As a result of recent legislation passing through Parliament, from the 1st of July 2018, the GST withholding regime has been amended to require purchasers of new residential premises and new residential subdivisions to withhold the GST on the purchase price at settlement, and pay it directly to the Australian Taxation Office (ATO).
Currently, supplies of new residential premises are generally subject to GST and the supplier remits the GST to the ATO in their next BAS. This can be up to three months after settlement.
This legislation is designed to overcome one of the main forms of non-compliance with these obligations, which involves developers selling properties for a purchase price that reflects their GST obligations, but dissolving their business before their next BAS lodgement to avoid remitting the GST. This is known as a form of phoenixing.
The ATO have indicated that their powers and strategies to address this type of non-compliance are hindered by the delay that occurs between when the GST is paid to the supplier and when their liability arises, hence the need for reform.
The New Law
Where an entity (the supplier) makes a taxable supply of new residential premises or a subdivision of potential residential land by way of sale or long term lease, the recipient of the supply (the purchaser) is required to make a payment of part of the consideration to the ATO directly. This is to occur prior to, or at the time that consideration is first provided for the supply (other than as a deposit).
To help purchasers comply with their obligation to withhold, an entity that makes a supply of residential premises or potential residential land by way of sale or long term lease is required to notify the purchaser in writing of certain matters before making the supply via a ‘notification’. The notification is to be in writing and must include, amongst other things:
- Whether the purchaser is required to withhold and make a payment to the ATO; and
- If the purchaser is required to withhold and make a payment to the ATO, the vendor’s legal name, ABN, the amount required to be paid and when the amount is due.
There are fixed percentages which apply to the stated contract price in terms of the amount to be paid to the ATO, where settlement adjustments are not taken into account. It is also not a requirement that the vendor disclose to the purchaser the ‘actual’ GST anticipated to be payable on the supply. The purchaser is therefore required to withhold and, ultimately pay to the ATO either:
- 1/11th of the contract price; or
- Where the margin scheme applies, 7% of the contract price.
Failure to Notify
Where a person fails to give the required notice in writing to the purchaser, they have committed an offence. A person has failed to give the required notice when they do not make one or more of the required representations.
This is a strict liability offence, so taxpayers need to be aware that it is not necessary to establish fault in failing to make the required representations. However, there is a potential defence available to taxpayers who are able to demonstrate that they have made an honest mistake of fact.
The maximum penalty for this offence is 100 penalty units, which equates to $21,000. For corporations, the offence is multiplied by five.
There are also penalties imposed on purchasers for failure to withhold and pay the required amounts to the ATO, which will equal the amount of the withholding obligation (subject to certain exemptions).
Generally, the withholding obligation and all associated amendments apply in relation to supplies for which any of the consideration is first provided on, or after the 1st of July 2018. This stands whether or not the contract was entered into before, on, or after the commencement date of the new provisions (being 29th March 2018).
The exception to this general rule is given where the contract for the supply was entered into before the 1st of July 2018, and consideration for the supply is first provided before the 1st of July 2020, providing a two year transitional period for pre-existing contracts.
Where a contract is entered into before the 1st of July 2018, and consideration for the supply occurs after the 1st of July 2020, then the amendments will apply. This means that after the 1st of July 2020, the supplier has an obligation to provide a notice before making a supply.
This regime has serious consequences for all parties involved in the sale of property, not only for vendors and purchasers, but for conveyancers, financiers and developers. It is important that you are aware of and advised of your obligations, and that the settlement process is conducted in compliance with this new law. Failure to do so can attract considerable penalties.
Let us know if we can assist you by assessing the impact on any property transactions you have or plan to entered into pre-1st of July 2018 in order to determine whether the property is subject to these new rules. Alternatively, we can advise whether the transitional rules will apply to any potential post 1st of July 2018 contracts.
We’re here to help.
Ann-Maree Ventura Special Counsel
Level 3, 1 Palmerston Crescent
South Melbourne, VIC 3205, Australia