No. 49: New GST withholding and notification rules on property transactions

Draft legislation has been released on 6 November 2017 in relation to GST withholding for sales of new residential premises or new potential residential land (for example subdivided residential lots).  The proposed new rules were first mentioned in the 2017-18 Federal Budget and apply to contracts entered into on or after 1 July 2018, and to contracts entered into before that date where they are not settled by 1 July 2020.

Under the proposed new laws, it will be a requirement for purchasers of new residential premises and new potential residential land to withhold 1/11th of the purchase price as GST.  The GST on the purchase price is to be paid directly to the ATO on or before the day on which any of the consideration for the purchase is first provided, which will usually be at settlement.  This does not include consideration provided by way of a deposit.

Reason behind the new rules

There has been in the past avoidance of GST revenue due to activities of so called “phoenix” operators.  Currently, the obligation of sending GST to the ATO is on the vendor as GST is collected and remitted to the ATO when reporting sales.  However, the Treasury claims that there have been developers failing to pay GST to the ATO even after having claimed GST credits on the eligible constructions costs.

Application of the new rules

  • The proposed date for the application of the new rules is 1 July 2018. Where contracts have already been entered into prior to that date, the draft legislation provides for a two-year transitional arrangement.  Contracts entered into before 1 July 2018 will not be affected by the proposed withholding rules provided the transaction settles before 1 July 2020.  This will be particularly relevant for off the plan sales.
  • To assist with compliance with the new withholding rules, a new notification regime will also be introduced whereby vendors will be required to issue a written notice to purchasers at least 14 days prior to settlement. The notice must include details about the vendor (name and ABN), the amount to be withheld, the date the amount must be paid to the ATO and the GST-inclusive market value of any non-monetary consideration for the supply.  Most importantly, this new notification regime applies to the supply of any residential premises or any potential residential land.  The withholding obligation on the other hand, applies to new residential premises or new potential residential land.
  • The vendor notification regime will not apply to contracts entered into before 1 July 2018 notwithstanding settlement occurs after this time.
  • Failure to issue the notice will attract a penalty of 100 units at $210 per unit, ie. an amount up to $21,000. This will apply per contract.  An administrative penalty may also apply.  The only exception to the penalties applying is if the vendor honestly and reasonably believed the property being sold was not “new residential premises”.
  • A vendor would normally be entitled to a reduced GST liability if the margin scheme applies. Under the proposed rules, the purchaser is still required to withhold and remit 1/11th of the purchase price to the ATO.  This will lead to an overpayment of GST to the ATO.  The vendor can therefore apply for a refund of the difference between the amount paid directly to the ATO and the amount of GST that should have been payable under the margin scheme.  This application must be submitted in an approved form within prescribed timeframes.  Applications cannot, however, be made where taxpayers have used the margin scheme and lodge on a monthly basis, unless GST has been withheld in error.

Questions arising from the application of the new rules

Will the vendor still need to report a GST liability on the sale?

Yes, the vendor is still required to report a GST liability in its Business Activity Statement on the relevant sale.  The vendor is also entitled to a credit for the GST that has been withheld and remitted to the ATO by the purchaser on the vendor’s behalf.

Other than any settlement adjustments, the GST liability and credit should generally net out to nil in the return.

However, there will be cash flow issues that vendors need to consider as they will no longer have the benefit of having the GST component of the sales price as proceeds in their bank account for the period between settlement and lodgement of their Business Activity Statement.

Will the withholding apply to the contract price or the adjusted purchase price?

Contract prices are usually adjusted on settlement to account for items such as land tax, water rates and council rates.

The proposed legislation suggests that the withholding will be applied to the adjusted purchase price.  However, this may result in practical complications if not all settlement adjustments are known when the vendor is required to issue the notice to the purchaser 14 days before settlement.

Is there any exemption for developers with a good GST compliance history?

There is no exemption in the current draft legislation available in these circumstances.  The rules apply to all developers selling new residential premises or potential residential land.

We note that the above proposed rules will have a major impact on the way GST is accounted for on property transactions.  Once the legislation is finalised, property vendors and purchasers will need to make sure that any contracts which are settling on or after 1 July 2018 comply with the rules.

Please contact your Blaze Acumen advisor should you have any queries in relation to any issues raised above.  Any comments on the draft legislation is to be provided to the Treasury by Monday 20 November 2017.  We will monitor and issue further alerts as the legislation is updated.