture or extension of a building or civil engineering work (for example, rewiring of an existing office block, or a bathroom renovation in a private house).

This Ruling does not apply to: (i) a supply of goods that is made independently of construction and building services; or (ii) a supply of real property; or (iii) a supply of design services, except to the extent made under an agreement for construction and building services; or (iv) a supply of services to the extent that you make the supply under a PAYG voluntary agreement [F2] ; or (v) a supply covered by section 19 of A New Tax System (Goods and Services Tax Transition) Act 1999 (the Transition Act).

Unless otherwise stated, all legislative references in this Ruling are to the Transition Act.

This Ruling applies [to tax periods commencing] both before and after its date of issue. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

The Transition Act contains both general and specific provisions in relation to supplies that span 1 July 2000. Section 19 is a specific transitional provision for written agreements entered into before 1 July 2000, for construction projects completed on or after that date. That section provides that the value of work and materials permanently incorporated in or affixed on the construction site before 1 July 2000 will not be subject to GST.

Goods and Services Tax Ruling GSTR 2000/14, titled 'Goods and services tax: transitional valuation of work-in-progress for head contractors in the building or civil engineering industries', explains how to determine this value for the purposes of section 19.

However, section 19 does not apply to all types of construction. For example, it does not apply to a supply you make under a contract to a head contractor, nor does it apply to some supplies you make directly to a property owner.

The intention of the Transition Act is that GST is only payable on a supply to the extent that it is made on or after 1 July 2000 [F3] . For construction and building services commencing before and finishing on or after 1 July 2000, this effect will be achieved by determining the extent the service is performed before that date.

In most circumstances a supply of construction and building services is entered into to provide a given result. We consider that, for the purposes of this Ruling, this kind of supply is a supply of a service only. Any materials used in producing the given result are ancillary or integral to the provision of the service (refer paragraph 19).

Under this Ruling, there are two approaches to dividing the performance of the service into a portion that is not subject to GST and a portion that is. Under Apportionment Option A (explained in more detail at paragraphs 32 to 35) you may determine the portion of the service you perform before 1 July 2000 on the basis of progress payments received. You may choose this option either: (i) where the agreement for the supply of the service provides that payments be made only on a progress basis as stages of completion designated under the agreement are reached; or (ii) where the service you perform forms part of the construction, major reconstruction, manufacture or extension of a building or civil engineering work and progress payments are made to you by the head contractor for that construction project.

If you do not apportion the performance of the service under Option A, you should apportion under Option B (explained in more detail at paragraphs 45 to 48). Option B determines apportionment on the basis of records that you maintain which explain the transactions and activities relevant to that supply.

Section 19 only applies to a supply which is the whole of a construction, major reconstruction, manufacture or extension of a building or civil engineering work, made under a written agreement before 1 July 2000.

This would generally exclude subcontractors from that section. If section 19 applies to you in respect of a supply you make, you cannot choose to apply this Ruling [F4] .

For the purposes of this Ruling, construction and building services are only those services supplied in respect of a building or civil engineering work. Construction and building services include, but are not limited to bricklaying, carpentry, plumbing, tiling, electrical, painting, air conditioning installation, lift installation, or any combination of these. Typically these types of services are provided in home renovation, office refurbishment, or by a subcontractor working in a larger construction project.

In some circumstances a supplier may enter into an agreement to design and construct. Where these services are supplied under the same agreement then the design component is considered to be part of the construction and building service.

Entitlement to a special credit for sales tax paid on stock may be allowed under section 16. Good and Services Tax Ruling GSTR 2000/8, titled 'Goods and Services Tax: Special credit for sales tax paid on stock', provides guidance as to how section 16 operates in determining the extent of the special credit available in respect of stock held for the purposes of sale or exchange at the start of 1 July 2000.

If you supply construction and building services, you should determine any special credit to which you may be entitled, in accordance with that ruling, on the basis that you are a builder [F5] .

Where you are engaged to produce a given result, we consider the substance of the agreement is to perform a service. Any materials used in producing the service are ancillary or integral to the work that must be performed to provide the finished job. In such circumstances, you are making a single supply, being a supply of a service.

The value of the materials used will be taken into account in determining the extent of the performance of your service that occurs before 1 July 2000. However, for these materials to be characterised as being used, they must be affixed to or incorporated into the construction site or building on which you are performing your service.

Section 12 provides a different rule for progressive and periodic contracts. We do not consider that section 12 applies to an agreement for the supply of construction and building services. This is because the agreement will be for a particular job to be done, rather than for a supply to be made for a specified period.

