WIP & Job Costing for Builders
Know the margin on every job — not just at 30 June.
Jobs that straddle 30 June are where builders' tax goes wrong. We set up job costing that shows your real profit per project, and close off WIP at year-end the way the ATO expects.
Long jobs, two financial years, one tax return.
Any building contract that starts in one income year and finishes in a later one is a long-term construction contract for tax — even if it runs for less than 12 months. The ATO's ruling on these contracts is TR 2018/3. It replaced the older ruling IT 2450, which was withdrawn in October 2017.
TR 2018/3 is clear on one point: you cannot wait until a job is finished to bring the profit or loss to account. In the ruling's words, "it is not permissible to defer the bringing of profits or losses to account until the contract is completed". The completed contracts method is not acceptable for tax, even if you use it in your own books.
The two methods the ATO accepts
| Method | How it works | Watch out for |
|---|---|---|
| Basic approach | Progress and final payments are income in the year you receive them — or the year they are billed or billable for work certified as acceptable for payment. Costs are deducted as incurred. | You can't push income into next year by holding back an invoice you were entitled to send before 30 June. |
| Estimated profits basis | The expected final profit or loss on the contract is spread across the years it takes to complete, on a fair and reasonable basis. | Your cost estimates must be well documented, and the method must be reasonable and in line with accepted accounting practice. |
Whichever method you choose, TR 2018/3 says it must be applied consistently to all years of the contract and to all similar contracts. You can't pick the method that suits you job by job.
Deposits, retentions and progress claims
- Up-front payments and deposits: under the basic approach, the ATO's general rule is that an up-front or advance progress payment is recognised between when you receive it and when the next progress payment is due.
- Retentions your client holds: not income until you receive them or are entitled to receive them.
- Retentions you hold from subbies: not deductible until they are due to the subcontractor.
- Bank guarantees given instead of retentions don't reduce your assessable income.
WIP is not trading stock — for contract builders
For a contract builder, TR 2018/3 says work-in-progress is not trading stock, because the property normally belongs to your client. Spec builders and developers holding land for sale are in a different position — land can be trading stock once a business of dealing in land has started. If you do both, the two need to be accounted for separately.
Your books vs your tax return
Accounting standards measure construction revenue differently. Under AASB 15, revenue is recognised over time where your work creates an asset the customer controls — progress is measured with output or input methods such as cost-to-cost. TR 2018/3 notes that the accounting standard does not line up with the tax rules, so the profit in your financial statements and your taxable income can differ. We reconcile the two every year.
Why job costing comes first
You can't do WIP properly without good job costing. If labour, materials, subbies and variations aren't coded to the right job during the year, your 30 June estimate of cost-to-complete is a guess — and the ATO expects your estimates to be documented. Good job costing gives you three things: a defensible year-end WIP, early warning on jobs going over budget, and pricing data for your next quote.
Real margin per job. A WIP figure you can defend.
Set up once, reported monthly, closed off properly at 30 June.
Job costing set-up
Tracking categories or jobs in Xero or MYOB, coded by job, phase and trade — linked to your estimating or job-management software where possible.
Monthly per-job profit reports
Budget vs actual for every open job: labour, materials, subbies, variations and retentions. See the over-runs while you can still fix them.
Year-end WIP schedule
Cost-to-complete and stage-of-completion workings for every job running over 30 June, documented the way TR 2018/3 expects.
Method review
We check whether the basic approach or the estimated profits basis suits your contracts — and keep it consistent year to year.
Retentions & variations register
Retentions owed to you and by you, variations claimed and approved — tracked so income and deductions land in the right year.
Books-to-tax reconciliation
Your accounting profit and taxable income reconciled, with WIP adjustments explained — ready for your lender, your HBCF review or the ATO.
WIP questions builders ask us.
What counts as a long-term construction contract for tax?
Under the ATO's ruling TR 2018/3, a construction contract is long term if the work extends beyond one income year. A job that runs for less than 12 months but straddles 30 June is still a long-term contract.
Can I just declare the profit when the job is finished?
No. TR 2018/3 says the completed contracts method is not acceptable for tax. You must use either the basic approach (payments received or billable) or the estimated profits basis.
Is IT 2450 still the ATO ruling on construction contracts?
No. IT 2450 was withdrawn in October 2017 and replaced by TR 2018/3, issued in March 2018. TR 2018/3 restates the same principles.
When are retentions taxed?
Retentions your client holds back are not income until you receive them or are entitled to receive them. Retentions you hold from subcontractors are not deductible until they are due to the subcontractor.
Is work-in-progress trading stock?
For a contract builder, TR 2018/3 says WIP is not trading stock because the property normally belongs to the client. Land held by spec builders or developers for resale can be trading stock — that is a separate question we work through with you.
Which accounting software do you use for job costing?
Most of our builders use Xero with tracking categories or projects, and we also work with MYOB. Where you use job-management software such as Buildxact, Tradify, simPRO or ServiceM8, we connect the data rather than double-handling it.
Sources & fine print
Rules, dates and thresholds on this page were checked against these official sources on 7 October 2026. They change — always confirm the current position for your situation.
- ATO — TR 2018/3 Income tax: recognition of income from long-term construction contracts — issued 7 March 2018
- ATO — TR 2018/3 (PDF)
- ATO — TA 2026/1 Contrived property development arrangements between related parties — issued 14 January 2026
- AASB 15 Revenue from Contracts with Customers — paragraphs 35–45
- AASB 15 — Application guidance B14–B19 (measuring progress)
General information only. This page is not personal tax or insurance advice. Talk to us about your circumstances before acting on it.
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Jobs over 30 June?
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15 minutes on the phone, no charge. Tell us how many jobs you have running and how you track them — we'll tell you what your year-end WIP needs.