GST withholding legislation passed through Parliament

In the 2017-18 Budget the Treasurer announced that from 1 July 2018 a buyer who receives new residential premises or a subdivision of potential residential land by way of sale or long term lease would be required to remit GST on the purchase price to the ATO on or before settlement.

The proposed legislative changes were in response to the ATO’s submission to the 2015 Senate Inquiry into ‘Insolvency in the Australian construction industry’ which identified over 12,000 entities engaging in non-compliance activity known as ‘phoenixing’.

Update

The Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 was passed by both Houses of the Parliament on 29 March 2018. The new legislative changes will come into effect on 1 July 2018.

Summary of Legislation

New residential premises and potential residential land

The legislation will apply to the sale or long-term lease of:

  • new residential premises; or
  • potential residential land that is included in a property subdivision plan and does not contain any building that is in use for a commercial purpose.

A new residential premises can be created where there have been substantial renovations of an existing premises.

The Commissioner of Taxation may decide by legislative instrument that the withholding requirements do not apply to a supply of new residential premises or potential residential land.

Notification by sellers

Sellers will be required to provide buyers with a notice in writing before settlement advising whether the buyer is required to pay GST to the ATO. If GST is payable, then the notice must include details such as:

  • the seller’s name and ABN (if applicable);
  • the amount of GST payable;
  • when payment is required to be made to the ATO; and
  • the GST inclusive market value of any consideration not expressed as an amount of money.

The notification requirement does not apply to the sale of commercial residential premises or the sale of potential residential land if the buyer is registered for GST and acquires the land for a creditable purpose.

Failure to issue a notice is a strict liability offence that can result in a maximum penalty of $21,000 per notice (per contract) for individuals and $105,000 per notice for companies. 

Amount of GST

Buyers will be required to remit 1/11 of the contract price to the ATO (subject to settlement adjustments) or 7% of the contract price (subject to settlement adjustments) if the margin scheme is applied.

If the seller is an associate of the buyer and the sale is without consideration, or is less than the GST inclusive market value, then the amount to be paid to the ATO is 10% of the GST inclusive market value of the property.

Payment of GST

Buyers will be required to pay GST to the ATO on or before the day of settlement, or as otherwise determined by the Commissioner of Taxation.

Buyers can discharge their withholding obligations by instructing their solicitor/settlement agent to pay the ATO at settlement, or, by providing a bank cheque (made payable to the Australian Tax Office) to the seller on or before settlement.

Buyers must also provide a notice to the ATO on the day of settlement advising the amount to be paid to the ATO (even a nil amount), regardless of whether the amount is paid.

Deposits provided under a contract of sale will not trigger payment obligations.

Where the purchase price is paid by instalments, the GST liability arises on payment of the first instalment.

Multiple buyers

Where a number of buyers acquire land as tenants in common, the GST liability is apportioned according to their interest in the property. However, it will not be apportioned for joint tenants.  In that case, each joint tenant has the obligation to pay (but this does not result in more than one payment having to be made).

Withholding tax credits

Sellers will be entitled to a credit through their normal BAS lodgement for the amount paid by the buyer to the ATO.

Transitional arrangements

Withholding obligations will not apply to contracts entered into before 1 July 2018 if settlement occurs before 1 July 2020. This provides for a transition period of two years for pre-existing contracts.

The legislation also provides transitional arrangements for project delivery agreements entered into before 1 July 2018.

Lavan comment

The new legislation is designed to address cases of non-compliance with the GST law in the property development industry. Unfortunately, the legislation does not provide any exemptions for developers who can demonstrate a history of compliance with their tax obligations. As such, this legislation will apply to all developers from 1 July 2018.

If you are unsure how these legislative changes will affect you from 1 July 2018 please contact Peter Beekink, Tamara Heng, Tim Morgan.