From 1 July 2018, a new regime will require recipients of taxable supplies of certain new residential premises or potential residential land to withhold 1/11th (or 7-9% if the margin scheme is applied) of the unadjusted, GST inclusive contract price.
Recipients will be required to remit the amount withheld to the ATO on or before settlement.
Who will this affect?
Purchasers and vendors of certain residential property or potential residential land need to be aware of their obligations under the GST withholding regime.
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.
Parties to development agreements should also be mindful of the effect the GST withholding regime may have on any existing ‘waterfall’ payment arrangements.
What you need to know
Prior to settlement, a vendor must provide notice to the purchaser if it is selling any ‘residential premises’ or ‘potential residential land’ and advise the purchaser of the correct GST treatment.
Failure to comply with notice or withholding obligations carries heavy penalties.
The new rules apply to supplies for which any of the consideration is first provided on or after 1 July 2018, whether a contract for the supply was entered into before, or after the commencement of the new rules.
An exception arises where the contract for supply was entered into before 1 July 2018, and consideration for the supply is provided before July 2020, providing a two-year transitional period for pre-existing contracts.
Parties to a terms contract should be aware that the obligation to withhold and remit GST arises on the payment of the first instalment (other than the deposit). Vendors under these contracts should speak with one of our experts to ensure that their interests are protected.
What type of property is affected by the GST withholding requirement?
New residential premises means any property that has not previously been sold as a residential property or results from the construction of a new building to replace demolished premises on the same land, but for these purposes does not include premises that have undergone a substantial renovation, or commercial residential premises.
Potential residential land means land which is permissible to be used for residential purposes but does not yet contain any buildings which are residential premises. The withholding regime will not apply to the supply of land:
- which includes a building used for a commercial purpose or
- where the purchaser is registered for GST and the acquisition is for a ‘creditable purpose’.
Impact on Vendors
Suppliers of residential premises (not only ‘new’ residential premises) or potential residential land must provide the purchaser with a notice stating whether or not the purchaser is required to make a payment to the ATO.
The notice needs to set out, among other things:
- the vendor’s name and ABN
- the amount that the purchaser has to withhold and
- when the purchaser has to pay the withheld amount.
There is no requirement for a vendor to provide a GST withholding notice for contracts entered into before 1 July 2018.
The supplier will be entitled to GST credit for the withholding payment actually made by the purchaser.
Suppliers should be mindful of the impact of the new withholding regime on their cash flow projections and mortgage repayment schedules. They should also seek warranties when selling potential residential land to a GST registered entity to ensure that the acquisition is for a creditable purpose and not for personal or domestic use.
Development agreements containing ‘waterfall’ payments to account for GST liability should be reviewed and amended to ensure that one party does not receive an unintended windfall.
Failure of the vendor to provide a notification to the purchaser regarding GST withholding is a strict liability offence. The notification requirements apply to the supply of all residential premises, not only those to which withholding applies. A breach of the notification requirements can result in penalties of up to $100,000 for companies and in excess of $20,000 for individuals.
The purchaser is strictly liable to pay to the ATO the amount that the purchaser was entitled to withhold from the contract consideration. Failure by the purchaser to withhold the GST gives rise to an administrative penalty under existing provisions (equal to 100% of the amount to be withheld).
A purchaser should remit 1/11th of the purchase price to the ATO irrespective of a vendor’s notification.
What do I need to do?
Ensure that all contracts of sale, long term leases and development agreements deal with each party’s obligations under the new regime.
Speak with a member of our Property and projects team to review and update any standard contracts or to help you comply with your obligations.
This article was written with the assistance of Declan McAleese, Law Graduate.