October 3, 2018
Property | NSW
The GST withholding regime commenced on 1 July 2018. It changes the treatment of GST for new residential premises and potential residential land.
WHY HAS IT CHANGED?
Previously, where the sale of new residential premises or potential residential land included GST, the supplier (often the developer) would remit the GST paid by the purchaser to the ATO in their quarterly Business Activity Statement (BAS). However, according to the ATO, a number of developers were engaging in “phoenixing” activity – that is, dissolving their company after completion of the development without remitting the GST collected from the sales to the ATO.
In order to combat phoenixing, the GST withholding regime was introduced and now requires the purchaser to pay the GST directly to the ATO.
WHEN DOES IT APPLY?
The GST withholding applies to taxable supplies by way of sale or long-term lease (lease greater than 50 years) for:
- new residential premises – premises which have not previously been sold (or subject to a long-term contract) as residential premises and have been built to replace demolished buildings on the same land; and
- potential residential land – land that is permissible to be used for residential purposes but does not contain any buildings that are residential premises.
HOW MUCH IS WITHHELD?
The purchaser is required to withhold the following:
- 1/11th of the “contract price” if the margin scheme does not apply; or
- 7% of the “contract price” if the margin scheme applies.
The contract price is the GST inclusive price set for the supply and does not include any adjustments for rates and/or land tax.
WHAT NOTICES TO PURCHASERS ARE REQUIRED? WHAT HAPPENS?
The supplier of new residential premises or potential residential land must notify the purchaser in writing of its withholding obligations, at the time of making the Contract, or within 14 days from the date of the Contract, as follows:
- the name, ABN and contact details (business address, email address and phone number) of the supplier;
- the amount to be withheld;
- when the purchaser is required to remit the payment to the ATO;
- if any of the consideration is not expressed as a monetary amount, the GST inclusive market value of the non-monetary consideration; and
- any other details required by legislation or the ATO forms.
The supplier lodges their BAS when due and once that BAS is processed the withheld amount paid to the ATO by the Purchaser is then available as an input credit against the BAS net amount.
WHAT IF I AM A PURCHASER?
Upon notice from a supplier that withholding is required, the purchaser or their representative must do the following:
- Complete the GST Property Settlement Withholding Notification Form (Form 1) to advise the ATO that a contract has been entered into for the supply of new residential premises or potential residential land in which there is a withholding obligation.
The purchaser or their representative can submit a Form 1 at any time after a contract has been entered into. In New South Wales, the 2018 Edition of the Contract for Sale and Purchase of Land requires the notification to be completed at least 5 days before completion.
- The purchaser must remit the GST withholding amount to the ATO on or before the day any of the consideration for the supply (other than the deposit) is paid. In most cases, this will be due on or before settlement. However, if the contract requires payments by instalments, then the GST withholding will need to be remitted to the ATO on or before the date the first instalment is paid.
- Complete the GST Property Settlement Withholding Notification Form (Form 2) to confirm the settlement date.
The purchaser or their representative can submit the Form 2 at the time the withholding obligation becomes due, either when the first instalment is paid or at settlement, or as soon as practicable thereafter.
If the purchaser’s representative is completing documents on the purchaser’s behalf, they must obtain a declaration from the purchaser in writing stating that the purchaser authorises the representative to lodge the document and that the information provided is true and correct.
There are penalties for non-compliance for both the vendor and the purchaser.
Failure by the supplier to notify the purchaser of their GST withholding requirements is a strict liability offence with a maximum fine that can be imposed by a court of 100 penalty units for individuals ($21,000.00) or 500 penalty units for corporations ($105,000.00).
If a purchaser fails to withhold and pay the required amount they may be liable to a penalty equal to 100% of the amount to be withheld. The penalty will not apply if the purchaser has reasonably relied upon notification from the supplier advising a withholding is not required.
ARE THERE TRANSITIONAL PROVISIONS FOR STRADDLING CONTRACTS?
If a contract were entered into prior to 1 July 2018, the purchaser would not be required to withhold any amount for GST provided that the consideration or first instalment (other than the deposit) is paid before 1 July 2020.
In the event the consideration or first instalment (other than the deposit) is due after 1 July 2020, the purchaser will be required to withhold an amount for GST.
Please note that this update is for general advice only and does not constitute legal advice. You should seek legal or other professional advice before relying on any of this content.
For more information, please do not hesitate to contact Mike Mourtada on (02) 8262 2723 or at MMourtada@mcw.com.au.