1.
The Treasury Laws Amendment (2018 Measures No.
1) Bill 2018 received
royal assent on 29 March 2018. The new law significantly changes the way that
GST is dealt with and will impact all residential property transactions.
2.
From 1
July 2018 (subject to transitional arrangements) purchasers of newly constructed residential properties or land in
new subdivisions will be required to pay the goods and services tax under A
New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST)
(presently set at 10%) directly to the ATO as part of the settlement.
3.
When
announced in the federal budget, it was asserted that the amendments would “strengthen
GST law, maintain the integrity of the Australian taxation system and ensure
property developers comply with their GST obligations and remit GST on their
residential sales”.
Former practice
4.
Formerly,
purchasers paid the GST to the vendor as part of the price; the vendor was then
supposed to remit it to the ATO with their post-settlement Business Activity Statement
(BAS).
5.
GST has always been payable on sales of new residential
premises and potential residential land. The change means that instead of
asking the developer/seller to make sure the GST is paid to the ATO upon the
sale of the property, the buyer is now obliged to do this.
Phoenixing
6.
There has
been a lot of publicity about ‘phoenixing’, a practice by some property
developers where they claimed and received the benefit of input tax credits for
GST incurred on their construction costs, then wound up the purpose-created
development corporation, and ultimately failed to remit the GST that they
collected on sales to the ATO. Then, they would allegedly start the process
over again for their next development, with a new purpose-created development
corporation.
7.
According to the Explanatory Memorandum of the Bill that
introduced the change, the GST debt in respect of insolvent entities was almost
$2 billion as of November 2017.
Withholding notice
8.
The
legislation now requires all vendors of residential premises or potential
residential land to provide the purchaser with a specific notice before the
supply is made. The notice needs to advise the purchaser of whether it needs to
withhold GST, and if so, the amount and means of payment.
9.
If the
purchaser is required to withhold an amount, the vendor must also provide its
name and ABN, the amount to be withheld, and when the purchaser is required to
pay the amount.
10.
This
notification requirement applies to vendors in respect of sales of all
residential premises (not just new premises) or potential
residential land with limited exceptions.
11.
There are
penalties for both the vendor and
purchaser in failing to comply with their obligations under the new regime.
12.
Apart from the withholding notice that is to be provided
to the buyer, in most cases the administration of GST in respect of the sale of
second-hand residential property has not changed (it is still GST exempt as an
input-taxed supply).
Timing
13.
The
purchaser’s obligation to withhold and remit will usually arise at settlement. However, where the price is payable in
instalments (for example, under a terms contract), the purchaser will be
required to remit the GST to the ATO on the day the first instalment (other
than the deposit) is paid.
14.
The amount to be withheld varies depending
upon whether the margin scheme applies. If the margin scheme does not apply,
the purchaser must withhold 1/11th of
the contract price. If the margin scheme applies, the purchaser must withhold 7% of the contract price (regardless
of the actual liability). Any reconciliation is to be made in the vendor’s next
BAS. The contract price is, effectively, the price set for the supply in the
contract. It does not take into account any potential adjustments such as
amounts for land tax, council rates and water rates.
15.
The new regime
takes effect in respect of:
a.
All
contracts entered into after 1 July 2018; and
b.
Contracts
entered into prior to 1 July 2018 if they settle after 1 July 2020 (therefore,
the new regime will apply to some prior existing off-the-plan contracts).
16.
The purchaser
may satisfy its obligations to remit the GST by:
a.
Payment
direct to the ATO;
b.
Providing
a bank cheque made out to ATO to the vendor at settlement or at the time the
first instalment is paid; or
c.
If
parties are using PEXA (as is increasingly likely), both parties can authorise
PEXA to distribute the amount for GST to the ATO as part of directions for
settlement funds.
17.
If the
purchaser fails to withhold and pay
the required amount to the ATO, the purchaser will be liable to a penalty equal to the amount of the GST payable (unless
it has reasonably relied on notification by the vendor). What is reasonable will depend upon all of the circumstances of the case.
18.
The
requirement to notify the purchaser is a strict liability offence and a court
may impose a maximum penalty of 100 penalty units for individuals ($21,000) or
500 penalty units ($105,000) for corporations.
19.
The
Standard Form LIV Contract of Sale of Real Estate now has a specific Special
Condition (SC15B) to take into account these legislative changes.
