The legislation requiring purchasers of new residential properties and subdivisions to withhold and remit GST directly to the ATO from 1 July 2018 has been introduced into Federal Parliament.
The new GST withholding regime was first announced as part of the 2017-18 Federal Budget. The Bill introduced into Parliament (Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (Cth)) contains a number of substantial changes from an exposure draft that was released in November 2017.
As the GST withholding regime represents a significant change to the state of play and is one step closer to being law, it is important for vendors, purchasers and others involved in real property transactions to prepare for change.
Key features of the GST withholding regime
The GST withholding regime will utilise new and existing withholding tax provisions in the Taxation Administration Act 1953 (Cth) and imposes obligations on both purchasers and vendors. It should be noted that changes may be made to the proposed legislation prior to enactment - so the Bill may not necessarily represent the final form of the regime.
Key features of the proposed regime under the Bill are:
GST Withholding on new residential property supplies
The GST withholding applies to taxable supplies of the following by way of sale or "long-term lease":
- "new residential premises" (other than those created through "substantial renovation" and "commercial residential premises"); and
- certain subdivisions of "potential residential land", where the subdivision does not contain any buildings used for a commercial purpose.
The concepts used are largely taken from the GST law, which will assist with practical implementation of the regime. However, the classification of a supply of real property for GST purposes is not always straightforward.
Amount of GST Withholding payable by Purchaser to ATO
The recipient of the supply (ie. typically, the purchaser) must withhold and pay to the ATO:
- 1/11th of the "contract price"; or
- 7% of the "contract price" where the margin scheme applies.
These are fixed percentages applied to the stated contract price, i.e. settlement adjustments are not taken into account. There is no new requirement for the vendor to disclose the actual amount of GST anticipated to be payable on the supply.
Timing of payment of GST Withholding to ATO
The purchaser must remit the GST withholding amount to the ATO on or before the day any of the consideration for the supply is first provided (other than as a deposit) - ie. settlement in most instances.
Suppliers to notify Purchaser re GST Withholding
The supplier must notify the purchaser in writing as to whether GST withholding is required before the supply is made. This obligation will apply to most supplies of residential premises or potential residential land even where it is clear that the supply will not be taxable (eg. sale of an existing dwelling by a vendor not registered for GST purposes).
Where the supply is subject to GST withholding, the notice must also provide certain specified details - including the GST withholding amount and time for payment.
Penalties on Supplier for failing to notify
A failure by the supplier to notify the purchaser regarding GST withholding is a strict liability offence, with a maximum fine that can be imposed by a court of 100 penalty units (currently, $21,000) for individuals or 500 penalty units (currently, $105,000) for corporations. Alternatively, the ATO may impose an administrative penalty of 100 penalty units ($21,000).
Penalties on Purchaser for failing to withhold
Failure by the purchaser to withhold the GST withholding and remit it to the ATO gives rise to an administrative penalty under existing provisions (equal to 100% of the amount to be withheld). The penalty will not apply if the purchaser has relied on a notification from the supplier (provided reliance is reasonable), or if the purchaser has provided the supplier with a bank cheque for the GST withholding that is payable to the ATO.
Supplier credit for GST withholding
The supplier remains liable for the GST on a taxable supply that is subject to GST withholding, but is entitled to a credit equal to the GST withholding amount remitted to the ATO by the purchaser. Any variation between the GST withholding amount and the supplier's actual GST liability would be corrected in the supplier's Business Activity Statement.
Transitional provisions for pre-1 July 2018 contracts
The new provisions will not apply to a contract which is entered into prior to 1 July 2018 for which consideration (other than the deposit) is first provided before 1 July 2020.
Pre-1 July 2018 property development arrangements
It is not uncommon for property development arrangements (PDAs) to contain "waterfall" payment arrangements dealing with how proceeds of sale are to be distributed amongst the parties to the PDA - including payments to fund GST liabilities. Such payment arrangements could give rise to unintended results under the new GST withholding regime. Accordingly, there are transitional provisions that apply to PDAs entered into prior to 1 July 2018 if certain conditions are satisfied.
Preparing for change - will you be ready?
The GST withholding regime will have a significant impact on real property transactions. At the very least it will require the standard Contract for Sale used in each State and Territory to be amended and updated to reflect the regime - not only on account of technical issues and new obligations under the regime, but also to address issues that arise in practice (eg. the settlement process).
Vendors, purchasers and conveyancers will look to the ATO to provide education and assistance with transition to the proposed regime. However, increasing adoption of electronic conveyancing will likely assist with implementation of the GST withholding regime by facilitating more transparent payment of GST withholding to the ATO as part of the settlement process.
Purchasers will of course need to ensure that they make appropriate arrangements to remit the GST withholding to the ATO.
Suppliers of new residential property will in particular need to be aware of their obligations under the proposed regime such as the requirement to provide written notice to the purchaser. The classification of a supply of real property for GST purposes is no less important under the proposed regime than it is currently - although it arguably has greater significance given that the purchaser will now be effectively responsible for paying the GST to the ATO.
Developers and financiers will also need to understand the commercial impact of the GST withholding regime on their business, as the GST withholding regime will effectively mean that the developer and financier will not have access to the GST component of the contract price.
Finally, it will still be necessary for suppliers and purchasers of new residential property to consider and monitor pre-1 July 2018 contracts - ie. to consider whether they may fall outside the transitional two-year period (eg. as a result of delay in construction), and whether such contracts will require clauses to address the potential application of the GST withholding regime.