The legislation introducing GST withholding obligations for buyers of new residential properties has now passed both houses of parliament. As a result, buyers will be required to withhold and pay GST to the ATO, commencing from 1 July 2018. Contracts entered prior to this are exempt, provided settlement occurs before 1 July 2020.
1. What is the GST withholding regime?
Buyers must withhold GST from the purchase price they pay to a seller for remittance to the ATO if they purchase:
- new residential premises, other than those created through a substantial renovation or commercial residential premises; or
- subdivisions of potential residential land, which is land that is permissible to use for residential purposes, but that does not contain any buildings that are residential premises.
This obligation also applies to long term leases of these types of residential land.
The federal government is cracking down on phoenix developers. It is argued that these developers establish special purpose entities for their developments and once sales are complete, leave them devoid of any assets and unable to remit GST.
It is estimated that GST revenue will increase by $590M in the first three financial years following commencement, while the costs of compliance will be:
- transitionary for developers as they update their processes; and
- otherwise need to be factored into conveyancing and likely be borne by the buyer.
3. What does this mean for you?
The GST withholding regime represents a shifting of the burden for collection of revenue away from government agencies, similar to the CGT Withholding Regime.
In our view, there are implications for all stakeholders involved in the relevant transaction:
- Sellers must notify the buyer in writing whether GST withholding is required on all residential property sales, including sales of potential residential land.
- Failure to issue the notice to buyers, or the issuing of a false notice, is a strict liability offence (meaning fault on the part of the seller does not need to be proven). The maximum penalty is $21,000 for individuals and $105,000 for corporations.
- Sellers, particularly for larger developments, need to consider the cash flow implications. There will no long be the “pot” of GST money that some developers have (regardless of the rights and wrongs of doing so) clearly counted on as part o their available cash flow.
- Buyers are required to withhold and pay (generally at settlement) to the ATO the fixed percentage of:
- one-eleventh of the contract price, or
- if the margin scheme applies, 7% of the contract price.
- Administrative penalties apply to buyers who fail to withhold GST, equal to the amount that was required to be withheld. Buyers are, however, entitled to rely on the notice they are provided by sellers as a complete defence.
- Buyers need to be mindful of the likelihood of additional conveyancing costs associated with purchases of new residential properties.
- Should consider the likelihood that the withholding provides the ATO with a priority ahead of them as secured creditors, for the GST.