We consider that section 12 applies where the supply is made for a specified division or portion of time which begins before 1 July 2000 and concludes on or after 1 July 2000. This is consistent with the view taken in Goods and Services Tax Ruling GSTR 2000/7, titled 'Transitional arrangements-supplies, including supplies of rights, made before 1 July 2000 and the extent to which such supplies are taken to be made on or after 1 July 2000' [F6] .

Support for this view is found in the examples provided in the Explanatory Memorandum of the kinds of supplies to which section 12 will apply [F7] : • a one year maintenance agreement; • supply of a right to use a printing press for a 4 year period; • lease of a building for a 10 year period; • hire agreements and similar arrangements.

Subsection 7(1) provides that GST is only payable on a supply to the extent it is made on or after 1 July 2000. We consider the word 'extent' allows for the apportionment of a supply that spans 1 July 2000.

To determine whether a supply is made before 1 July 2000, it is necessary to consider the transitional timing rules contained in section 6. Subsection 6(4) deals with the supply of services and provides that the supply is made when the services are performed.

We consider that subsection 6(4) must be read with subsection 7(1), which means that where the performance of a service spans 1 July 2000, only that portion of the service performed as at the start of 1 July 2000 will not be subject to GST.

You, as an individual, can enter a PAYG voluntary agreement [F8] with a payer to bring your work payments into the PAYG withholding system. Both you and the payer must have an Australian Business Number (ABN) and the work payments must not be subject to any other PAYG withholding system.

Generally, you will not be subject to GST on supplies you make under a voluntary agreement. You can read more about voluntary agreements in the 'PAYG Voluntary agreement' Fact Sheet and the 'Guide to PAYG for Business' booklet. [F9]

Paragraph 70(1)(a) of the Tax Administration Act 1953, provides that if you make a taxable supply, taxable importation, creditable acquisition or creditable importation, you must: (d) keep records that record and explain all transactions and other acts you engage in that are relevant to that supply, importation, acquisition or dealing; and (e) retain those records for at least 5 years after the completion of the transactions or acts to which they relate.

An accounting system that is sufficiently detailed to allow you to identify actual stages of completion of a job, or to identify the work done and materials used for which you progressively bill the recipient of the supply, will satisfy the requirements of section 70 for the purposes of this Ruling.

If your accounting system does not do the above, you must maintain other records that evidence the time spent and the nature of activities undertaken on those days. These records should also evidence details of materials affixed on-site, where the supply of your service includes provision of materials.

If you receive progress payments for the supply of the service, you may use these payments to determine the extent the service has been performed before 1 July 2000, provided the payment is only for service performed before 1 July 2000.

Advance payments, that is payments received before 1 July 2000 in respect of performance of services on or after that date, will not be taken into account under this option in determining the extent the service has been performed before 1 July 2000. These payments will be attributed for GST purposes to your first tax period on or after 1 July 2000 [F10] .

You may use this option where either: (i) the agreement for the supply of the service provides that payments be made only on a progress basis as stages of completion designated under the agreement are reached; or (ii) the progress payment is made to you by a head contractor, in respect of your supply forming part of the head contractor's construction, major reconstruction, manufacture or extension of a building or civil engineering work.

This option will not reflect any additional work done between the date of your last pre-1 July 2000 progress claim and 30 June 2000.

If you wish to include this additional progress in your determination of the extent to which you have performed the service by 1 July, you may do so by using Option B.

Commonly under agreements for the supply of construction and building services, the recipient of the supply (the payer) may retain an amount from the total amount payable as a means to ensure that the supplier will satisfactorily perform its obligations under the agreement.

Under the progress payment option explained above, where the payer retains such an amount from a progress payment to you, the amount retained still forms part of the progress payment for purposes of determining the extent of the service you have performed before 1 July 2000.

Where amounts retained for this purpose are subsequently paid to you, they will not be subject to GST to the extent that they relate to the portion of the service you perform before 1 July 2000. This will be the case regardless of whether, on or after 1 July 2000, you perform rectification work as required in accordance with the terms of the agreement relating to the retained amounts.

Where an amount less than the total amount retained is paid to you because you do not perform rectification work as required, and the recipient of the supply engages someone else to perform that work, that person will be making a separate supply. If performed on or after 1 July 2000 (and the person is registered or required to be registered for GST), it will be a taxable supply and subject to GST.

Under a written agreement with XYZ Enterprises, Bonza Constructions commenced building an office block on XYZ's land in March 2000. Construction of the office block will not be finished until March 2001. Bonza receives progress payments based on certification by a quantity surveyor of its progress claims. In putting together these progress claims, Bonza assembles progress claims from all its subcontractors. The supply Bonza is making is subject to section 19 [F11] .

