Federal Budget 2017-18: Property purchasers to pay GST to the ATO

Under a proposal contained within the recent 2017-18 Federal Budget, property purchasers rather than property developers must remit the GST directly to the Australian Taxation Office (ATO) as part of the settlement process. This plan to shift the responsibility of accounting for GST from property developers to purchasers will apply to newly-constructed residential properties and new subdivisions from 1 July 2018.

Potential implications for developers

The implications are not just about the impact on cash flows of changes to the timing of reporting and paying GST. The full impact for developers will depend on whether the purchaser’s liability will be interim or final. Regardless, it may also have a significant impact on their funding requirements.

If the purchaser’s liability to account for GST is non-final, the purchaser may be required to collect a notional amount with a settling-up when the property developer submits its business activity statement (BAS). If the GST amount remitted by the purchaser is significantly more than the developer’s actual GST liability, this would impact the cash flows of the developer with knock-on implications for their funding requirements.

However, the Budget papers suggests that the purchaser’s GST obligations may be a final liability. If so, it may not be possible for purchasers to accurately calculate the GST payable on the transaction because, either:

  • the developer does not wish to discloses or make public its GST costings and calculations; or
  • it may be unreasonable to expect purchasers to manage complex GST calculations even if the developer makes the information available.

As a result, any final GST imposed on purchasers may be imposed under a simplified final withholding tax regime. This could bring the margin scheme to an end.

Purchasers who have contracted on GST inclusive terms and who wish to ensure they have extinguished their GST obligation fully may have an incentive to adopt the most conservative method of calculating GST. But if they overpay GST to the ATO, would the developer have rights of review or objection if the tax is imposed ultimately on the purchaser?

Potential implications for lenders

The new proposal also has potential ramifications for financing a property development because the full proceeds of sales usually required by lenders will be reduced by the GST deduction.

As referred to above, to ensure they meet their GST obligations, the amount of GST remitted on sales by the purchasers may exceed the forecasted GST liability for the development. In addition to impacting the developer’s profit, it may affect the lender’s security in several ways. For example:

If the GST payable by the purchaser to the ATO is non-final and as a result the GST amount paid to the ATO at settlement substantially exceeds the developer’s final GST liability, it is hoped that the developer will be able to claw back the difference as a refund. But this will most likely be on  BAS after settlement and after the lender’s security has been discharged. If the GST payable by the purchaser is a final tax, where the purchase price is inclusive of GST and the purchaser adopts the most conservative method of calculating GST, an overpayment of GST by the purchaser may in turn reduce the net sale proceeds available to the vendor, including a receiver or mortgagee in possession.

Actions to consider now

The proposal is currently scheduled to commence on 1 July 2018. Therefore, all new contracts that may complete after 1 July 2018 should be reviewed before exchange.

We encourage you to contact your Walker Wayland NSW advisor if you wish to discuss this or any other aspects of the Budget further.