What is the effect of the GST withholding regime relating to new residential land in Australia?

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 1/11^th 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.

WG Stark 

Hayden Starke Chambers