From 1 July 2018, buyers and sellers of ‘new residential premises’ or land in certain subdivisions of ‘potential residential land’ will be subject to a new GST withholding regime.
New GST withholding regime
From 1 July 2018, buyers of ‘new residential premises’ or land in certain subdivisions of ‘potential residential land’ will be required to withhold an amount from the contract price which they will need to remit directly to the ATO on or before settlement.
Sellers will need to give written notice to relevant buyers prior to settlement, as to whether the buyer will be required to withhold and pay any such GST to the ATO. Where the transaction is subject to GST withholding, the seller’s notice must also include details such as the GST withholding amount and time for payment.
The remitting of such GST will become part of the settlement process rather than something done post-settlement in the seller’s next Business Activity Statement (BAS).
In respect of relevant transactions, penalties will apply on:
- sellers who fail to give a buyer the proper written notice regarding GST withholding; and
- buyers who fail to withhold and remit the GST to the ATO – however these penalties won’t apply if the buyer has relied upon a notification from the seller (where such reliance is reasonable), or if the buyer has provided the seller with a bank cheque for the GST withholding amount payable to the ATO.
Reason for the new GST withholding regime
Currently, the GST laws require a buyer to pay GST to the developer/seller as part of the contract price on certain property transactions where there is a taxable supply. The seller is then required to remit the GST to the ATO in their next BAS.
Amendments have been made to the “GST laws” in an effort to put a stop to tax evasion and protect GST revenue on such property transactions. The new regime endeavours to stop the problem where some developers/sellers have collected GST on relevant transactions but following settlement have dissolved their business (and in some instances create a new one) – referred to as illegal phoenix activity – in order to avoid remitting the GST to the ATO.
What sale contracts does the new regime apply to
The new GST withholding regime will apply to a buyer or lessee under a long-term lease (a long term-lease is generally a lease for a period of at least 50 years) entered into on or after 1 July 2018 of:
- new residential premises which generally means premises which have not previously been sold as residential premises, or where an existing residential property was demolished and a new residential property built in its place on the same land – but does not include where premises have been created through substantial renovations of an existing building, or commercial residential premises; or
- potential residential land which means land that is included in a property subdivision plan and which is permitted to be used for residential purposes (but does not yet contain any buildings that are residential premises) and does not contain any building that is in use for a commercial purpose – but only where the recipient is not registered or does not acquire the property for a creditable purpose. The withholding obligation doesn’t apply to business to business transactions in respect of potential residential land. As such, where a buyer is registered for GST purposes, there is no withholding obligation.
In order for the withholding obligation to apply, the transaction must also be a taxable supply. Withholding is not required if the transaction is GST-free, input taxed, or not treated as a taxable supply.
The amendments to the GST laws have provided for a transitional arrangement whereby the regime will not apply to sale contracts that were entered into before 1 July 2018 as long as the property transaction settles before 1 July 2020.
Amount of GST withholding payable by buyer to ATO and timing for payment
The recipient of the supply (ie the buyer) must withhold and pay to the ATO:
- 1/11th of the ‘contract price’; or
- 7% of the ‘contract price’ where the margin scheme applies.
These fixed percentages apply to the contract price, and settlement adjustments are not taken into account.
The buyer must remit the GST withholding amount to the ATO on or before the day of the consideration for the supply is provided – which is usually at settlement in most instances.
How does this impact you?
- Buyers and sellers should be aware of their new obligations including:
- sellers providing relevant and timely notification to buyers; and
- buyers withholding and remitting the correct amount to the ATO.
- Parties may incur additional costs (although, likely to be a small cost) as conveyancers may wish to pass on the cost of additional compliance.
- Conveyancers and property developers/sellers will need to implement changes to their processes and systems to adapt to the new regime.
- Contract precedents and existing contracts not to be settled before 1 July 2020, will need to be reviewed and amended to reflect the new obligations.
- Sellers will no longer benefit from retaining the GST and this may have cash-flow implications.
 A New Tax System (Goods and Services) Act 1999, Tax Administration Act 1953 and the Income Tax Assessment Act 1997.
The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.