December 5, 2018
Sellers and buyers of ‘new residential premises’ and ‘potential residential land’ must be aware of their obligations under the new GST withholding rules. These changes came into effect on 1 July 2018 and brought new and additional commitments for buyers and sellers involved in transactions concerning residential real property.
The fundamental changes under the new GST withholding rules include:
- some buyers of ‘new residential premises’ and ‘potential residential land’ are required to remit the seller’s GST liability in respect of the supply of the property to the Australian Taxation Office (ATO) on the seller’s behalf; and
- some sellers of residential property have an obligation to notify buyers whether or not they are required to withhold the seller’s GST liability under the new regime.
Why the changes?
A person that makes a taxable supply of real property to another person is liable to remit the GST payable on that supply to the ATO. The Federal Government and the ATO have noticed that some sellers of ‘new residential premises’ and ‘potential residential land’ were avoiding the obligation to remit GST on taxable supplies of real property. They established special purpose vehicles to conduct property development activities and dissolving their businesses before their next BAS lodgement after the sale of the developer’s stock (escaping the obligation to pay the GST liability). The ATO’s view is that this is a form of “phoenixing”.
In an attempt to address this “phoenixing” risk to the revenue, the new GST withholding regime puts the onus on some buyers to remit the seller’s liability for GST for taxable supplies of ‘new residential premises’ and ‘potential residential premises’ made to them. Types of real property that this obligation impacts include off the plan units, house and land packages and newly subdivided residential land.
What are my obligations if i am selling?
Some sellers of ‘new residential premises’ and ‘potential residential land’ must notify the buyer in writing, before making the supply, whether the buyer is required to remit the seller’s GST liability to the ATO under the new GST withholding rules. The notice must state, amongst other things, the seller’s name and ABN, the GST withholding amount and when payment is to be made by the Buyer to the ATO.
The rules prescribe that the GST withholding amount is calculated as follows:
1/11th of the contract price (ignoring adjustments)
Taxable supply and the parties have agreed to apply the margin scheme
7% of the contract price (ignoring adjustments) and despite the seller calculating that its GST liability under the margin scheme is less than 7% of the contract price
The broad nature of the GST withholding rules means that the notification requirement extends to the sale of all residential premises – not just ‘new residential premises’ and ‘potential residential land’.
If a seller fails to provide notice to the buyer penalties of up to 100 penalty units ($21,000) for individuals and up to 500 penalty units ($105,000) for corporations may apply.
What are my obligations if I Am buying?
Once it is established that the buyer must withhold and pay to the ATO the seller’s GST liability in respect of the supply of the property, the buyer must:
- notify the ATO of the transaction (the ATO has established a process to facilitate this, more information can be found here - https://www.ato.gov.au/business/gst/in-detail/your-industry/property/gst-property-settlement-online-forms-and-instructions/); and
- pay the seller’s GST liability in respect of the transaction to the ATO at settlement (or sometimes earlier).
The penalty for a buyer not complying with their withholding obligations is equal to the amount of GST payable by the seller on the supply of the property. Importantly, the buyer may still be liable even if they have not been notified by the seller or have been incorrectly notified.
when do the gst withholding rules not apply?
There are certain situations where the new GST withholding rules will not apply. Example exclusions include the supply of:
- existing residential premises – that is residential premises that have been sold before or have been leased for at least 5 years prior to sale;
- ‘new residential premises’ which have been created through substantial renovation;
- commercial residential premises – that is hotels, caravan parks etc.; and
- in cases where the buyer is registered for GST, and the acquisition is for a ‘creditable purpose’.
There is also a transitional period which was introduced. The new regime does not apply to real property transactions that were entered into prior to 1 July 2018 so long as settlement occurs before 1 July 2020. However, if you entered into a contract on or after 1 July 2018, or settlement occurs after 1 July 2020, the GST withholding regime applies.
How can MCW help you?
We can help you:
- review and amend existing or standard form contracts to ensure they make provision for the GST withholding rules; and
- advise on your obligations under the GST withholding rules in respect of a transaction.
For more information on GST withholding rules, please contact: