The new regime will require purchasers of new residential premises and potential residential land to remit the GST payable on the supply directly to the Australian Taxation Office (ATO).
The withholding regime will impact residential property developers and purchasers, as well as lawyers, conveyancers, financers and other parties who operate in the property development industry.
Changes aimed at property developers who fail to remit their GST liability
Under the current law, property vendors remit the GST on their sales to the ATO by reporting it in their Business Activity Statements (BAS). The Government is concerned that some property developers fail to remit the GST on their sales, while still claiming input tax credits for development costs. In extreme cases, developers engage in phoenixing activities in order to deliberately avoid their tax obligations.
Under the new withholding regime, the responsibility for payment of the GST to the ATO will shift to the purchaser. This is intended to overcome the situation where the developer goes into liquidation after it receives payment for the property but before the GST is remitted to the ATO.
What will it apply to?
The new rules will apply to supplies, by way of sale or long-term lease, of new residential premises.
They will also apply to supplies of potential residential land that is included in a property subdivision plan and that does not contain any residential buildings or buildings being used for commercial purposes. A common example of potential residential land that will be caught within the new regime is a vacant block of land sold as part of a house and land package, which the purchaser acquires prior to the commencement of construction.
New residential premises that have been created as a result of substantial renovations will not be subject to the withholding requirement.
Application and transitional rules
The new regime will apply to all contracts of sale entered into on or after 1 July 2018.
Contracts signed before 1 July 2018 will not be subject to the withholding requirement provided the consideration for the supply (other than a deposit) is first provided before 1 July 2020.
Accordingly, the new rules will apply to existing contracts and those entered into before 1 July 2018 where the consideration for the supply (other than a deposit) is first provided on or after 1 July 2020.
There is also a specific provision that applies to existing development agreements which contain distribution clauses that are impacted by the new withholding requirement. This provision effectively deems the vendor to have received the GST amount for the purposes of the agreement between the parties so as not to disturb their existing arrangement.
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 pay that amount to the ATO on or before the day on which any part of the consideration for the supply (other than a deposit) is first provided. This will usually be at settlement. However, for a contract under which the price is payable in instalments (such as a terms contract), the GST amount will be due on or before the date for payment of the first instalment (not being a deposit).
Where the purchaser pays the withheld amount to the ATO, the vendor will be entitled to a credit in its BAS equal to the amount paid by the purchaser. This credit will then be offset against the GST liability on the sale of the property, which the vendor is still required to report in its BAS.
The purchaser must pay the withheld amount directly to the ATO. Alternatively, they can provide the vendor with a bank cheque made out to the ATO. Provided they retain a record of the payment, no penalties will apply to the purchaser for any delay in the ATO receiving the payment from the vendor.
Business to business transactions
The withholding obligation in respect of potential residential land is not intended to apply to business to business transactions. Therefore, where a recipient is registered for GST purposes, there is no withholding obligation. The only exception is where a registered recipient does not acquire the land for a creditable purpose, such as when they purchase a block of land on which to build their personal residence. In those circumstances a withholding obligation will still apply.
Contract price and adjustments
The amount to be withheld will be calculated based on the contract price for the sale of the property. This does not include settlement adjustments but will include other contractual adjustments where, for example, the price may be modified during construction of a new residential premises.
Margin scheme sales
Where the margin scheme is applied to the sale, the GST payable on the supply will be less than 1/11th of the sale price. In recognition of this, the legislation requires the purchaser to withhold a lesser amount equal to 7% of the price. The Minister may, by legislative instrument, determine a higher rate that can apply to sales made under the margin scheme but that rate cannot exceed 9%.
Where the effective GST rate applicable to a development sold under the margin scheme is less than 7%, the developer will be forced to seek a refund of the difference through the BAS lodgement process. This is likely to give rise to cash flow issues for some developers.
Notification obligation on the vendor
To assist purchasers with their obligation to withhold, a vendor is required to give to the purchaser a written notice before the date the supply is made. The notice must state:
- 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.
Importantly, the notification must be provided in respect of all sales and long-term leases of residential premises, including but not limited to taxable supplies of new residential premises.
Failure to provide the notice gives rise to a strict liability offence with a maximum liability of 100 penalty units, which is currently equal to $21,000 per infringement. However, as it is a strict liability offence, if a company is prosecuted under the criminal code it will be liable for a penalty which is 5 times that amount.
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 the withholding obligation.
However, no penalty will apply if the purchaser relies on a notice provided by the vendor which indicates that the purchaser is not required to withhold, and there is nothing in the contract or other information known to the purchaser which makes it unreasonable for the purchaser to believe that the vendor’s statement is correct.
This is a welcome concession from the initial draft legislation, which imposed a strict liability penalty on purchasers who failed to withhold.
Credits and refunds
If an amount has been withheld in error, the vendor may apply to the ATO for a refund of the amount of the payment made in error outside of the BAS lodgement process. The vendor must apply to the ATO at least 14 days before GST is payable on the supply.
In all other cases, the credit and any available refund must be sought as part of the BAS lodgement process.
If you operate within the property development industry, the new withholding regime is likely to impact you. To be prepared you should consider whether any of the following issues apply to your circumstances -
- Contracts of sale will need to be updated to cater for the new withholding regime and to 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 identify those contracts that fall within or outside of the transition period.
- Property developers will face cash flow issues. Financing arrangements and covenants will need to be reviewed to ensure that cash flow can be adequately managed. In particular, those developers that sell their properties under the margin scheme will need to consider the potential impact of the 7% withholding requirement on their cash flow position.
- 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 instances where the purchaser makes payment of the GST amount directly to the ATO. Under these circumstances 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 withholding obligation if it is not correctly withheld.
The new changes will come into effect from 1 July 2018, which does not allow very much time to adequately deal with the issues referred to above in order to ensure a smooth transition to the new regime. Our specialist team of GST advisors is ready to assist you with the transition process. Please contact your Pitcher Partners representative for further information.