What does the new GST Withholding regime mean for residential Purchasers and Developers?
Effective from 1 July 2018, GST payable on new residential properties and subdivisions will now be withheld by purchasers and remitted directly to the Australian Taxation Office (‘ATO’). These changes have substantial consequences for developers with the regime being introduced to prevent developers from avoiding remittance of GST.
Under the new regime, developers are required to notify purchasers, in writing, prior to settlement:
1. Whether the purchaser is required to withhold GST payment; and
2. Name, ABN, amount to be paid and due date for payment.
Developers that fail to comply with notifying the purchaser may (likely) be subject to substantial penalties. The maximum fine that may be imposed is 100 penalty units ($21,000) for individuals and 500 penalty units ($105,000) for corporations.
When does it apply?
The purchaser’s withholding obligation will apply in the following circumstances:
1. If the developer is GST registered and there is a taxable supply, that is, supplied in the course of business; and
2.The transaction is for a ‘new residential property’ and ‘potential residential land’; and
3.The purchaser is not GST registered and the transaction is ‘business to business’ transaction.
However, the notifying obligation is said to apply to most supplies of residential premises or potential residential land even when it is apparent that the supply will not be taxable (that is, if it does not satisfy clause 3 above).
When does it not apply?
The GST withholding does not affect the sales of existing residential properties or the sales of new or existing commercial properties.
Additionally, the withholding obligation does not apply in instances where a developer ‘on sells’ the ‘new residential properties’ or ‘potential residential properties’ to a purchaser who is registered for GST and is making the purchase for a ‘creditable purpose’. Under the GST legislation, ‘creditable purpose’ means the business acquires in carrying on its enterprise.
What property is affected?
The new regime only applies to ‘new residential properties’ and ‘potential residential land’. This includes apartments, home and land packages and vacant residential land.
For GST purposes, ‘new residential property’ is when the premises ‘has not previously been sold as residential premises and have not previously been the subject of a long-term lease, have not been created through substantial renovations of a building, or have not been built or contain a building that has been built, to replace demolished premises on the same land’ (s 40-75(1) A New Tax System (Goods and Services Tax) Act 1999).
Although not defined in the GST legislation, ‘potential residential land’ has been said to include vacant land in subdivision land that can be used for residential purposes.
What is the GST withholding amount?
The purchaser is required to withhold and pay to the ATO:
- 1/11th of the ‘contract price’ or
- 7% of the ‘contract price’ where the margin scheme applies*
In the event the purchase price is payable in instalments, the full GST withholding amount on the full purchase price is payable on or before the first instalment is paid (excluding the deposit).
The new regime will not apply to contracts entered into before 1 July 2018 for which consideration (save for the deposit) is initially provided before 1 July 2020.
How to protect yourself?
In order to ensure that the purchaser has complied with their obligation and you do not become liable for non-compliance, it is good practice to obtain evidence that they have in fact remitted the GST withholding to the ATO. This can be done by obtaining an EFTPOS receipt detailing same or request that a cheque be made out to the ATO and handed over to you at settlement, to which you may then forward to the ATO.
Further, you should communicate with your financial advisors as to your cash flow, particularly during times of settlement, to ensure you have available funds to cater for the GST withholding.
From the Purchasers’ perspective
As a purchaser, you will be required to remit the GST payment from the conveyance directly to the ATO at the time of settlement. This must be done on or the day before any consideration, other than a deposit, is provided
If a purchaser fails to comply with their withholding obligation, they may face an administrative penalty which may be equal to the withholding amount. However, if the purchaser can show that they relied upon the notification of the developer which was incorrect, the penalty may be waived.
If you would like more information about this new regime and how to minimise your risk, speak to one of our friendly staff at Bambrick Legal today.