Purchaser to withhold GST on certain property transactions from 1 July 2018
From 1 July 2018, purchasers of new residential premises or subdivisions of potential residential land will be required to pay part of the purchase price directly to the ATO on or before the settlement of the property, rather than paying the whole amount to the vendor.
This new regime is aimed at addressing tax evasion activities by property developers who avoid their GST obligations, such as by putting their companies into liquidation shortly after property sales are completed, but having claimed GST credits on construction costs along the way. Under these schemes (referred to as ‘phoenixing’), new companies are subsequently set up under control of the same individuals to start the process again.
One very effective way to ensure that property developers meet their GST obligations is to ensure that the ATO gets its cut from the property purchasers, before the developers get a chance to see the money. The developers would then get a GST credit on their Business Activity Statement for the amount paid by the purchaser to the ATO. Importantly, the onus to pay GST to the ATO under this regime falls on the purchaser.
What properties are affected by the new regime?
Newly constructed residential premises and new subdivisions of potentially residential land both fall under the new regime. The term new residential premises is defined by the GST Act as premises that have not previously been sold as residential premises and have not previously been the subject of a long-term lease.
Even though a property which has been substantially renovated will be considered new residential premises for GST purposes generally, it is nonetheless excluded from this withholding regime due to the potential difficulty in establishing when renovations are deemed to be significant enough to result in new residential premises.
Commercial residential premises (such as hotels) are excluded from this withholding regime.
Sales of potential residential land to a GST-registered purchaser who acquires it for a creditable purpose (as defined in the GST Act) will also be excluded. This is to ensure that certain business-to-business transactions are not affected by this regime.
How much should be paid and when?
The amount to be remitted to the ATO will be equal to 1/11th of the sale price (excluding settlement adjustments).
A special rule applies for the sale of new residential premises under the margin scheme. A purchaser of new residential premises under the margin scheme will only be required to remit 7% of the purchase price to the ATO. The Commissioner of Taxation has the option to vary the withholding amount from 7%, but cannot go higher than 9% when the margin scheme is applied.
The payment must be made on or before the day on which any of the consideration (other than a deposit) is provided. Usually, this will be at settlement.
What is the process to pay the GST?
First, any person selling residential premises will need to provide necessary details to the purchaser prior to settlement. This occurs irrespective of whether the premises are new or not.
The following matters must be included in the notice to the purchaser:
- the name and ABN of the entity that made the supply
- the amount that the purchaser will be required to pay the Commissioner (even if it is $0)
- when the purchaser is required to pay that amount to the Commissioner
- the GST inclusive market value of any non-monetary consideration, and
- any other matters specified in the regulations.
If a vendor fails to comply with the above notification requirements, the purchaser is still obliged to make a payment under this regime and will be liable for the full amount that should have been paid to the ATO. See below for further details on penalties.
The notice requirement above does not apply to commercial residential premises such as hotels, or to subdivisions of potentially residential land transferred in certain business-to-business transactions.
Second, the purchaser must notify the Commissioner of the amount of withholding on or before the due date for payment (usually this will be at settlement).
Third, the payment of the amount due will be made to the ATO, likely at settlement.
Penalties for vendors and purchasers
Vendors may have an administrative penalty of 100 penalty units imposed for failure to comply with the notification requirements described above. In addition, a criminal penalty of 100 penalty units also applies to vendors for failure to give purchasers the required notice to withhold. Each 100 penalty units currently totals $21,000.
Purchasers may also have administrative penalties imposed for failure to pay the amount required to the ATO. For a purchaser, the penalty amount is equal to the amount they were required to pay under this regime, i.e. 1/11th of the purchase price, or 7% of the price if the margin scheme was used.
The penalty for failure to pay will not apply if the purchaser is given a notice by the vendor stating that the premises are not new residential premises or indicating that they are not required to make a payment to the ATO in relation to the relevant property transaction AND there were no circumstances or terms of transaction that made it unreasonable for the purchaser to believe the accuracy of the notice given to them by the vendor.
The purchaser will not be liable for a penalty if, at settlement, they give the vendor a bank cheque made out to the Commissioner of Taxation for the amount the purchaser is required to remit to the ATO. A purchaser should therefore retain evidence of having provided such a cheque to the vendor, including a photocopy of the cheque, and vendor’s acknowledgement of receipt of the cheque.
NOTE: As stated above, if the purchaser does not receive a notice from the vendor regarding the obligation to withhold a portion of the purchase price, the purchaser may still be liable to pay that amount to the ATO. If you enter into a contract to purchase residential premises (whether new or not) or residential subdivision land from 1 July 2018, you will need to ensure that the vendor provides you with a notice regarding your obligation to withhold a part of the purchase price, even if it states that you are not required to withhold any amounts, or that the premises are not classified as new residential premises.
The withholding regime will not apply to property purchase contracts entered into prior to 1 July 2018, as long as the property transaction settles no later than 30 June 2020.
There remains a significant amount of administrative detail yet to be released by the ATO in relation to the operation of this new regime, including the logistics of notifying the ATO of the amount due and making the payment. We expect these details to be released over the next few weeks. We understand that the Law Society is still working through these changes and we are hopeful that conveyancers and lawyers undertaking conveyances of property will ensure that their vendor and purchaser clients comply with the new requirements.
Should you wish to discuss the new GST withholding regime or obtain further details in relation to it, please contact your Ruddicks adviser.
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The content of this newsletter is general in nature. It does not constitute specific advice and readers are encouraged to consult their Ruddicks adviser on any matters of interest. Ruddicks accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. This information is current as at 1 June 2018, and was published around that time. Ruddicks particularly accepts no obligation or responsibility for updating this publication for events, including changes to the law, the Australian Taxation Office’s interpretation of the law, or Government announcements arising after that time.
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