The Federal Government’s charges for the payment of GST on buyers of new houses and apartments and residential land will be an additional administrative burden for lawyers and sellers of residential property.
The Government announced in the 2017-18 Budget that from 1 July 2018 buyers of new residential premises or new residential subdivisions will be required to remit GST on the purchase price to the ATO on or before settlement.
The exposure draft legislation and explanatory materials were released on 6 November 2017 and the Treasury has received submissions in relation to its consultation paper.
The proposed legislative changes are in response to the ATO’s submission to the 2015 Senate inquiry into ‘Insolvency in the Australian construction industry’ which identified over 13,000 entities engaging in non-compliance activity known as ‘phoenixing’.
New residential premises and potential residential land
The draft legislation will apply to:
- residential premises not previously sold as residential premises;
- new subdivisions for house and land packages where a buyer may receive a taxable supply of a vacant block of land the subject of a property subdivision plan; and
- new residential premises created through substantial renovations, or built to replace demolished premises on the same land.
Notification by sellers
- the draft legislation requires sellers to provide buyers with a notice in writing of their obligation to remit GST to the ATO at least 14 days prior to settlement;
- the notification requirement appears to apply to the supply of any residential premises or potential residential land, rather than just residential sales that are a taxable supply;
- failure to issue a notice is a strict liability offence that will attract a maximum penalty of $21,000 per contract; and
- sellers will be required to identify if withholding payments are required under each contract of sale, and to advise buyers of their obligation to remit GST to the ATO.
Timing of withholding obligation
- the intention of the legislation is for buyers to remit payment to the ATO on or before the day of settlement;
- deposits under a contract of sale will not trigger payment obligations; and
- where the purchase price is paid in instalments, buyers will be required to remit payment to the ATO by the end of the day on which the first instalment is made.
Withholding tax credits
- sellers will be entitled to a credit for the amount paid by the buyer to the ATO; and
- the ability to claim tax credits will be contingent on the buyer remitting payment to the ATO.
- under the draft legislation GST will be overpaid on margin scheme sales such that the balance purchase price that the developer receives at settlement will be less and will likely create short term cash-flow issues for developers; and
- to ensure cash-flow issues are minimised developers will be able to apply to the ATO for a refund prior to lodging BAS returns.
- withholding obligations will not apply to contracts signed before 1 July 2018, so long as settlement occurs before 1 July 2020. This will provide a transition window of two years for pre-existing contracts; and
- Contracts which settle after 1 July 2020 will be caught by the legislation, even if the contracts are entered into prior to 1 July 2020.
Lavan understands that submissions made to the Treasury have proposed various amendments to the draft legislation, such as:
- the adoption of procedures and mechanisms from the foreign resident capital gains tax withholding regime, including clearance certificates;
- incorporating vendor notices into contracts of sale; and
- exemptions for developers with an excellent compliance history.
Various issues with the draft legislation have also been raised, including:
- the adverse affect on development lending practices, including increased lending costs;
- cash-flow issues and compliance costs for developers;
- the effects on the timing of GST refunds; and
- the potential effect on housing supply and affordability.
Takeaways for Sellers
- sellers will be required to provide a notice to buyers at least 14 days prior to settlement;
- the notice must state the amount of GST a buyer is required to remit to the ATO; and
- sellers which fail to provide the required notice will be subject to a strict liability offence.
Takeaways for Buyers
- buyers will be liable to remit payments to the ATO once the legislation takes effect; and
- buyers that fail to withhold will be subject to a strict liability offence unless they can show an honest mistake of fact. The maximum penalty to each offence is $2,100.