The GST withholding regime starts July 2018 — A look at the transactions to which it will apply
The new GST ‘withholding’ regime for sales of new residential properties and vacant residential lots will apply from 1 July 2018 onwards.
The changes are an anti-avoidance measure to prevent developer companies from selling properties for a purchase price that includes GST and then dissolving their business before they are liable to remit the GST (known as a form of ‘phoenixing’).
To overcome the problem, the new legislation will require purchasers to remit the GST element of the purchase price directly to the ATO at settlement.
IN A NUTSHELL
There is a new notice requirement for vendors
Vendors of all residential premises and potential residential land (not just new premises or new building lots) must notify the purchaser before completion (ie before the supply is made) as to whether or not the supply is one which attracts the purchaser GST payment obligation. If so, the notice must include the amount of GST the purchaser must pay to the ATO on behalf of the vendor.
The NSW Law Society standard form contract for sale of land has been amended to include the necessary notice, where it
Purchasers may have to withhold GST and pay to ATO
The new purchaser GST payment obligation will only apply
- the vendor is GST registered and supplies the land in the course of its business (ie where the sale is a “taxable supply”) AND
- the transaction relates to a new residential property or a vacant residential lot in a subdivision AND
- in the case of a vacant residential lot, the purchaser is not GST registered (or is registered, but is not buying the land for a GST creditable purpose).
Therefore, the purchaser GST payment obligation will not apply
- the sale of a ‘used’ residential dwelling
- the sale of a non-residential property (eg commercial or industrial), or
- the sale of vacant residential land sold in a ‘business to business’ transaction (ie where the purchase is for a GST creditable purpose).
The amount of the purchaser’s GST payment
The purchaser must pay 1/11th of the contract price to the ATO, unless the margin scheme applies, in which case the amount to be paid to the ATO is 7% of the contract price.
A MORE DETAILED SUMMARY OF THE GST “WITHHOLDING” AND NOTICE REQUIREMENTS
1 The purchaser’s payment obligation
- The new obligation for the purchaser to withhold the GST from the vendor and pay it to the ATO applies where the sale is a taxable supply and the property under the sale contract falls into one of 2 categories, which we will refer to as “New Residential Property” and “Vacant Residential Lot”.
- The 2 categories are based on the definitions of new residential premises and potential residential land in the GST legislation, but are somewhat narrowed down.
- They are:
New Residential Property
This is premises occupied for residential accommodation (or intended or capable of being so occupied) that have not previously been sold as residential premises.
Residential premises created as a result of substantial renovations to an existing building are excluded, and so are strata lots created by registration of a strata plan in respect of an existing residential building.
Vacant Residential Lot
This is vacant land in a subdivision plan (registered or unregistered) that is permitted to be used for residential purposes.
- The obligations also apply in connection with the grant of a long-term lease (which is essentially a lease or licence for at least 50 years).
2 Vendor’s notice obligation
- The vendor must notify purchasers whether or not the GST payment obligation applies to the sale. The notice must be given before completion.
- The notice requirement applies to a broader range of sales than those where the payment obligation arises, as it applies to sales of residential premises and potential residential land, as defined in the GST legislation. The notice obligation is therefore essentially applicable to all residential sales.
- The notice must be in writing and:
- must state whether the purchaser will be required
- to make a payment of GST; and if payment is required, must also state the vendor”s name and ABN, the amount the purchaser is required to pay and when the purchaser must pay.
- The omission to comply with the vendor’s notice obligation is a strict liability offence attracting 100 penalty units (currently $11,000).
3 When must the purchaser pay?
• The purchaser must pay the amount directly to the ATO on the date when any consideration (other than the deposit) is first provided. This will be at completion except in the rare case where payments of part of the balance of the price are to be made before completion.
4 How much must the purchaser pay?
- • The purchaser must pay an amount equal to 1/11th of the contract price to the ATO, unless the margin scheme applies.
- • If the margin scheme applies, the purchaser must pay 7% of the contract price.
- The purchaser payment and vendor notice requirements each apply in connection with:
- contracts entered into before 1 July 2018 where completion takes place on or after 1 July 2020; and
- contracts entered into on or after 1 July 2018, regardless of when completion takes place.
- The payment and notice regime does not apply if completion takes place before 1 July 2020 under a contract entered into before 1 July 2018.