The implementation of the GST withholding regime on 1 July 2018 is directed at ‘phoenixing’ activity by property developers who claim input tax credits and claim GST from purchasers on settlement of new residential property but then dissolve their businesses to evade remitting the collected GST.
The 2018 amendments require purchasers of certain new residential premises or certain potential residential land that is part of a property subdivision plan to withhold an amount from the purchase price on account of the vendor’s GST liability and remit it to the Australian Taxation Office (ATO) on or before settlement.
“The 2018 amendments to the Contract for Sale and Purchase of Land, requires purchasers of certain new residential premises or certain potential residential land that is part of a property subdivision plan to withhold an amount from the purchase price on account of the vendor’s GST liability and remit it to the Australian Taxation Office (ATO) on or before settlement.”
The need for a new 2018 edition Contract for Sale and Purchase of Land has arisen at least partly because of the implementation of the Treasury Laws Amendment (2018 measures No 1) Act 2018 (Cth) (‘The 2018 Act’). This legislation introduces a new section 14-E, GST payable on taxable supplies of certain real property in schedule 1 of the Taxation Administration Act 1953 (Cth) from 1 July 2018.
The GST withholding regime applies to sales or long-term leases of more than 50 years for:
- ‘New residential premises’ (s 40-75) of A New Tax System (Goods and Services Tax) Act 1999 ‘GST Act’ which includes residential premises not previously sold as residential premises or erected to replace demolished premises on the same land and that are not created through substantial renovations and are not commercial premises (s 14-240(2)(a)); and
- Potential residential land (s 195-1 GST Act) which is land permitted for use for residential premises which is part of a property subdivision plan (this includes deposited plans and strata plans), however does not contain any buildings that are residential premises or are used for commercial purpose (s 14 -250(2)(b)).
The GST withholding regime applies to transactions completed on or after 1 July 2018 except for those matters where the contract was entered into before 1 July 2018 and settlement takes place before 1 July 2020 (Item 27 of Part 3 of the 2018 Act).
Vendors will be aware whether the transaction is subject to the GST withholding regime and, if so, the amount that the purchaser must withhold. Vendors of residential premises or potential residential land are required to notify purchasers in writing prior to making the supply which is usually before settlement, whether the purchaser must make a withholding payment (s 14-255(l)). The notification requirement is applicable to the supply of all residential premises or potential residential land by sale or long-term lease.
Where the purchaser is:
- Not required to withhold – because the transaction relates to existing residential premises or commercial residential premises, the vendor is only required to confirm the status (s 14-255 (a)(i)); or
- Required to withhold – the vendor is required to provide the name and ABN of the supplier, the amount to be withheld (for example 1/11th of the purchase price or actual amount, if known), the date when the amount will need to be withheld (for example on settlement or the actual date if known) and any other matters that are noted in the regulations. This information is required to allow the purchaser to complete the ATO online forms, which will be discussed below.
The vendor can provide the required information as part of the contract or long-term lease or in a separate document.
Pursuant to the 2018 edition the vendor is to provide the notification in the contract where the required information is known to the vendor as at the contract date. Otherwise, the vendor is required to provide the required information to the purchaser under cover of a separate notice within 14 days from the date of the contract.
Purchasers that are required to withhold must withhold:
- Where the margin scheme does not apply 1/11th of the purchase price (ss 14-250(6)(b) and (7));
- Where the margin scheme applies, 7% of the purchase price (ss 14-250(6) and (8);
- Where the contract is between associates without consideration or for less than the market value, 10% of the GST exclusive market value of the supply (s 14-250 (9)).
There is no withholding obligation if a deposit is forfeited but the release of deposit to the vendor prior to settlement will trigger the purchaser’s withholding obligation on the full purchase price.
The ATO requires purchasers or their representatives who are withholding GST to complete two (2) online forms:
- The ‘GST Property settlement withholding notification’ before settlement. The purpose of this form is to advise the ATO of the sale and creates a lodgement reference number and a payment reference number, and;
- The ‘GST property settlement date confirmation’ on or before settlement. The purchaser will provide its lodgement reference number and payment reference number and will use its payment reference number when remitting the RW payment to the ATO. The ATO will then send an acknowledgment email to the purchaser’s email address provided in the Settlement Date Confirmation Form once the RW payment has been receipted by the ATO
To find out more about how the GST withholding regime works or how it may affect you, contact our friendly property law team today.