From 1 July 2018 changes have been implemented to the payment of GST on new residential property.
The changes introduce an administrative measure (not a new tax) but have significant implications for the settlement process and cash flow of sales by property developers. They are the result of some property developers making taxable sales of new residential property and failing to remit the GST collected from purchasers to the Australian Tax Office (ATO).
New provisions are incorporated in the NSW Law Society 2018 edition standard contract for sale of land on account of the new laws.
What property is involved?
The changes apply to sales of new residential premises and potential residential land such as house and land packages, vacant residential land and new apartments. Commercial residential properties are excluded from the provisions.
Landlords and tenants under long term leases (50 years or more) of new residential premises or potential residential land will also be affected by the GST withholding regime.
What is changing?
Purchasers of new residential premises or potential residential land are required to remit to the Australian Tax Office (ATO) an amount equivalent to the amount of GST payable by the vendor on the sale price. This represents a departure from the usual practice prior to 1 July 2018 where the vendor received all funds at settlement then satisfied is GST obligations in accordance with its Business Activity Statement (BAS) requirements.
The rate of withholding
The rate of withholding differs depending on whether the margin scheme is applied. If the margin scheme is not applied, 1/11th of the GST inclusive purchase price is remitted. If the margin scheme is applied, the rate is currently set at 7% of the GST inclusive price.
A vendor of new residential land or potential residential land must not complete the sale without first having notified the purchaser in writing of its withholding obligations. This notification is best done by way of marking the relevant box and providing the required information set out in the 2018 edition contract for sale of land. The inclusion of a special condition in the contract is also recommended.
A failure by the vendor (the supplier) to notify the purchaser regarding GST withholding is a strict liability offence with heavy penalties in the form of a maximum fine that can be imposed by a court of 100 penalty units (currently, $21,000) for individuals or 500 penalty units (currently, $105,000) for corporations. Alternatively, the ATO may impose an administrative penalty of 100 penalty units ($21,000).
If notified by a vendor that a GST withholding payment applies, the purchaser must remit the GST withholding amount to the ATO on or before the day any of the consideration for the supply is first provided (other than as a deposit). This will be settlement in most instances. However, in a contract providing for payment of the price in instalments, it will be the date of payment of the first instalment.
Failure by the purchaser to withhold the GST withholding and remit it to the ATO gives rise to an administrative penalty (equal to 100% of the amount to be withheld).
How is the Vendor credited for GST paid on its behalf?
The vendor is entitled to a credit equal to the GST payable on the sale of new residential property by way of the purchaser’s withholding payment. The credit is taken into account in calculating the vendor’s net amount of GST payable for a tax period. Practically, this means that vendors will have to wait until lodging their BAS to receive a refund.
It is also important to note that the vendor will only receive a credit for amounts actually paid to the ATO by the purchaser and so vendors and their advisors will need to ensure that the GST amount is actually paid by the purchaser in order to discharge the vendor’s GST liability.
Contracts signed prior to 1 July 2018 are not subject to any withholding requirement provided settlement takes place prior to 1 July 2020.
There is a commercial impact for the business operations of property developer vendors, as the GST withholding regime effectively means that the developer will not have access to the GST component of the contract price.
The classification of a supply of real property for GST purposes is of high importance given that the purchaser will now effectively be responsible for paying the GST to the ATO.
For real estate agents, it will be more important than ever to know a vendor’s GST status and negotiate the sale price on an expressly GST inclusive or exclusive basis.
The onset of e-conveyancing will assist in transparency and in the accuracy of GST withholding payments, with payments to the ATO being remitted directly via the PEXA Platform.