Draft legislation released for residential property GST withholding regime

By Craig Whatman - November 15, 2017

In this year’s federal Budget the Government announced that it would be introducing a purchaser withholding regime for supplies of new residential property with effect from 1 July 2018.

Treasury has now released exposure draft legislation for the new regime. It will require purchasers of new residential premises and potential residential land to remit a GST amount directly to the Australian Taxation Office (ATO). The withholding regime will impact residential property developers and purchasers, as well as lawyers and conveyancers who operate in the property development space.

The deadline for submissions on the draft legislation is 20 November.

Why the change?

Under the current law, the vendor of new residential premises or potential residential land is required to remit the GST associated with the sale to the ATO through its Business Activity Statement (BAS). The government has identified that some property developers are failing to remit the GST on their sales, despite claiming credits for GST incurred on development costs. In some cases those developers then liquidate their company in order to avoid payment of the GST. In order to combat this non-payment of GST, the responsibility for payment of the GST will be shifted to the purchaser.

Presently, where a developer goes into liquidation the ATO becomes an unsecured creditor in respect of any outstanding GST liabilities, often with little hope of recovery. As a result of the proposed change, the ATO will collect the GST at or before settlement in order to overcome the situation where the developer goes into liquidation before the GST on the sales is remitted. By making purchasers pay the GST directly to the ATO, the new regime removes the current time-lag in GST payment which, in the government’s view, is a significant contributor to current ‘phoenixing’ activity.

What will it apply to?

The new rules will apply to supplies of ‘new residential premises’ and ‘potential residential land’, as defined in the GST Act. The application of the rules to potential residential land is intended to capture house and land packages where the purchaser acquires a vacant block of land prior to construction of the house taking place.

Under the proposed transitional rules, the new regime will apply to any contract where any part of the consideration (other than a deposit) is first provided on or after 1 July 2018. This is irrespective of whether the contract is signed before or after 1 July 2018.

However, contracts signed prior to 1 July 2018 will not be subject to the new rules provided the consideration for the supply (other than a deposit) is first provided before 1 July 2020.

Accordingly, for existing projects where off-the-plan sales contracts have already been entered into or will be entered into prior to 1 July 2018, the new regime should not be applicable provided settlement occurs and the balance of the purchase price is paid prior to 1 July 2020.

For other new projects, or even existing projects where contracts of sale are entered into after 1 July 2018, the new measure will apply to the sales.

How will it work?

Where a vendor makes a taxable supply of new residential premises or potential residential land, the purchaser will be required to withhold 1/11th of the price and to pay that amount to the ATO at or before the day on which any of part the consideration for the supply (other than the deposit) is first provided. This will usually be at settlement, but for a contract under which the price is payable in instalments, the obligation will be triggered at the time of payment of the first instalment (not being the deposit).

Penalty for 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 GST payable.

However, no penalty will be applied if the amount relates to a taxable supply of new residential premises and the purchaser reasonably believes that the premises are not new residential premises.

Notification obligation on the vendor

To assist purchasers to comply with their obligation to withhold, a vendor is prohibited from making a taxable supply of new residential premises or potential residential land unless, at least 14 days before making the supply, the vendor has given to the purchaser a written notice stating:

  • Whether the purchaser is required to withhold and make a payment to the ATO; and
  • If so, the vendor’s legal name and ABN, the amount required to be paid and when the amount is required to be paid.

The requirement to notify the purchaser is a strict liability offence and failure to provide the notice gives rise to an administrative penalty of 100 penalty units, which is currently equal to $21,000 per infringement.

Vendor credit for the amount withheld

Where the purchaser pays the withheld amount to the ATO, the vendor will be entitled to a credit in its next BAS equal to the amount paid by the purchaser.

Supplies made under the margin scheme

Where the margin scheme is applied to the sale, the GST payable on the supply will be less than 1/11th of the price but, based on the draft legislation, the purchaser will still be required to withhold the full 1/11th of the price at settlement and to pay that amount to the ATO. The vendor will not get the benefit of a credit for the difference between the amount paid by the purchaser and the actual GST amount payable on the supply until the ATO processes the vendor’s BAS for the relevant period.

In an attempt to try and address the cash flow issues that will be experienced by vendors once the new regime comes into effect, the draft legislation provides for an advance refund mechanism which can be used by quarterly BAS lodgers in order to claim an early refund of the difference between the GST amount withheld by purchasers during a period and the vendor’s actual GST liability under the margin scheme.  Where a purchaser withholds in error, but in purported compliance with the obligation to withhold (e.g. the premises are not new residential premises and therefore no requirement to withhold arises), the vendor may also apply for a refund of the amount of the payment made in error.

In either case, the vendor must apply to the ATO at least 14 days before the end of the tax period to which the supply is attributed. The ATO must refund the amount if it would be fair and reasonable to do so having regard to various factors. However, payment of the refund is subject to strict review criteria which could well delay the refund process and restrict the actual benefit to vendors.

Vendors that are monthly BAS lodgers are not able to claim a refund on the basis that the margin scheme applied to the supply. Treasury has indicated that this is due to an entity that has monthly tax periods not suffering a significant cash-flow disadvantage because they will receive a credit upon lodgement of their monthly BAS. However, no such restriction applies where the refund is sought on the basis that the payment was made in error.  

How might the new withholding regime affect your business?

There will be a number of impacts for our clients and contacts in the property development sector, including:

  • Contracts of sale will need to be updated to cater for the new withholding regime and appropriately protect vendors and purchasers.  As the new regime could apply to contracts signed before 1 July 2018 where the settlement occurs on or after 1 July 2020, we recommend that you review your contracts now to determine what changes may be required.
  • Property developers will face cash flow issues, particularly where the margin scheme applies to their developments. Developers will no longer have the benefit of the GST component of the sale proceeds in their bank account for the period between settlement and lodgement of their BAS. Furthermore, the margin scheme benefit will not crystallize until the BAS has been processed by the ATO. Financing arrangements and covenants will need to be reviewed to ensure that cash flow can be adequately managed.
  • Property development structures involving separate land owning and developer entities will need to consider the impact of the changes on the typical ‘waterfall’ payment structure under which both parties are paid for their respective involvement in the project.
  • Accounting and GST compliance software may need to be updated to account for the fact that a developer has a GST liability that it will not be paid for at settlement because the purchaser will withhold the GST amount and pay it directly to the ATO.
  • Settlement statements and the settlement process itself will need to be changed to cater for the purchaser’s payment of the GST amount directly to the ATO.  Vendors will need to consider how they can satisfy themselves that the purchaser has paid the GST amount to the ATO before they proceed with settlement.
  • Property lawyers and conveyancers will need to familiarise themselves with the new regime to ensure they administer it correctly on behalf of their clients, particularly given that purchasers will be subject to a penalty equal to the full amount of the GST payable if it is not correctly withheld.

What are the next steps?

Given the wide ranging impact of the new rules on our clients who regularly sell and purchase new residential property, we are participating in the consultation process on the exposure draft legislation with Treasury and the ATO. We encourage you to raise any issues of concern with us as soon as possible so that we can take them into account as part of that process.

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