Establishing a Progress Invoicing and Retention Sums Workflow in Xero for Trade Subcontractors

Progress Invoicing and Retention Sums in Xero: A Plain-English Guide for Subcontractors

Keep your trade cash flow tidy, track held retainers clearly, and stay on top of your GST without any stress. streamlined bookkeeping and GST management

GC
Graham Chee•Principal and Founder, Local Knowledge
FCPA
CPA
GRCP
GRCA
Published 8 October 2026
Expert Content Verification

Content reviewed and verified by Graham Chee, with FCPA-led practice at Local Knowledge, Mascot NSW. Continuous CPA Australia member since 1986. Prior career at Goldman Sachs, BNP Investment Management and Merrill Lynch.. Last reviewed October 2026. Next review scheduled for January 2027.

TL;DR

Keep your trade cash flow tidy, track held retainers clearly, and stay on top of your GST without any stress. [streamlined bookkeeping and GST management](/insights/bookkeeping-north-sydney-bookkeeping)

Key Takeaways

  • GST applies to the full progress claim: Under ATO GSTR 2000/19, GST is payable on the full value of the taxable supply claimed in your milestone, not the reduced net cash amount paid by the builder.
  • A separate retention asset account is essential: Set up a dedicated Current Asset account in your Xero Chart of Accounts named Retention Sums Held by Customers so you can monitor your locked funds at a glance.
  • Retentions belong off the general receivables aging report: If retentions sit as overdue invoices in your Accounts Receivable, your day-to-day cash collection reports will be skewed and confusing.
  • Line-item deduction method: When issuing your claim invoice in Xero, add a second line with a negative figure pointing to your retention asset account, using the BAS Excluded tax code.
  • Security of Payment Act alignment: In New South Wales, the Building and Construction Industry Security of Payment Act 1999 gives you strict rights and deadlines around progress claims, so your books must reflect the actual approved payment schedule.
Australian Taxation OfficeCPA Australia

Introduction

How to handle progress claims and retentions cleanly in Xero

To track progress claims and retention sums accurately in Xero, subcontractors should invoice the full progress claim with GST, deduct the retention amount on a separate line item mapped to a dedicated Current Asset account coded BAS Excluded, and reconcile the net payment from the head contractor against the invoice. This systematised workflow ensures that your GST is correctly reported under Australian Taxation Office rules while keeping withheld funds visible on your balance sheet rather than lost inside overdue trade receivables. Principal Advisor Graham Chee (FCPA, CPA) draws on Fellow CPA Australia status and prior institutional roles to deliver authority-grade guidance on establishing this reliable bookkeeping routine.

Running a trade business across suburban Sydney—whether you are a sparky on a commercial fit-out in Alexandria or a plumber working on townhouses in the Shire—brings its own bookkeeping headaches. Head contractors often hold back 5% to 10% of each invoice as a retention sum to guarantee defects liability trade cash flow and commercial finance solutions. If you simply lower your total invoice figure, your GST and income get messy. If you leave the full amount sitting on your standard debtors ledger, it looks like your builder is six months late paying you. With a principal-led, step-by-step setup in Xero, you can keep your books crystal clear and ensure every dollar is accounted for when practical completion arrives.

Key Concepts

What you need to know about retention sums

GST applies to the full progress claim: Under ATO GSTR 2000/19, GST is payable on the full value of the taxable supply claimed in your milestone, not the reduced net cash amount paid by the builder.

A separate retention asset account is essential: Set up a dedicated Current Asset account in your Xero Chart of Accounts named Retention Sums Held by Customers so you can monitor your locked funds at a glance.

Retentions belong off the general receivables aging report: If retentions sit as overdue invoices in your Accounts Receivable, your day-to-day cash collection reports will be skewed and confusing.

Line-item deduction method: When issuing your claim invoice in Xero, add a second line with a negative figure pointing to your retention asset account, using the BAS Excluded tax code.

Security of Payment Act alignment: In New South Wales, the Building and Construction Industry Security of Payment Act 1999 gives you strict rights and deadlines around progress claims, so your books must reflect the actual approved payment schedule.

Practical completion triggers the release: Most building contracts hold 50% of retentions until practical completion and the remaining 50% until the defects liability period ends, usually 12 months later.

Practical Application

Putting the workflow to work on real Sydney jobs

Let us look at how this works on a normal site. Imagine you run an electrical business in Botany, contracted for a 100,000 dollar sub-main installation with a commercial head contractor. The contract terms state a 10% retention withholding up to 5% of the total contract sum. When you reach Milestone 1, you submit a progress claim for 20,000 dollars plus 2,000 dollars GST, making a total claim of 22,000 dollars. The builder withholds 10% of the claim, which is 2,000 dollars, and deposits 20,000 dollars into your bank account.

