New GST Withholding Regime on supplies of Residential and Potential Residential Land
From 1 July 2018, purchasers of new residential premises or potential new residential land must pay the GST component of the purchase price directly to the ATO either on, or before settlement.
Previously, for purchasers who were registered for GST, the GST was added onto to the purchase price and paid by the purchaser to the vendor on settlement. For purchasers not registered for GST (i.e. typical Mum and Dad type buyers), the purchase price paid was inclusive of the GST component. It was then the vendor's responsibility to remit the GST to the ATO.
However, the ATO has found that some property developers were collecting the GST from purchasers on settlement of the sales of new residential property and then claiming input tax credits, whilst not remitting the GST to the ATO. In order to avoid making payments, some developers were then dissolving their businesses before their next Business Activity Statement was due. This activity is referred to by the ATO as 'phoenixing'.
When will the regime apply?
As there is no threshold on this new GST withholding regime, it will apply to all sales or long term leases (> 50 years) of:
- new residential premises; and
- potential residential land
which are settled on or after 1 July 2018, unless the contract is entered into before 1 July 2018 and settlement occurs before 1 July 2020.
What is defined as 'new residential premises' and 'potential residential land'?
A 'New residential premises' is a residential premises that had not previously been sold as a residential premises, or that which was built to replace a demolished premises on the same land, which was not created through substantial renovations and is not a commercial residential premises.
A prime example of this would be a house and land package purchased 'off the plan' from a developer.
'Potential residential land' is land permitted to be used for residential premises and is included in a property subdivision plan, but does not contain any buildings that are residential premises or in use for a commercial purpose. An example of this would be vacant land zoned for residential use, or that allows residential use.
How will it work?
The vendor must make notification in writing as to whether a purchaser is required to withhold GST on the transaction. If the purchaser is required to withhold, the vendor must also notify the purchaser of what that amount is, and when it is to be paid to the ATO.
The Law Society's recently released standard form 2018 contract provides for the details to be given, which enables the purchaser to remit the residential withholding payment (RW payment) to the ATO. These details include giving the supplier's name, the ABN, business address, proportion of RW, the amount that the purchaser must pay etc.
However, if the information is not known at the time that the contract is prepared (i.e. at an auction) then the new contract provides that the vendor must present all of the required information to the purchaser in a separate notice within 14 days of the contract date.
If the 2018 contract is not used in the transaction, it will be important that, prior to exchange of contracts, the purchaser's legal representative asks the vendor's legal practitioner whether the regime applies to the sale. This is so appropriate conditions may be drafted to ensure that the notification is given within a reasonable time before settlement, and the payment is ultimately withheld and paid.
How is the GST to be calculated?
The amounts to be withheld are:
(a) where the margin scheme does not apply: 1/11th of the purchase price;
(b) where the margin scheme applies: 7% of the price; and
(c) where a contract between associates without consideration, or for less than the market value: 10% of the GST exclusive market value of the supply.
The ATO will require the purchaser (or their representative) to complete two online forms.
- The 'GST property settlement withholding notification' is to be completed before settlement. This form will advise the ATO of the sale, and generates a lodgement reference number and a payment reference number.
- The 'GST property settlement date confirmation' is to be completed on or before settlement.
The purchaser is then obliged to remit the RW payment to the ATO.
It is important to note that purchasers do not need to register for GST simply because they have a withholding requirement as above.
The ATO may impose serious penalties on either party if this new regime is not followed. In particular, if a purchaser does not withhold and remit the RW payment to the ATO, then the purchaser will be liable for the amount. The requirement to withhold is also triggered by the release of the deposit to a vendor where the withholding payment is required to be paid at the time of release, rather than at settlement.
This is subject to some defences, such as the purchaser having relied on an incorrect notice by the vendor. With that said, this is not a complete defence, as a vendor should check that the notification they are giving is correct by discussing the position with their accountant.
Time will tell whether this new regime will further complicate the settlement process, which in recent years has seen many significant changes, such as the introduction of the Foreign Resident Capital Gains Withholding (FRCGW) tax regime. This regime obliges a purchaser who purchases property from a vendor who is a foreign resident, to ensure that the foreign resident capital gains tax is drawn from the sale proceeds and paid to the ATO.
Similarly, this new GST withholding regime puts the onus on the purchaser of property captured under the new regime to pay the GST to the ATO, despite it being the vendor's liability.
It is now more important than ever to obtain sound legal and accounting / tax advice when purchasing or selling residential property.
If you would like to speak with a member of our Commercial Property team regarding this new GST regime, or simply have a query regarding your sale or purchase, please don't hesitate to get in touch with: