Tax Insight: Update – Withholding GST on property transactions

13 February 2018

On 7 February 2018, the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (the Bill) was introduced into the House of Representatives.

The Bill seeks 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.

See the HWLE tax team’s previous Tax Insight on the Exposure Draft legislation here.

Key changes from the Exposure Draft

The Bill largely reflects the Exposure Draft legislation released by the Treasury late last year, with the following key changes:

  • The purchase price specified in the contract may be used to calculate the withholding amount.
  • For contracts where the GST has been calculated under the margin scheme, there is now a reduced GST withholding rate of 7% of the purchase price.
  • The purchaser may fulfil their GST obligation by providing a bank cheque to the vendor, instead of remitting the GST directly to the ATO.
  • Vendors no longer need to notify purchasers 14 days before settlement. Notification can occur at any time before settlement.
  • The proposed new GST withholding provisions will only apply if the purchaser is the recipient of a taxable supply of:
    • new residential premises (except those created through substantial development and commercial residential premises); or
    • subdivisions of potential residential land (purchasers who are not registered for GST and acquire the land for non creditable purposes or the land contains a building for commercial purposes).

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 timing difference in GST payment which the ATO considers to be the main enabler of current GST evasion, especially through the practice of ‘Phoenixing’.

Impact on property development ‘waterfall’ arrangements

Payment waterfalls contained in property development agreements should be carefully reviewed in the context of the new rules. Where the waterfall includes payments to fund the discharge of a party’s GST liability, this payment may no longer be necessary due to the purchaser having already withheld the GST from the vendor, thereby resulting in an inadvertent windfall gain.

Where the agreement was entered into before 1 July 2018 and the payment under the waterfall would result in a windfall gain, the new rules provide that the payment should not be made and that the parties to the agreement are discharged from all liability to pay the GST liability amount.

What’s next?

Once the Bill has passed through the Parliament and received Royal Assent, the proposed rules will significantly change the process for accounting for GST on property transactions and impose various new obligations on both vendors and purchasers.

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 and which settle before 1 July 2020. This could particularly impact off the plan sales.

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 and Alina Sedmak, Associate.

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