Deposits and progress payments: when the GST is due

Two kinds of deposit

A part payment. Most deposits in small business are simply an early instalment of the price: 50% up front to book the job, the balance on completion. The money is yours, it is consideration for the sale, and it carries GST like any other payment.

A security deposit. Some deposits are held purely as a guarantee: a bond on hired equipment, a holding deposit that is refunded if the customer proceeds and paid separately. GST law treats these differently. No GST is payable when the security deposit is received. GST becomes payable only if the deposit is forfeited (the customer pulls out and you keep it) or applied to the price (you use it as the final payment).

The label on your invoice does not decide which it is; the substance does. If the deposit will be credited against the price of the work, it is a part payment.

Part payments on a cash basis

On the cash basis, which most sole traders use, the GST on a part payment is reported in the tax period you receive it. A $3,300 deposit received on 20 March carries $300 of GST into the January to March BAS. The $7,700 balance received on 10 May carries $700 into the April to June BAS. Total $1,000, spread across two statements by the dates the money arrived.

That is all there is to it, and it is why cash basis suits businesses that take deposits: the BAS always matches the bank statement, and you never pay GST on money you have not received. FlowFi treats each deposit as income on the date it lands and works out the GST inside it.

Part payments on an accruals basis

On accruals, the GST on a sale is attributed to the period in which you issue an invoice or receive any payment, whichever comes first, and, for an ordinary one-off sale, that is the GST on the whole sale. Issue an invoice for a $11,000 job on 20 March, receive a deposit the same day, and the full $1,000 of GST belongs to the March quarter even though the balance is months away.

The exception is a supply made progressively or periodically: a contract that is billed in stages, or a service supplied over a period and paid for as it goes. Each stage or period is treated as a separate supply, so the GST is attributed stage by stage as each progress invoice is issued or paid. Building contracts with staged claims fall into this category. See cash vs accruals for the basics of each method.

Progress claims and retentions

For a job billed in stages, treat each progress claim as its own sale: invoice it as a tax invoice showing the GST on that stage, and report it when received (cash) or invoiced (accruals). Keep the claims numbered so the running total is visible against the contract sum.

Retentions, where a builder holds back a percentage until defects are fixed, are reported when the retention is actually paid to you or invoiced, whichever is first. Do not report GST on a retention you may never see.

Refunds, forfeits and cancelled jobs

• You refund a part payment because the job is cancelled: make a decreasing adjustment on the BAS for the period you refund it, so the GST you reported comes back. Issue an adjustment note.
• A customer forfeits a security deposit: the deposit becomes consideration at that point and the GST is reported in that period.
• You apply a security deposit to the final invoice: GST on it is reported when it is applied.
• A customer pays a deposit and never proceeds, and you keep it even though it was a part payment: it remains consideration; the GST you reported stands.

What to show on the invoice

A deposit invoice for a part payment is a tax invoice like any other: the words Tax invoice, your ABN, the date, a description (Deposit for kitchen renovation, 30% of contract sum) and the GST amount on the deposit. The final invoice shows the total job, less the deposit already paid, with GST on the balance. Both together add up to the GST on the full price. Invoicing software handles this with a deposit invoice followed by a balance invoice; FlowFi does it that way and applies the reminders to the balance.

For a security deposit, do not issue a tax invoice; a receipt describing it as a refundable security deposit is the right document. See tax invoice requirements.