In the 2017-2018 Budget, the Federal Government announced that purchasers of ‘new residential premises’ or ‘new residential subdivisions’ will be required to remit the GST component of the purchase price directly to the Australian Taxation Office (ATO).
The changes were introduced by the Federal Government in an effort to combat a perceived non-compliance with GST law from the property development industry. According to the Government, 355 individuals controlling over 13,000 entities in 2015/2016 engaged in a practice known as ‘phoenixing’. ‘Phoenixing’ is where a developer collects GST on the purchase price of a property (a taxable supply) but dissolves the collecting entity before their next Business Activity Statement (BAS) is lodged to avoid remitting the GST. The ATO has estimated that the practice of ‘phoenixing’ has resulting in the loss of $2 billion in taxation revenue for the 2015/2016 tax year.
Treasury Laws Amendment (2017 Measures No. 9) Bill 2017 (Draft Bill)
The Federal Government has now released the Treasury Laws Amendment (2017 Measures No. 9) Bill 2017 (Cth) (Exposure Draft) for comment by the public.
The Exposure Draft provides that:
- a purchaser will be liable to pay an amount of GST to the Commissioner if they are the recipient of a taxable supply that is, or includes, a supply of a ‘new residential premises’ or a ‘new residential subdivision’;
- if the purchaser is liable to pay an amount of GST, then that payment must be made on or before the date that any consideration for the property is paid (other than consideration paid by way of a deposit). In most instances this will be completion of the property;
- the amount paid by the purchaser must be 1/11 of the consideration for the property;
- a vendor will be prohibited from making a supply of ‘residential premises’ or ‘potential residential land’ unless, 14 days before completion, it has provided the purchaser with a written notice specifying:
- the vendor’s name and ABN;
- the amount that the purchaser is required to withhold; and
- the date on which the purchaser is required to make the payment; and
- a vendor will face a fine of up to 100 penalty units (approx. $17,000) if it fails to provide a purchaser with the written notice referred to above.
What is ‘new residential premises’?
The term ‘new residential premises’ is defined in section 40‑75 of the Goods and Services Tax (GST) Act 1999 (Cth) (GST Act). A premises is considered to be ‘new residential premises’ if the premises has:
- not previously been sold as residential premises;
- been created through substantial renovations of a building; or
- been built to replace a demolished premises on the same land.
What is ‘new residential subdivisions’?
The definition of ‘new residential subdivisions’ in the Exposure Draft is broad. It includes any ‘potential residential land’ contained in a subdivision plan which has not previously been sold.
‘Potential residential land’ is defined in section 195‑1 of the GST Act, and means land that is permissible to use for residential purposes, that does not contain any buildings that are used for residential premises. This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not contain any residential premises.
The Exposure Draft provides that the new arrangements will not apply to contracts for sale entered into before 1 July 2018 provided that completion of that contract occurs before 1 July 2020.
Whilst there is a transitional period, it is still possible for contracts entered into before 1 July 2018 to be caught by the new regime. This raises a number of practical issues such as:
- purchasers will still remain contractually bound to pay the whole purchase price (less the deposit and any amount remitted pursuant to the foreign withholding tax scheme) to the vendor;
- developers may have entered into agreements with their financiers which require payment of more than 90% of the price before the bank will discharge their mortgage from the relevant lot/apartment. These agreements may not contemplate the purchaser keeping and remitting 1/11 of the price to pay to the ATO.
A number of lobby groups, including the Property Council of Australia, have made submissions to the Federal Government requesting that all contracts entered into before 1 July 2018 be exempt from the new regime. The Federal Government has not yet indicated whether they will take this recommendation on board.
A copy of the Exposure Draft and accompanying explanatory memorandum can be found here.