First announced in the 2017-18 Federal Budget, the Federal Government recently introduced its Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (Bill) to change the regime for recovery of GST in certain residential real estate transactions.

While the legislation is still to be passed, real estate vendors and purchasers need to make sure that they are aware of the new regime which may affect sale transactions that are settled on or after 1 July 2018.

Contracts of sale made on and after 1 July 2018

In respect of all contracts of sale, and long-term leases, made on or after 1 July 2018 for new residential properties and potential residential land, purchasers must withhold from settlement proceeds an appropriate amount for GST and pay it to the ATO.

Contracts of sale made before 1 July 2018

While the legislation provides for a 2-year transitional period, contracts made before 1 July 2018 will also be subject to the new withholding requirements if any part of the consideration (other than deposit) is first paid on or after 1 July 2020.

Contracts made before 1 July 2018 will not otherwise be subject to that GST withholding requirement.

Amount of GST to be withheld by purchasers

The amount to be withheld and paid to the ATO by a purchaser is 1/11th the price unless the margin scheme is to be used for calculation of GST in connection with the relevant sale.

When the margin scheme is to be used to calculate GST payable for a sale the amount to be withheld and paid to the ATO is to be 7% of the price.

Failure by a purchaser to do so renders the purchaser liable to a penalty equal to the amount that should have been withheld and paid to the ATO.

Notices to be given to purchasers by vendors

Vendors will be required to give purchasers written notice in connection with all residential sales where the property is supplied on or after 1 July 2018 (i.e. where settlement takes place on or after 1 July 2018) advising the purchaser if the property is new residential property or potential residential land, the amount of GST the purchaser is to withhold and pay to the ATO, and the vendor’s name (name known to the ATO) and ABN.

Vendors will be required to give notices in respect of all residential sales whether or not they are of new residential properties or potential residential land but not including sales of commercial residential property (e.g. serviced apartments) or sales of potential residential land to a purchaser who is registered for GST and who acquires the land for creditable purposes.

There are substantial penalties if a vendor fails to give that notice.

New residential properties and potential residential land

'New residential properties' are residential properties that have not previously been sold as residential premises and do not include residential properties created through substantial renovations or commercial residential premises.

'Potential residential land' is vacant land in a plan of subdivision that is zoned for residential use. Accordingly, land contains a residential building or building being used for commercial purposes is not potential residential land.

Development agreements

In some circumstances, development agreements made between a land owner and a developer may be affected by the proposed new regime. Therefore, existing agreements should be reviewed to determine if the new regime will adversely affect either party and if so whether appropriate amendments can be agreed by the parties.

New development agreements should take into account this new regime so that it will not have unintended affects for either party.

GST credits and refunds

Credits and refunds for GST withheld and paid by purchasers will be available through the usual BAS procedure. Additionally, when a vendor is entitled to a refund for the GST withheld and paid in whole or in part because of say an error, it may apply for that refund outside the BAS lodgement regime if it does so within 14 days of the date GST is payable in respect of the relevant supply.

Status of the law and what to do now

While a Bill has been introduced to Parliament to amend the law to give effect to the announcement made by the Federal Government in the 2017-18 Federal Budget, the Bill has yet to be passed into legislation.

The law, when changed, will affect residential sales made before 1 July 2018 where the first payment of any part of the price (other than the deposit) is paid on or after 1 July 2020. In the meantime, contracts of sale now made in relation to residential sales, and in particular those involving long-term development projects, should be reviewed and in most cases amendments made for the benefit of vendors.