What is happening with GST and supplies of property?
The new GST rules which impose a withholding obligation for purchasers will:
- apply from 1 July 2018
- apply to sales of land with new residential premises or potential residential land
- make the purchaser liable to remit GST to the ATO and
- require the vendor to provide a purchaser with a notice.
This is another compliance obligation to be imposed on vendors and purchasers (for example, in addition to the foreign resident CGT withholding) that will need to be considered and factored into property purchases and settlement.
Currently, supplies of new residential premises are subject to GST and the obligation is on the vendor to remit GST to the ATO.
However, a number of developers supplying properties were found to have collected GST from purchasers but then proceeded to dissolve their business entities before lodging their Business Activity Statement (BAS) and remitting the GST (so called, “phoenixing”).
The recent changes are intended to address this issue.
There is a school of thought that this is an extreme industry-wide response which is intended to address an outlier issue. Some may say these changes are a ‘heavy handed’ approach which impose an unfair burden on low risk developers. It will be interesting to see whether the Commissioner of Taxation issues special guidance or offers a regime for lower risk entities to be exempt from the GST withholding obligation.
When does it apply?
The new rules commence with effect from 1 July 2018 and will apply to applicable property transactions that are entered into on or after 1 July 2018. Transactions entered into before 1 July 2018 are excluded unless the settlement date occurs after 30 June 2020.
What is excluded?
The purchaser GST withholding and remission obligation applies to new residential premises or potential residential land. The following are excluded from the new purchaser obligations:
- supplies of new residential premises that were created through ‘substantial renovations’
- supplies of ‘Commercial residential premises’ such as a hotel or bed and breakfast
- supplies that are made to a purchaser who is registered for GST
- supplies between members of GST groups or by GST joint venture operators to participants in a GST joint venture and
- supplies of leases or licenses that do not constitute a long term lease.
The Commissioner has indicated (in his draft Law Companion Ruling 2018/D1) that circumstances relating to government affordable housing schemes and development arrangements involving non-monetary consideration may be excluded from these GST changes.
What if there are multiple purchasers?
If a purchase is made as tenants in common, each Purchaser is required to make payment in proportion to their interest in the property.
For example, if Taylor and Harry purchase a property and acquire single title as tenants in common in equal shares, Harry will be required to withhold and pay 50% of the value of the GST payable on the property whilst Taylor will also be required to withhold and pay 50% of the GST payable on the property. Each have separate obligations to withhold and remit an amount to the ATO.
What does a vendor need to do?
A vendor is required to provide the purchaser with a specific type of notification (relating to GST on the supply) before making the supply. This notification informs the purchaser that they are required to make a GST payment to the ATO and outlines the amount of GST owed. Failure to do so may result in 100 penalty units (which is currently $21,000, or up to 5 times that amount for corporations).
The vendor will be entitled to a credit for the amount of any payment made to the ATO by the purchaser.
Are there any special rules relating supplies made under the margin scheme?
Yes. Generally, the amount of GST to be paid is 1/11th of the contract price of the supply. However, where supplies are made under the margin scheme, a statutory rate will apply. The statutory rate of 7% (or greater amount as determined by the Minister in a legislative instrument, but no more than 9%) must be withheld by the purchaser and paid to the ATO.
Practically, are there any concerns for you as either a vendor or purchaser?
Yes. When considering project financing, regard should be had to the GST attribution rules and timing around BAS reporting. In particular, it should be noted that when payments are made in instalments, the GST law may apply so that all GST is payable up front by the purchaser and that payment may be taken out of the existing first instalment amount. Obviously, this will cause issues when the GST payable represents a large amount of the instalment amount. This could cause credit and finance issues for vendors (particularly those who are developers and need to receive certain milestone payments for longer term projects).
If a purchaser fails to withhold an amount, it will be liable to pay a penalty amount that is equal to the withholding amount.
If in doubt, pay anyway?
The intention of the law is that, if in doubt, the purchaser can pay the GST on the supply directly to the ATO and thereafter the vendor can seek to recover the GST from the Commissioner.
Are you concerned?
There are a range of options to ensure that you comply with these changes and, if you are engaged in buying, developing or selling residential properties – it would be wise to consider these changes in light of your circumstances.