In Xero, you enter Line 1: Milestone 1 Electrical Works for 20,000 dollars, coded to your Sales income account with GST on Income applied smart financial workflows and automation tools. This reports your full 2,000 dollars of GST to the ATO on your next Business Activity Statement. You then enter Line 2: Retention Withheld - Project Name as a negative amount of minus 2,000 dollars, mapped directly to your Retention Sums Held asset account with the tax rate set to BAS Excluded. The invoice total now matches the exact 20,000 dollars coming into your bank feed, reconciling cleanly with zero adjustments, while your 2,000 dollar retention sits safely on your balance sheet until hand-over.

Recommended Steps

A step-by-step routine for your day-to-day bookkeeping

1

Set Up Your Chart of Accounts

Create a new Current Asset account in Xero named Retention Sums Held. Set the default tax rate to BAS Excluded and check the box to enable payments to this account.

2

Draft the Milestone Claim Invoice

Enter the gross work completed as a positive line with GST on Income. Add the retention deduction on the next line as a negative figure mapped to your Retention Sums Held account, coded BAS Excluded.

3

Reconcile the Net Bank Receipt

When the head contractor pays the net progress claim, match the bank statement line directly against your net Xero invoice during your regular bank reconciliation.

4

Invoice and Release on Practical Completion

When the project hits practical completion or the defects liability period ends, create a final invoice billing the Retention Sums Held account with BAS Excluded to clear the asset balance into cash.

Common Questions

Clear answers to tradie bookkeeping questions

Q.Why cant I just invoice the smaller net amount I actually get paid?

Under Australian tax law, your GST liability is triggered by the value of the completed work you claim, not the cash in your pocket. Invoicing the net amount understates your turnover and underreports GST on your BAS, which can cause compliance problems with the ATO during a review.

Q.Do I charge GST again when the head contractor releases the retention at the end?

No. You already accounted for and reported the GST on the original progress claim when the work was completed. When releasing the retention sum at practical completion, the final entry is coded as BAS Excluded so you never pay GST twice.

Q.What happens if a builder goes into liquidation and never pays the retention?

If a builder becomes insolvent and the retention cannot be recovered, an adjusting journal entry moves the outstanding balance from your Retention Sums Held asset account to a Bad Debts expense account. Your FCPA advisor will ensure this write-off is handled correctly for tax purposes.

Q.Can I use Xero Projects to track retainers across different jobs?

Yes. You can assign project tracking categories to both the income line and the negative retention line item. This lets you run clean job-costing reports that show your actual profit margin alongside any cash still held back on specific sites.

About the Author

Graham Chee

Graham Chee, FCPA, CPA, GRCP, GRCA

Principal and Founder, Local Knowledge

Graham Chee is the principal and founder of Local Knowledge, an FCPA-led Australian practice that brings institutional-grade compliance, investment-structure and intellectual-property experience directly to owner-managed businesses. Graham is a Fellow of CPA Australia (FCPA since November 2005, continuous CPA member since 1986) and holds the OCEG Governance, Risk & Compliance Professional (GRCP) and Governance, Risk & Compliance Auditor (GRCA) designations. His prior career includes senior roles at Goldman Sachs, BNP Investment Management and Merrill Lynch. Graham was previously portfolio manager of the Asian Masters Fund (IPO December 2007 – 31 December 2009), which returned +29% in AUD terms versus the MSCI Asia Pacific (ex Japan) benchmark. He signs off on 100% of client files personally.

Areas of Expertise:

Strategic Business Advisory
Taxation Planning & ATO Compliance
Business Valuation
Succession Planning
Investment-Structure Governance
Governance, Risk & Compliance
Australian Financial Reporting (AASB)
Intellectual Property Protection
Experience: FCPA-led practice at Local Knowledge, Mascot NSW. Continuous CPA Australia member since 1986. Prior career at Goldman Sachs, BNP Investment Management and Merrill Lynch.
This insight was generated by our AI intelligence engine

Get Expert Guidance on Your Trade Bookkeeping

This article provides general bookkeeping information for Australian businesses and does not replace personalised tax advice. Consult a registered tax agent or CPA to address your specific contract terms.

Graham Chee FCPA, CPA, GRCP, GRCA · Principal, Local Knowledge · Mascot NSW · CPA-signed files