Once the Treasury Laws Amendment (2017 Measures No. 9) Bill 2017 has been enacted, the responsibility for paying GST on certain real estate transactions will shift from developers to purchasers. From 1 July 2018, purchasers of new residential premises or land within a subdivision in Australia may need to remit part of the purchase price directly to the ATO. This shift will require purchasers to withhold that part of the purchase price representing the GST liability of the developer and remit the withheld amount directly to the Australian Tax Office (‘ATO’).
The GST withholding regime will utilise new and existing withholding tax provisions in the Taxation Administration Act 1953 (Cth) and impose obligations on both purchasers and vendors.
Currently, the purchase price paid to developers includes an amount of GST. Developers are required to pay the GST they collect to the ATO as part of their Business Activity Statement at the end of each of their applicable reporting periods.
Operation and Compliance
From 1 July 2018:
- Developers must issue a notice to withhold 14 days prior to settlement. Penalties will apply for failure to issue a notice.
- Purchasers will be required to pay the GST amount to the Commissioner on or before the day the purchase price is paid. Withholding will be 1/11th of the contract price or 7% of the contract price where the margin scheme applies.
- The developer will report the actual GST amount through their Business Activity Statement (BAS) and will be entitled to a credit for the amount paid to the Commissioner by the purchaser, and a refund if it exceeds the actual GST liability.
- If the developer remits quarterly or annually and makes a supply under the margin scheme, refunds for any excess withholding can be made before the BAS is lodged.
- Purchaser can provide vendor with a bank cheque made out to the Commissioner for the GST withholding amount.
These changes, originally proposed in the 2017-2018 Federal Budget, have been introduced to address the growing trend of developers collecting GST as part of the property purchase price, and then taking steps to dissolve the company prior to remitting the GST collected, effectively avoiding paying the GST collected to the ATO. Also, to prevent developers who build dwellings claims the indirect tax concession scheme (ITCS), sell dwellings and then disappear before paying GST to the ATO. The stated aim is to “strengthen compliance” with the GST law pursuant to the previous announcement in the 2017-18 Budget as the Government is concerned some developers are failing to remit GST on the sale of new residential premises. Adding to this, the upfront GST revenue-flow is a benefit for the Government.
Impact and Consequences
Under contracts for affected transactions dated on or after 1 July 2018 will have impacts mainly on developers as detailed below:
- Developers will be required to serve a withholding notice on purchasers. Failure to serve such notice is a strict liability offence.
- Developers will lose the utility of the GST funds following the changes, financiers are likely to increase pre-sale requirements to make up for the reduced amount being received by the developer at completion that could otherwise be used to repay obligations secured against the development property. The loss of utility of the GST funds will have implications for the cash flow of developers. For example, if the parties elect to use the margin scheme, the amount required to be paid by the purchaser will be greater than the actual GST liability of the developer, and the developer will be required to wait until the end of the reporting period to receive a refund.
- Developers should seek legal advice to ensure contracts for residential premises (including existing residential premises, new residential premises and potential residential land) are properly drafted or amended to comply with the changes proposed by the Bill.
The government has stated that purchasers should experience only “minimal impact” from the change in law, however this new obligation imposed on purchasers will increase the complexity and risk of buying and financing new property so unfortunately it is likely that the purchasers’ costs will also increase.