GST on property transactions
Currently, GST is included in the purchase price of new residential premises and is paid to the developer of the premises by the purchaser. The developer remits the GST to the ATO on their next BAS, which can be up to three months after settlement.
However, from 1 July 2018, purchasers of new residential premises or new residential subdivisions will remit the GST on the purchase price directly to the ATO as part of the settlement process. This new procedure aims, among other things, to tackle the strategy of ‘phoenixing’ whereby developers collect GST in the purchase price then dissolve their businesses before the GST is remitted to the ATO on the next BAS. By effectively making purchasers pay GST when the consideration for the property is provided, this removes the time lag in the GST payment.
Summary of the new law
The new law applies to purchases of new residential premises or a new subdivision of potential residential land. However, the Bill expressly excludes certain sales of premises and potential residential land.
The purchaser will be required to make a payment of 1/11th of the consideration to the ATO directly, prior to or at the time consideration is first provided (other than consideration provided as a deposit).
However, the Bill introduces a provision not in the Exposure Draft that provides where a supply is made under the margin scheme the purchaser is required to withhold only 7% of the purchase price. A true-up of the GST liability will occur when the BAS is lodged.
The previously proposed provisions that the supplier may apply to the ATO for a rapid refund of a portion of the amount withheld by the purchaser have not been included in the bill.
The entity that makes the taxable supply must remit the GST to the ATO after lodging their BAS. They will be entitled to a credit for the payment made by the purchasers. The time limit to issue a notification of a purchase to which the GST withholding will apply (originally 14 days before the purchase) has been removed.
Explanation of the new law
Generally, premises will be new residential premises where they:
- have not previously been sold as residential premises; or,
- have been built to replace demolished premises on the same land.
There is now a carve out for residential premises that have been created through substantial renovation.
Potential residential land means land that is permissible to use for residential premises but that does not contain any buildings that are residential premises. This includes land zoned for residential premises but that does not currently contain residential premises.
The legislation aims to cover house and land packages, where a purchaser may receive a taxable supply of a vacant block of land that is the subject of a property subdivision plan. Supplies between members of a GST group are excluded to ensure the withholding applies only of the supply to the end user for consideration.
Timing of withholding obligations
The purchaser is required to pay the amount to the ATO on or before the day consideration for the supply, other than an amount provided as a deposit, is first provided. In the majority of cases this would be on the day of settlement. The purchaser pays the balance of consideration to the supplier. If the consideration is received in instalments, the full 1/11th of the price representing the GST is to be withheld from the first instalment by the purchaser and paid to the ATO. The balance of the first instalment net of the GST on the full consideration is then payable to the supplier.
There is no withholding obligation from payments of a deposit. Further, if the deposit is forfeited no withholding will apply at that time either. Instead, the withholding obligation will apply to the first payment of consideration other than the deposit, and applies at the time if this is paid in addition to a deposit at that time. The Commissioner may allow variations in timing such that a withholding applies to the amount of each instalment but it is expected this will apply only in very specific circumstances.
The amount to be paid
The amount to be paid to the Commissioner will be 1/11th of the price for the supply i.e. the amount of money paid for the supply or, where the consideration is not expressed as money, the GST inclusive market value of the consideration.
To minimise the cash-flow impact for a margin scheme sale, the withholding in respect of such a sale has been limited to 7% of the purchase price.
Having a fixed amount simplifies compliance, but this may exceed the GST payable on the taxable supply, for example, in situations where the transactions consists of multiple different types of supplies under a single agreement. Therefore, there is an incentive for the supplier to assign a proportion of the price to that part of the supply to which the withholding obligations will apply. Otherwise, they will face a further cash flow disadvantage if 1/11th of the whole consideration is withheld.
The purchaser does not need to provide the amount withheld to the supplier even though the contract price includes the GST in the consideration. The supplier receives a credit for this amount in their next BAS when paying the net GST for the period.
The Bill introduces an option for the purchaser to satisfy the withholding by providing the seller with a bank cheque made out to the ATO for the GST withholding amount.
Notification by suppliers
The supplier of residential premises or potential residential land, and not just new residential premises or new subdivisions of potential residential land, is required to notify the purchaser of certain things in a notice. However, the proposed time limit for issuing the notcie has been removed. It is up to the supplier to determine if any exemptions apply. This obligation includes:
- name and ABN of the entity making the supply;
- the amount the purchaser will be required to pay to the Commissioner of Taxation and the due date of the payment;
- where some or all of the consideration is not expressed in money, the GST inclusive market value of that amount of the consideration; and
- any other matters specified in the regulations.
Failure to notify, or making a defective or false notification is a strict offence with a penalty of up to 100 penalty units (currently up to $21,000). Proving an honest mistake of fact however will avoid a penalty. As the offence applies to all entities that supply residential premises, this means that each time residential premises are supplied as a taxable supply, the vendor must advise the purchaser if the property is new residential premises in relation to which a GST withholding applies.
An administrative penalty may also apply where the purchaser fails to make a withholding payment, unless they can provide an honest and reasonable defence e.g. the supplier gave notice that the property was not new residential property.
Notification by purchasers
The withholding entity must notify the ATO in the approved format five days before they intend to make the payment as well as on the day they make the payment.
Withholding tax credits
The entity that makes the supply is entitled to a credit for the amount paid to the ATO and they can claim this in the period in which its net amount including that supply is reportable. However, the credit is only available for the amount that has been paid to the ATO and is contingent on it having been paid, and not just withheld. The credit is reduced by any amount that has been refunded.
Refunds where a payment is in error
An entity can claim a refund if an error has been made. The ATO will determine whether the refund application is ‘fair and reasonable’.
Express carve outs
The new legislation expressly excludes GST withholidng from applying to sales of:
- commercial residential property;
- residential premises that are created through substantial renovations; and
- supplies of potential residential land if either:
- the purchaser is registered for GST and acquires the land for a creditable purpose; or
- the land contains a building used for a commercial purpose.
The new rules apply to all contracts entered into on or after 1 July 2018. Contracts entered into before 1 July 2018 are not caught by the legislation unless they settle on or after 1 July 2020.
Existing property development arrangements
Further transitional provisions aim to preserve the position of all parties to a property development agreement that existed prior to 1 July 2018, where an agreed distribution or ‘waterfall’ payment arrangement applies. Such an arrangement provides for how the consideration is to be distributed amongst the parties to the arrangement, including where some funds are to be distributed to a party to discharge their GST liability to the ATO. This may result in a windfall gain as the purchaser has already met the GST obligation.
The transitional rules aim to put the parties into the position they would have been in without GST withholding.