New GST withholding regime for residential property commences

By Tom Cantwell, Partner and Ajith Pius, Associate

The Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 received royal assent on 29 March 2018. The new law significantly changes the way that GST is dealt with and will impact all residential property transactions.

Summary of key changes:

  • A purchaser of new residential premises or potential residential land will be required to withhold GST at settlement and remit this directly to the ATO, rather than the current situation of paying it to the vendor as part of the price, who would then remit it to the ATO with their post-settlement Business Activity Statement (BAS).
  • All vendors of residential premises (not just new premises) or potential residential land must provide the purchaser with a specific notice before the supply is made. The notice will need to advise the purchaser of whether it needs to withhold GST, and if so, the amount and means of payment. There are significant penalties for failing to give the notice.

Why the change?

According to the ATO a number of developers have been accepting a purchase price that includes GST at settlement, but dissolving their development company before remitting the GST to the ATO and creating a new company for their next development. This is known as a form of “phoenixing”.

As of November 2017, the ATO identified 3,731 individuals engaged in GST related phoenixing in the previous 5 years. These individuals controlled over 12,000 insolvent entities, responsible for $1.8 billion in GST debt that has been written off. The insolvent entities also claimed $1.2 billion in GST input tax credits between 2013 and 2017.

The new laws aim to prevent the practice of phoenixing, by receiving payment of the GST directly from purchasers.

New Law:

From 1 July 2018, where a vendor sells (or supplies by way of long term lease generally over 50 years):

  1. new residential premises (other than those created through a substantial renovation or commercial residential premises); or
  2. potential residential land (i.e. residential zoned vacant land),

it will be the purchaser’s responsibility to withhold GST, and remit this directly to the ATO.

When the Purchaser is required to withhold the GST:

The purchaser’s obligation to withhold and remit will generally arise at settlement. However, particular care will be required for contracts where the price is payable in instalments (for example, terms contracts), as the purchaser will be required to remit the GST to the ATO on the day the first instalment (other than the deposit) is paid.

The amount to be withheld:

Non-Margin Scheme: If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price.

Margin Scheme: If the margin scheme does apply, the purchaser must withhold 7% of the contract price regardless of the actual margin liability. Any reconciliation required will take place via the vendor’s next BAS.

The contract price is, effectively, the price set for the supply in the contract, not taking into account any potential adjustments such as amounts for land tax, council rates and water rates.

Date of effect:

The new law affects:

  • all contracts entered into after 1 July 2018; and
  • contracts entered into prior to 1 July 2018 if they settle after 1 July 2020. This is particularly important for off-the-plan contracts, where you might need to factor in potential delays which put your settlement beyond 1 July 2020.

How the GST is actually withheld:

The new laws allow the purchaser to satisfy its obligations to remit the GST by:

  • payment direct to the ATO;
  • providing a bank cheque made out to ATO to the vendor at settlement or at the time the first instalment is paid; or
  • as electronic settlements become more prominent, if parties are using PEXA, both parties can authorise PEXA to distribute the amount for GST to the ATO as part of directions for settlement funds.

Vendor’s notification obligation:

To help purchasers meet their compliance burden vendors must notify purchasers in writing of whether they will be required to make a payment under the new laws.

If the purchaser is required to withhold an amount, the vendor must also provide its name and ABN, the amount to be withheld, and when the purchaser is required to pay the amount.

Unlike the withholding obligation, this notification is required to be made by vendors in respect of sales of all residential premises (not just new premises) or potential residential land with limited exceptions.

Penalties:

There are penalties for both the vendor and purchaser in failing to comply with their obligations under the new regime.

Penalty for Purchaser’s failure to withhold: If the purchaser fails to withhold and pay the required amount to the ATO, the purchaser will be liable to a penalty equal to the amount of the GST payable (unless it has reasonably relied on notification by the vendor).

Penalty for Vendor failing to notify: The requirement to notify the purchaser is a strict liability offence and a court may impose a maximum penalty of 100 penalty units for individuals ($21,000) or 500 penalty units ($105,000) for corporations.

Takeaway:

Contracts of Sale in each state and territory will now need to be amended to take into account:

  • Notification obligations on vendors, noting the significant penalties for failure to disclose; and
  • Administrative and settlement issues that are likely to arise, for example whether the purchaser is to withhold GST by providing a bank cheque to the vendor.

Suppliers, financiers and developers will need to take into account the impact on their cash flow as GST will now need to be remitted to the ATO at settlement, and they will need to wait until the vendor’s next BAS to obtain any credit from the ATO. This is particularly important for developers who sell their properties under the margin scheme, as purchasers will be withholding 7% of the contract price at settlement.

For further information, please do not hesitate to contact us.

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