Lotsa Pipes (plumbing subcontractor) has contracted with Bonza Constructions (the head contractor) to provide plumbing requirements for the building in the example above. On 26 June 2000, Lotsa Pipes submits a progress claim of $10,000 to Bonza for work done to that date. Some weeks later, Bonza makes payment in respect of that claim, but withholds 5% ($500) under a retention arrangement. In this case, the retention amount represents part of the supply made by Lotsa Pipes before 1 July 2000. No part of the $10,000 will be subject to GST. The progress payment represents the extent of the performance of the services before 1 July 2000.

As in the above example, but in this case Bonza does not agree that Lotsa Pipes' claim for work and materials to 30 June justifies payment of $10,000. After discussion, part of the claim, worth $600, is agreed not to have been performed. Bonza makes payment in respect of the remaining $9,400, withholding 5% ($470). In this case, the progress payment for purposes of determining the extent of the performance of the service will be $9,400. The $600 portion will be subject to GST when it is performed.

Splasha Paints is a large painting contractor. It has an agreement with a building owner to paint the entire building inside and outside. The agreement price is $250,000 and the service is expected to take 3 months. Splasha may make progress claims in respect of certain stages of completion of the job, as designated under the agreement. The work starts on 20 May and the first stage is completed on 26 June. Splasha lodges a progress claim in respect of this stage of completion for $70,000. Splasha does more work between 26 June and 30 June, but chooses to adopt the progress payments option to determine the extent of its service performed before 1 July 2000. In this case, $70,000 will represent the extent of the service performed before 1 July 2000. However, Apportionment Option B, as described in paragraph 45, may allow you to determine the portion of the further service Splasha performs to 30 June.

Where: (i) you wish to determine the service performed from the date of your last progress claim up to 1 July 2000; or (ii) you lodge a progress claim for service performed before 1 July 2000 that does not fall within paragraph 34; or (iii) you are not entitled to receive progress payments, you must determine the extent of the service you perform before 1 July 2000 based on your records, maintained in the manner explained in paragraphs 29 to 31.

Beaut Refurbishments offers a range of design and construction services. They enter into a single agreement with a client to design and construct a fitout of the client's building, relying on their own resources together with construction contractors to complete their commitments under the agreement. The total agreement price is $2,100,000. The professional services component is $100,000. This covers largely design and construction management. The balance covers the construction cost of the fitout. The design phase commences in early May and is expected to be completed by early August. Beaut invoices its client for an amount of $70,000 for its service performed to 30 June 2000. The invoice is based on its comprehensive record system, which records the time and work undertaken on preparatory drawings, discussions re preparatory drawings and amendments to these drawings. The invoice, supported by these records, is an acceptable method of determining the extent the service is performed before 1 July 2000.

Lars is a home renovator. He enters an agreement with Sachin and Indira to renovate their verandah and add an outdoor entertainment area. The job is not a major reconstruction or an extension of the house. The work starts on 10 June and is not expected to be finished until the end of July. The agreed price (including materials) is $20,000, which is payable upon completion. Lars purchases all the materials for $8,000 and by 30 June, the materials are all on site. Lars' records, maintained from the start to the end of the job, evidence the days and hours spent in providing the service, the nature of the activities undertaken during this time, and materials used. On the basis of these records, Lars is able to determine that as at 30 June 2000, $5,000 worth of materials had been incorporated into the verandah and entertainment area, and half of the work had been completed. He concludes that $11,000 ($5,000 materials plus $6,000 labour) represents the portion of the service performed before 1 July 2000.

As in the above example, except Sachin and Indira purchase all materials for the renovation themselves prior to 1 July 2000 and provide those materials to Lars. In this case it is not necessary to determine whether the materials have been incorporated into the verandah and entertainment area, since they have been purchased by the home owners prior to 1 July. Accordingly, the materials will not be subject to GST. The extent of the service performed by Lars prior to 1 July 2000, determined on the basis of his records, will not be subject to GST, provided Lars maintains records of the service as outlined in Example 6.

Below is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Date of effect 5 Background 6 Ruling 10 Explanations (this forms part of the ruling) 13 Section 19 13 Construction and building services 15 Special credit for sales tax paid 17 Single supply 19 Timing of supply under section 12 21 Subsections 7(1) and 6(4) 24 Supply under a PAYG Voluntary Agreement 27 Records you must maintain 29 Apportioning a supply spanning 1 July 2000 - how to determine the extent of the service performed before 1 July 2000 32 Apportionment Option A - apportioning the supply based on progress payments 32 Retention amounts 37 Example 1 - section 19 41 Example 2 - progress claim by subcontractor 42 Example 3 - reduced progress payment 43 Example 4 - completed stage 44 Apportionment Option B - apportionment based on your records 45 Example 5 - comprehensive record system 46 Example 6 - home renovation apportionment 47 Example 7 - home renovation - owner buys materials 48 Detailed contents list 49