Changes to the GST legislation will come into effect on 1 July 2018 to close loopholes in the current legislation that have resulted in some property developers not fulfilling their GST obligations when selling new residential premises or subdividing potential residential land.
Under the current laws, the vendors of new residential dwellings remit GST to the Australian Taxation Office (ATO) in the first Business Activity Statement (BAS) that is submitted following settlement of the sale of a new dwelling or land. This inevitably means that the ATO could receive money up to three (3) months after the date of settlement. Vendors have also used the current legislation to try and not pay GST at all by winding their company up prior to when their next BAS is due.
The Australian Government has introduced amendments to the GST laws which require the purchasers of new residential dwellings or potential vacant land to withhold the amount of GST payable by the vendor, and to pay this GST component directly to the ATO, in order to ensure that vendors pay the required GST to the ATO.
What am I responsible for?
Although it is the vendor who may be required to pay GST, the obligation would ultimately rest with the purchaser who must withhold the amount of GST payable from the settlement proceeds and make payment of the GST amount to the ATO at least 14 days before the supply (in effect the settlement date). It is important to note however that purchasers do not need to register for GST just because they have this withholding requirement placed upon them.
All vendors of new residential property or land, irrespective of whether there is a requirement to withhold GST, must notify the purchaser in writing as to whether they are required to withhold an amount. The following details must be included in that written notice:
1. Name and ABN of the supplier/ developer
2. The amount of GST that the purchaser will be required to withhold from settlement and pay directly to the ATO;
3. The date of settlement when the amount is due to be paid to the ATO;
4. In the event not all the purchase price is expressed as money, the GST-inclusive market value of the consideration not being expressed as money;
5. Any other matters specified in the regulations.
It is important to note that if the vendor fails to provide the required details in the notice to the purchaser, penalties will be issued.
There will be no requirement to provide a notice where the purchaser is registered for GST and buys the property for a creditable purpose (to the extent that he or she acquires it in carrying on his or her business) or for the supply of commercial premises.
The new laws do not change the vendor’s obligation to lodge their BAS within the current timeframes and report their GST liabilities. Once the vendor’s BAS is processed by the ATO, however, they will obtain a credit for the amount of GST that was withheld and paid by the purchaser.
What GST is payable?
Generally speaking, the amount to be withheld is calculated at 1/11th of the purchase price that is listed on the Contract for the Sale of Land. There are situations however, where the amount to be withheld is calculated differently. For example, if the margin scheme applies to the supply of the new dwelling or vacant land, then 7% of the contract price is to be calculated as GST.
Further to this, if the supply is between associates and is without consideration (that is, a purchase price), then 10% of the GST exclusive market value of the supply is to be withheld by the purchaser and paid to the ATO.
In the event there are multiple purchasers of the new dwelling or subdivided land, then GST will be calculated at 7% (where the margin scheme applies) or 1/11th of the contract price for their % of interest in the property purchased.
For example, Joe and Sue purchase a new residential dwelling for $1,000,000 (and the margin scheme does not apply) as tenants in common in unequal shares where Joe is to have a 60% interest in the property and Sue will have 40%. The amount of GST payable by the vendor/ developer will be 1/11th of the total contract value which would equate to $90,909. Seeing as though each purchaser will be treated as receiving a separate supply, Joe will be responsible for withholding and paying an amount equal to 60% of the total GST payable and Sue will be responsible for withholding and paying 40% of the total GST amount on or before settlement.
Failure to withhold the GST payable will result in penalties being issued to the purchaser.
Transitional rules
The amended legislation includes a transitional arrangement that excludes sale contracts that were entered into before 1 July 2018 so long as the property sale settles before 1 July 2020. This will provide certainty for contracts that have already been signed before the commencement date.
Under these transitional rules, the vendor is not required to notify the purchaser of the withholding requirement and the purchaser has no obligation to withhold GST.
The final word
Calculating GST is complex enough as it is and the amendments to the current GST legislation will result in an extra compliance burden for real estate agents, legal professionals, conveyancers, vendors and purchasers in order to ensure the correct amount is calculated, withhold and paid to the ATO.
In line with the specific notification requirements it is critical that lawyers and conveyancers are completely prepared to ensure that processes are in place to ensure any impact on settlement timeframes and business cashflow is kept to a minimum.
Contact our conveyancing team today if you would like any further information, advice or assistance with respect to these GST changes.