Following on the imposition of the Capital Gains Tax Withholding Regime, the Federal Government is set to introduce a new withholding regime for the purpose of collecting GST on the supply of new residential properties effectively at the time of the supply.
The bill proposing the introduction of the new regime received assent on 29th March 2018 and will become effective from 1st July 2018. All contracts signed after that date will be subject to that regime as will contracts that are signed before 1st July but which don’t settle until after 1 July 2020. This will enable longer term contracts such as house and land packages with practical completion dates after 1st July to settle without any obligation to withhold funds but may affect longer term off-the-plan purchases.
Why the changes?
The legislation is aimed at getting developers and builders to submit their Business Activity Statements and to pay their GST liabilities. It has been a practice in the industry to claim the GST input credits for development costs but not remit the GST. There have even been instances of phoenix activities where companies are liquidated before the activity statement is due to be lodged or the GST remitted. The effect of this legislation is to shift the responsibility for payment of the seller’s liability for GST to the purchaser.
What sales to the reforms apply to?
The withholding regime applies to:
- The sale or long-term lease of new residential properties which have not been created through substantial renovations of a building and which are not commercial premises. By this definition, this may include resident leases in new retirement villages.
- The sale of potential residential land that is included in a property sub-division plan and does not contain any building that is in use for a commercial purpose. This includes land that forms part of a house and land package or off-the-plan purchases. It will also include small one-off developers sub-dividing existing properties for the purpose of supplying new residential lots.
Who is responsible for payment?
The buyer must pay an amount equal to 1/11th of the purchase price on the day on which any payment of the purchase price (other than the deposit) is paid. This will usually be at the settlement of the contract and a cheque equal to the amount of the seller’s GST liability for the sale will be provided as part of payment of the purchase price.
An exception to this is business to business sales where the buyer is registered for GST and the purchase is for a creditable purpose. This would include the purchase by a builder of residential land for the purpose of building new residential premises.
As stated above, the amount to be withheld is an amount equal to 1/11th of the purchase price except in the circumstances where the margin scheme applies. If it is agreed that the margin scheme applies then the amount to be withheld is 7%.
If the amount withheld in respect to a margin scheme is greater than the amount that the seller is liable to pay, the seller may apply to the ATO for a refund otherwise, the normal BAS process applies.
When must the payments be made?
As stated above, the payments are to be made on the day on which any payment other than the deposit is paid. In normal contracts, this would be the day of settlement. In instalment contracts however, it would be the date of the first instalment (other than the deposit) is paid. At such times, the entire amount of GST payable on the sale is remitted to the ATO. This could have the effect of the whole or a substantial portion of that first instalment being paid to the ATO by the purchaser.
The seller must provide the buyer with a written notice prior to settlement whether the buyer will be required to withhold any amount for payment to the ATO and if they required to do so provide the following information:
- The name and ABN of the seller;
- The amount required to be paid;
- When it is required to be paid;
- If some of the consideration is something other than cash, the market value of that consideration;
It is a strict liability offence if the seller does not provide notice as required. The maximum penalty is $21,000.00 per offence and there can also be criminal prosecution. In the case where a company is criminally prosecuted then the penalties are increased fivefold.
The same strict liability does not apply to the buyer but in the circumstances where the buyer fails to withhold the GST, then the buyer will be liable to pay to the ATO an amount equivalent to the amount that should have been withheld.
The buyer may also rely on the notice given by the seller and will not be held liable for any deficiencies or incorrect amounts withheld from the purchase price.
What to do now?
The introduction of this new regime not only imposes an obligation on the purchaser and the purchaser’s solicitors and conveyancers to act as a tax-collector for the government, it has the potential to disrupt the operations or even cause significant financial hardship to builders and developers including those small developers who may only be sub-dividing existing properties and who using the GST included in the sales price as working capital for ongoing works reconciling the liabilities on completion of the development. Thought must be given to refinancing or restructuring operations to allow for these payments.
The conveyancing process must also change and no doubt we will see amendments to the standard residential contracts prior to 1 July. In practical terms, on receiving notice from the seller, the buyer will order an additional bank cheque made payable to the ATO, similar to the process by which the land tax liabilities are paid and either remit it directly to the ATO or provide it to the seller or the seller’s solicitor on an undertaking to submit the same.