With the real estate market hotting up for another year, many home buyers will turn their thoughts to newly constructed residential premises or subdivisions, but new legislation may increase the costs and complexity of such purchases.
In a bid to tackle non-compliance of GST obligations from developers selling properties, the government has introduced a new measure that requires buyers of new residential premises and subdivisions of potential residential land to make a payment of part of the purchase price to the ATO. This measure has been introduced in response to developers who sell properties at a price that reflects their GST obligations but dissolving their businesses before BAS lodgement to avoid passing the GST on to the ATO.
The scale of the problem has grown significantly in the last decade and within the last 5 years these insolvent entities were responsible for around $1.8bn in debt written off, and at the same time claimed around $1.2bn in input tax credits. It is hoped that with the buyer remitting payment of the GST directly to the ATO, instead of the developer, as a part of the settlement process, less intensive compliance action will need to be taken and more GST revenue will flow into government coffers.
This law does not apply to commercial residential premises or those new residential premises created through substantial renovation. It only applies to sales and long-term leases of new residential premises and potential residential land. Therefore, if you purchase such a property, you have an obligation to make a payment.
In a majority of cases, the payment to the ATO will need to be made on or before the date of settlement. The payment is dependent on the contract price for the property and differs based on whether or not the margin scheme applies. If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price. If the margin scheme does apply, the purchaser would usually have to withhold 7% of the contract price. This seems complicated, but in practice, the seller has the responsibility to notify the buyer of the relevant details such as whether withholding is required and the percentage to withhold.
The legislation includes a transitional arrangement that excludes sale contracts entered into before 1 July 2018 as long as the property transaction settles before 1 July 2020. This will provide certainty for sale contracts that have already been signed.
This legislation will take effect from 1 July 2018.
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