The Federal Budget delivered on 9 May 2017 revealed some significant changes for the property industry.
GST on newly constructed residential properties/subdivisions
How things are done now Currently, developers are responsible for remitting GST to the ATO where GST is included in the purchase price. Unfortunately, some developers have been failing to remit GST on projects, despite claiming input tax credits on their construction costs. This is a no no!
What’s changed? From 1 July 2018 everything changes! Developers will no longer control how and when GST is remitted on sales because buyers of newly constructed residential properties or subdivisions will be required to remit the GST component directly to the ATO as part of the settlement.
What are the implications?
The legislation to effect this change has not yet been drafted. However, we can foresee some of the likely implications of the changes.
- Contracts Given that most of these sales are ‘off the plan’, contracts may need to be amended with immediate effect.
- Cash 1/11th of the purchase price, or the margin, as the case may be, will be remitted to the ATO immediately upon settlement. There may also be additional compliance costs for developers. This will have an impact on cash flow for developers.
- Loan Facilities It will take longer to pay down bank debt, as banks will no longer get their hands on the full proceeds of sale before the ATO does.
- Margin scheme It is not yet clear how the developer will provide evidence of the margin scheme calculations to the buyer, and who will be liable if the margin is calculated incorrectly.
- Naughty Buyers It’s not clear what happens if the buyers do not remit the GST. Will the developer still have a GST liability?
Foreign resident capital gains withholding
How things are done now The current process is that for properties worth $2 million or more, a buyer is required to obtain an ATO clearance certificate in respect of each seller. If a clearance certificate is not obtained prior to settlement, the buyer must withhold 10% of the purchase price and pay that amount to the ATO. As a general rule, clearance certificates have been quick and easy to obtain as it has only been the top end of the market which has been affected by the withholding scheme.
What’s changed? Clearance certificates will now be required for all contracts ‘entered into’ from 1 July 2017, where the purchase price is $750,000.00 or more and the proposed withholding rate will increase from 10% to 12.5%.
The existing rule will continue to apply for all contracts which are entered into before 1 July 2017, even if settlement occurs after 1 July 2017.
What are the implications?
- Volume Many more property transactions will now be affected by this change. The increased demand may cause delays in the issuing of clearance certificates by the ATO.
- Time is money As it is not clear if the ATO will be able to cope with the increased volume of requests for certificates, buyers may simply choose to withhold given that time is often precious when it comes to property transactions.
What should you do?
- Seek legal advice sooner rather than later about how these changes will affect contracts for sale.
- Seek financial advice about how these changes will affect cash flow.
For more information contact the Property Commercial Finance Team: