The Turnbull Government has released Exposure Draft legislation that proposes to implement the 2017-18 Budget measure of requiring purchasers of newly constructed residential properties or new subdivisions to remit the GST directly to the Australian Taxation Office (ATO) as part of the contract settlement procedure. The exposure draft has been released for industry consultation.
In a previous GST update of 12 May 2017 (click here to view), we stressed that the critical question in relation to the Budget announcement was whether the purchaser’s liability would be interim or final. The good news for developers is that the liability proposed under the Exposure Draft is an interim withholding tax liability. That means developers should not be denied access to the margin scheme.
The bad news, however, is that the withholding tax liability will generally be fixed at 1/11th of the GST-inclusive price even if the actual GST liability will be less than that amount. As anticipated in our earlier update, the purchaser will be required to collect a notional amount and a true-up will then occur when the property developer submits its business activity statement (BAS). This may present cash-flow and funding issues for developers if the GST amount remitted by the purchaser is significantly more than the developer’s actual GST liability. Any application of the margin scheme is likely to result in a refund situation for the vendor which may be delayed while the ATO scrutinises the vendor’s refund entitlement.
The proposed withholding measures are said to be aimed at ‘phoenix’ arrangements where fraudulent developers collect GST on the purchase price but then dissolve their business before their next BAS lodgement. However, the legislation does not include obvious safeguards that may prevent fraudulent operators escaping liability and it would appear that the new withholding measures may achieve little more than an increase in Government revenue by bringing forward the GST liability. In fact, the Government Budget Papers estimate that this measure will increase GST revenue by AUD$660 million net of administrative costs (and by AUD$1.6 billion over the forward estimates period) “due to the timing of when GST is collected and recognised”.
The question then is who will fund the AUD$660 million timing gap? The answer, of course, is the property industry. There will also be ramifications for lenders as the withholding obligations will reduce the proceeds of sale available for collection at completion thereby ensuring that the Commissioner of Taxation takes priority over secured creditors.
The new measures will apply to taxable supplies of residential premises or potential residential land.
The concept of ‘potential residential land’ has been borrowed from a GST exemption for transfers of subdivided farm land between related parties and the brevity of the definition of ‘potential residential land’ in the GST legislation suggests that it was never intended to have broad application beyond that very specific exemption. This may lead to withholding obligations arising in some unexpected situations.
The new withholding regime is proposed to commence on 1 July 2018, but ‘off the plan’ contracts exchanged before that date may be grandfathered until 1 July 2020.
What you should do now
Submissions close on 20 November 2017.