Property Development and GST Withholding

You only need to watch an episode of A Current Affair or read an ATO newsletter to know that the construction industry is notorious for phoenix activities and other schemes designed to avoid tax liabilities, obligations to purchasers and other general mischief.  This time, the government is seeking to tackle the ever-growing number of developers avoiding remittance of GST to the ATO and the growing hole it is causing in the government’s tax revenue.  As usual, thanks to a small percentage of people who do the wrong thing, a large segment of the community is faced with additional administrative burden.

From 1 July 2018, purchasers of new residential premises or potential residential land are required to withhold an amount (the “GST Withholding” amount) from the contract price at settlement and pay this directly to the ATO.

The rules ensure that the ATO receives the GST on the sale by placing the burden on the purchaser to pay an amount directly to the ATO, rather than waiting for the developer to submit a Business Activity Statement (BAS) and pay the amount due.  This eliminates the risk of developers selling a property, pocketing the settlement proceeds (including the GST amount) and then failing to lodge or pay their BAS, or winding up the business before the ATO can take action.

What property sales do the rules apply to?

The rules apply to the sale of new residential premises and new subdivisions of potential residential land.

However, to avoid any doubt, the vendor of any residential property is required to notify the purchaser as to whether or not they are required to withhold an amount.

Broadly, new residential premises includes residential premises which:

  • have not previously been sold as residential premises; or
  • have been built to replace demolished premises on the same land;

but excludes, among various other exceptions, premises that have been rented for at least five years.

Potential residential land is defined in the GST Act to mean land that is permissible to be used for residential purposes, but that does not contain any buildings that are residential premises.  Supplies of potential residential land are subject to the GST withholding rules where the land is included in a property subdivision plan and does not contain any building that is in use for a commercial purpose.

The new measures apply to relevant property sales where:

  • The contact is entered into on or after 1 July 2018, or
  • The contract was entered into before 1 July 2018, but no consideration (other than a deposit) is provided until after 1 July 2020.

How does it work?

The table below explains the additional steps required by the Vendor and Purchaser in respect of the new rules throughout the sale process.

Vendor notifies Purchaser          The vendor of any residential premises or potential residential land must provide a written notice to the purchaser stating whether the purchaser is required to withhold an amount and, if so, the amount required to be withheld and when it needs to be paid to the ATO.   This notice is required to be given prior to the sale being entered into, and is normally included as part of the contract.
Purchaser lodges first notification form to ATO If the GST withholding rules apply to the property sale, the purchaser (or their authorised representative, such as a lawyer) must lodge a form with the ATO advising that a contract has been entered into for a relevant supply and providing details of the property, the purchaser and the supplier (vendor).  The ATO will issue a confirmation together with a lodgement reference number (LRN) and unique payment reference number (PRN).
Settlement Occurs Settlement will occur as usual.  The only difference is that the amount of GST Withholding will be deducted from the amount paid to the vendor and will be paid to the ATO instead.  This will normally be arranged between the solicitors and the purchaser’s bank.
Purchaser lodges second notification form to ATO At settlement, or as soon as practicable thereafter, the purchaser or their authorised representative must lodge a second form with the ATO advising the actual settlement date.
Vendor lodges BAS The vendor lodges its BAS as usual.
ATO processes BAS and refunds any excess GST Withholding credits back to the vendor The ATO will review and process the BAS.  The GST Withholding credits will be offset against the vendor’s BAS liability.  If there is an excess, the credits will be refunded to the vendor.  If the credits are insufficient to cover the vendor’s BAS liability, they will need to make a payment for the difference.

Penalties apply to:

  • Vendors – for failing to give the notice required to the purchaser.
  • Purchasers – for failing to withhold or pay a withholding amount to the ATO.

Amount to withhold

The amount to be withheld by the purchaser depends on the circumstances for the relevant property sale.

Circumstance Amount to withhold
General rule      1/11th of the contract price
Margin scheme applies 7% of the contract price
Supplies between associates (other than arms’ length) 10% of the GST exclusive market value of the supply

Where there are multiple purchasers:

  • As joint tenants – The purchasers have a joint obligation to withhold and pay the withholding amount.
  • As tenants in common – Each purchaser withholds their portion of the total withholding amount based on their percentage interest in the property.

Impact on Vendors

The impact on vendors is mostly in the way of a negative cash-flow impact. Before introduction of the new rules, vendors would receive the full proceeds on settlement and would not be required to pay the GST liability until the due date for their BAS (potentially up to 4 ½ months after settlement).  This cash could be used in the interim to fund other activities.

However, under the new rules, the vendor will not receive the GST Withholding amount (which is commonly significantly higher than their actual GST liability after taking into consideration GST claimable on inputs) at the time of settlement.

Further, there is an increased chance of processing delays if the ATO identifies that there is a large variance between the supplier’s BAS liability and the GST withholding amount.

Impact on Purchasers

Purchasers of property subject to the new GST Withholding rules are unlikely to experience much change in the purchasing process.  In summary:

  • The additional administrative matters explained above will generally be attended to by the purchaser’s legal representative.
  • The total settlement amount will remain unchanged, but the payment will be split between the vendor and the ATO.

What next?

If you are selling a property to which the new rules apply, we strongly recommend contacting us prior to finalisation of the sale contract.  We can liaise with your solicitor or conveyance to ensure the correct GST and supplier details are included in the contract, which can save significant hassles later in the process.

If you are not sure whether the new rules apply to a property you are selling or purchasing, contact us for more information.

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