GST withholding for residential property developers
In a Nutshell
On 29 March 2018, the Treasury Laws Amendment (2018 Measures No.1) Act 2018 (Act) received royal assent. The Act creates a new “GST withholding regime”
From 1 July 2018, purchasers of new residential premises or subdivisions of potential residential land will be required to withhold the GST component of the purchase price from the vendor, and pay that amount directly to the ATO.
Currently, it is standard practice for a purchaser of new residential land to pay the full purchase price to the vendor at settlement, with the vendor then required to remit the applicable GST component to the Australian Tax Office (ATO) in their next business activity statements (BAS).
The changes to be implemented by the Act aim to counteract a practice possible under this current system, whereby a developer would collect GST on a sale and subsequently dissolve their business prior to remitting the GST component of the sale price to the ATO. It is estimated that these “phoenixing” operations resulted in a $2 billion tax revenue loss in 2015-16.
GST withholding regime
The new regime will apply to all contracts of sale entered into on or after 1 July 2018 (or existing contracts under which settlement does not occur prior to 1 July 2020).
The regime requires purchasers to withhold the GST component of the purchase price and remit this amount to the ATO.
Typically, the amount to be withheld will be 1/11th of the purchase price under the contract. However, where the margin scheme applies, the required amount will be 7% of the purchase price.
As the withholding amount does not include adjustments made at settlement, vendors will be required to correct their actual GST liability in their next BAS.
Vendors may be entitled to claim input tax credits for the withheld amount paid by the purchaser.
Following commencement of these new laws, a purchaser will be required to pay the GST on or before the day that any consideration (other than a deposit) is first provided, which will typically be at settlement. Notably, for contracts under which the sale price is payable in instalments, GST for the entire sale must be paid to the ATO at the time the first instalment is made.
The purchaser may pay the withheld amount directly to the ATO. However, Finlaysons recommends that vendors request a cheque made payable to the ATO at settlement or other evidence of payment such as EFT record. This provides confidence to the vendor that the GST has been remitted and they are entitled to input tax credits.
Prior to settlement, the vendor must provide written notice to the purchaser stating whether the purchaser will be required to withhold and remit GST and, if so, the amount required, in addition to further details.
Penalties of up to $21,000 for individuals and $105,000 for companies apply if a vendor fails to provide such notice.
This notification is required on the supply of any residential premises or potential residential land, not just new residential premises (as distinct to the application of the resulting withholding and remittance obligations – if any).
Adverse cash flow implications may arise for vendors who currently have the benefit of the GST component of the sale between settlement and the date of their next BAS.
Finlaysons anticipates further changes and regulations to come.
This Alert is intended as an alert only. It does not purport to be comprehensive advice. Readers should seek professional advice before acting in relation to these matters.