From 1 July 2018, buyers of certain residential property are not only buyers, they are also part of the Australian Taxation Office’s (ATO) new force of tax collectors, specifically to collect GST.
What is changing?
From 1 July 2018, the recipient of a supply of new residential property (usually the Buyer of the property) has the obligation to withhold and pay to the ATO the GST on the supply.1
The GST withholding regime will apply to taxable supplies by way of sale of:
- ‘new residential premises’ (other than those created through ‘substantial renovations’ of a building and are not ‘commercial residential premises’); or
- ‘potential residential land’ that is included in a ‘property subdivision plan’ and does not contain any building that is used for a commercial purpose.
The terms ‘new residential premises’, ‘substantial renovations’, ‘potential residential land’ and ‘property subdivision plan’ are existing terms in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). The terminology used is not new but there are complexities in interpreting what these terms mean.
The key features of the new GST withholding regime are as follows:
- The measures apply from 1 July 2018. The measures apply to contracts under which consideration (other than the deposit) is first provided on and after 1 July 2018, regardless of when the contract was first entered into (ie: when contracts are exchanged).
- As a transitional measure, contracts exchanged prior to 1 July 2018 for which consideration (other than the deposit) is first provided before 1 July 2020, are excluded from the GST withholding regime. This means that if the contract is exchanged prior to 1 July 2018 but it doesn’t settle until after 1 July 2020, then the exclusion does not apply and the GST withholding regime will apply.
- The amount to be withheld is either 1/11th of the ‘Contract Price’ or if the margin scheme applies, 7% of the ‘Contract Price’.
- The GST withholding amount is calculated by reference to the sale price in the contract for sale ie: ‘the Contract Price’, before the usual adjustments are made for land tax, rates, etc
- To facilitate the Buyer’s obligation to withhold GST, the Seller has an obligation to give notice to the Buyer of the details of the Buyer’s obligation to withhold before making the supply of residential premises or potential residential land by way of sale or long-term lease. The contents of the notice is prescribed by legislation.
- The Seller is entitled to claim the GST input tax credits for the withheld amount that the Buyer has paid to the ATO. This means that if the Buyer withholds an amount from the Seller, but does not pay it to the ATO, the Seller will not be entitled to the input tax credits.
- To minimise disruption to the usual settlement process, the Buyers are taken to have met their obligations if they hand over to the Seller on settlement day a bank cheque made payable to the ATO for the withheld amount.
- The sale of a house and land package may have different GST treatment depending on how the contract is structured. The sale of a house and land package under a single contract will require withholding on both the land and building components. However, if a separate contract is entered into for the sale of land with a separate contract for construction, withholding applies only to the sale of land contract.
Penalties for non-compliance
If the Buyer fails to withhold and pay the withheld amount to the ATO, the Buyer is liable for an administrative penalty equal to the amount that was to be withheld.
If the Seller fails to give the Buyer notice as required, (for example, if the Seller does not make one of the required disclosures or if they make incorrect disclosures), this is a strict liability offence. The maximum penalty is 100 penalty units or $21,000. In addition, the Seller is liable for an administrative penalty of 100 penalty units or $21,000.
This new GST withholding regime has shifted the responsibility of collecting GST on the sale of residential property to Buyers. The penalties for non-compliance on the Buyer and Seller are significant.
The withholding regime will not only impact the buyers, property owners and developers but will impact all parties involved in the property sale transaction, such as lawyers, accountants and financiers.
The changes mean that property owners or developers will no longer have the benefit of the GST component of the purchase price in their operations between settlement and their next business activity statement. As such, they will need to consider the impact on cash flow and may need to take steps with their financiers to manage the impact.
Financiers will be impacted as the changes mean that, effectively, the ATO is given priority ahead of secured creditors for the GST component.
Property owners or developers with long-term contracts will need to review and consider how the transitional measures will impact on their existing contracts.
As a result, property owners, developers, buyers and all parties involved in a property sale transaction should ensure that they understand the new rules and make changes as necessary to accommodate the new settlement process.
What should you do?
If there is any doubt about the characterisation of a transaction, please contact us for legal advice. We can review your situation and your contract and advise you of your position and options.