Developers – Are you ready for 1 July 2018? New GST withholding regime for residential property transactions
By Nafsika Palbas
26 June 2018
The new GST withholding regime applies to taxable supplies of new residential premises and potential residential land. This blog outlines the obligations imposed on vendors and purchasers and the impact this has on residential property transactions.
From 1 July 2018, the new GST withholding regime requires purchasers of new residential premises or potential residential land to withhold 1/11th (or 7-9% if the margin scheme is applied) of the unadjusted, GST inclusive contract price to the Australian Taxation Office (ATO) at settlement, rather than the vendor.
What type of property does the GST withholding regime apply to?
The regime applies to taxable supplies of the following:
- New residential premises – any property that has not previously been sold as a residential property or results from the construction of a new building to replace demolished premises on the same land. It does not include property created through substantial renovations of a building or commercial residential premises; and
- Potential residential land – land which is permissible to be used for residential purposes, which does not contain any buildings which are residential premises and are included in a property subdivision plan. It does not include land which includes a building used for a commercial purpose or where the purchaser is registered for GST and the acquisition is for a ‘creditable purpose.’
What obligations does the regime impose?
The regime imposes obligations on both vendors and purchasers. Now both vendor and purchaser are responsible for payment of the GST.
Prior to settlement vendors of any residential premises or potential residential land must give the purchaser a written GST withholding notice. The notice must state whether or not the purchaser will be required to withhold GST, and if so must also state the vendor’s name and ABN, the GST withholding amount and the time for the payment.
This obligation will apply to most sales of residential premises or potential residential land even where it is clear that the regime will not apply (for example, because the residential premises is not a new residential premises).
If you are a purchaser of new residential premises or subdivision of potential residential land you will, as at 1 July 2018 be appointed as an authorised ATO offical who will have the force of law to collect taxes.
The ATO is concerned that some developers are failing to remit GST collected on sales of property and phoenixing the development company. Amendments have been made and passed to GST laws requiring purchasers of new residential premises or subdivision of potential residential land to withhold an amount from the contract price and remit it to the ATO on or before settlement.
Failure by the vendor to notify the purchaser or failure by the purchaser to withhold the GST withholding amount carries heavy penalties.
What is the effect of the GST withholding amount being remitted to the ATO?
As a result of the purchaser remitting the GST withholding amount to the ATO, on account of the vendors potential GST liability, the vendor obtains a credit equal to the GST withholding amount.
The vendor remains liable for the GST on the taxable supply. Any variation between the GST withholding amount and the vendor’s actual GST liability will be addressed in the vendor’s Business Activity Statement (BAS).
What if the contract of sale was entered into before 1 July 2018?
Contracts of sale entered into before 1 July 2018 are exempt from the regime provided that before 1 July 2020 settlement occurs and the consideration (other than the deposit) is provided. This provides a two year transitional period for existing contracts.
If settlement occurs or consideration (other than the deposit) is provided from 1 July 2020, the regime applies regardless of whether the appropriate GST withholding regime special condition has been included in the Contract of Sale.
How does the GST Withholding Regime work with the Foreign Resident Capital Gains Withholding Regime?
Where a vendor is foreign, both the GST Withholding Regime and Foreign Resident Capital Gains Withholding Regime may apply to the sale of new residential premises and potential residential land.
This means that the purchaser must withhold two amounts from the contract price and remit it to the ATO at settlement, rather than the vendor.
To read more about the Foreign Residential Capital Gains Withholding Regime, please click here.
What impact will the regime have?
The regime will have a significant impact on residential property transactions. Key concerns are:
- Ensuring any new residential premises or potential residential land Contracts of sale executed after 1 July 2018 contain an appropriate GST withholding regime special condition;
- Reviewing and monitoring any pre-1 July 2018 Contracts of Sale to consider whether they may fall outside the two year transitional period; and
- Ensuring vendors and purchasers comply with their obligations under the regime during the conveyance of a property.
The regime will also have significant cash flow implications for developer vendors and their financiers who currently take advantage of the delay between settlement and GST remission on lodgment of the BAS, to repay debt and costs.
It is vital that vendors, purchasers and others involved in residential property transactions are aware of, and are prepared for, the introduction of the regime on 1 July 2018.
What should I do if I am affected?
Get legal advice and ensure your contract is updated to facilitate a process that allows for the withholding but also gives certainty to both parties that the amount will be paid to the ATO.
The ATO advises that for property transactions, purchasers will need to:
- Split the amount of GST from the total purchase price
- Pay the GST component directly to the ATO by a disbursement at settlement
- Pay the GST exclusive purchase price to the property developer (vendor).
Developers need to give written notification to the purchaser when they need to withhold. As the Vendor is still liable for payment of the GST it is important to ensure that the Purchaser actually remits the GST to the ATO.
The rate of withholding differs depending on whether the margin scheme is applied.
- If not, the rate is 1/11th of the GST inclusive purchase price set out in the contract;
- If so, the rate is currently set at 7% of the GST inclusive price (however the legislation reserves the right for the Minister to lift that percentage to a rate not exceeding 9%).
Any adjustments are ignored for the purpose of calculating GST. The developer’s actual GST liability is still calculated based on the adjusted price and any discrepancy will be dealt with in the Business Activity Statement process.
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