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Tax Insight: Draft legislation released on withholding GST on property transactions

On 6 November 2017, Treasury released for public consultation Exposure Draft legislation on a new GST withholding regime. These changes are to implement the announcement in the 2017-18 Federal Budget that purchasers of new residential premises or new residential subdivisions would pay the GST on the purchase price directly to the ATO as part of the settlement.

The purpose of the new rules are to shift the obligation to remit GST on property transactions from developers to purchasers in order to remove the time-lag in GST payment which the ATO considers to be the main enabler of current GST evasion. In this Tax Insight we provide an overview of the proposed new rules, noting that it is at exposure draft stage until 20 November 2017 and subject to change. We will continue to update as there is more certainty.

Key takeaways
  • A new withholding and payment regime will require all purchasers of new residential land and new residential subdivisions to pay 1/11th of the purchase price directly to the ATO on or before settlement;
  • Vendors will be required to comply with a new notification regime to provide purchasers certain information at least 14 days before settlement. Importantly, this will apply to all property transactions over residential land or potential residential land (vs. the new withholding obligation which only applies to new residential land and subdivisions);
  • Contracts will need to be updated to reflect these information representations (noting that the vendor notification requirements will not apply to contracts entered into before 1 July 2018). Non-compliance by vendors will result in a strict liability offence and penalty (currently $21,000) and an administrative penalty may also apply (currently also $21,000);
  • If the margin scheme applies or an amount was withheld and paid to the ATO in error, a vendor can apply for a refund from the ATO. The application must be made in writing and submitted no later than 14 days before the relevant business activity statement due for lodgement;
  • All contracts that are to settle after 1 July 2018 should carefully consider the date of application for the new rules, noting that there is a two year transitional period for contracts entered into before 1 July 2018. This could particularly impact off the plan sales.
Type of property transactions impacted

The proposed rules introduce a new payment regime for a purchaser that is a recipient of a taxable supply that is, or includes:

  • New residential premises; or
  • Potential residential land that:
    • is included in a property subdivision plan; and
    • has not previously been sold as potential residential land included in the property subdivision plan.

The Commissioner has the ability by legislative instrument to exclude a supply and intra-GST group supplies as well as a supply by a joint venture operator of a GST joint venture to a participant in the joint venture are specifically excluded.

Generally, premises will be new residential premises where they have not previously been sold as residential premises, have been created through substantial renovations of a building, or have been built to replace demolished premises on the same land.

Potential residential land will include land that is permissible to use for residential purposes (ie land that has been zoned for use for residential premises under a law of a State or Territory), but does not contain any buildings that are residential premises. This is intended to cover house and land packages, where a purchaser may receive a taxable supply of a vacant block of land which is the subject of a property subdivision plan.

Time and amount of withholding

The purchaser must pay directly to the ATO 1/11th of the purchase price (where “price” is as defined for GST purposes) on or before the day on which any of the consideration for the purchase is first provided (typically, at settlement). Relevantly, this does not include consideration provided as a deposit and the consideration is apportioned where there is more than one supply and the new rules do not apply in respect of each supply.

Where consideration under a contract is paid by instalments, the intention is that the purchaser will instead have to make a payment by the end of the day that they make the first instalment payment.

New notification regime for vendors

To help purchasers comply with the obligation to withhold, the proposed rules introduce a new notification regime which requires the vendor at least 14 days before making any supply of residential premises or potential residential land, to provide to the purchaser a written notice stating the following:

  • Whether the purchaser will be required to remit the GST directly to the ATO under the proposed rules;
  • If the purchaser is required to withhold the GST: ◦the vendor’s name and ABN;
    • the amount of GST that the purchaser will be required to pay to the ATO;
    • the time at which the purchaser is required to pay that amount; and
    • if some or all of the consideration will not be expressed as an amount of money, the GST inclusive market value that amount.

Non-compliance by a vendor with the above notification requirements, results in both a strict liability offence (100 penalty units, where a penalty unit is currently $210) and an administrative penalty may also apply (100 penalty units). The only exception to the penalties applying are where the vendor reasonably believed that the premises were not new residential premises.

It is important to note that unlike the withholding obligation which only applies to new residential premises or new subdivision of potential residential land, the notification regime applies to the supply of any residential premises or any potential residential land.

New refund regime for vendors

Where a purchaser has withheld the GST and paid it to the ATO and the margin scheme applies, the vendor can apply to the ATO in writing for a refund equal to the difference between the amount paid directly to the ATO and the amount of GST that should have been payable under the margin scheme.

Similarly, if a purchaser withheld and paid the GST in error, the vendor can apply to the ATO in writing for a refund equal to the amount withheld and paid in error.

Importantly, the application must be made no later than 14 days before the day on which the business activity statement for the period in which the property transaction occurred is due for lodgement.

Application of proposed changes

As a general rule, the changes are proposed to apply to property transactions for which any consideration (other than consideration provided as a deposit) is first provided on or after 1 July 2018, regardless of whether a contract for the supply was entered into before, on or after the commencement of the proposed rules.

However, the proposed withholding rules will not apply to contracts entered into before 1 July 2018 provided consideration for the supply is first provided before 1 July 2020.

The proposed vendor notification regime will not apply to contracts entered into before 1 July 2018.

Impact on business

The proposed rules significantly change the process for accounting for GST on property transactions and impose various new obligations on both vendors and purchasers.

Please contact a member of our National Taxation Group to discuss how these changes may impact you.

This article was written by Nima Sedaghat, Partner. 

Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.