The Budget measures include a radical plan to shift the responsibility of accounting for GST from property developers to purchasers. Under the proposal, purchasers must remit the GST directly to the Australian Taxation Office (ATO) as part of the settlement process.
The proposal will apply to newly constructed residential properties and new subdivisions from 1 July 2018.
What does this mean for the developers?
The full impact fordevelopers will depend on the final form of the legislation. The critical question is whether the purchaser’s liability will be interim or final.
If the purchaser’s liability to account for GST is non-final, the purchaser may be required to collect a notional amount and a true-up may then occur when the property developer submits its business activity statement (BAS). This may present cash-flow and funding issues for developers, particularly if the GST amount remitted by the purchaser is significantly more than the developer’s actual GST liability.
However, the language in the budget papers suggests that the purchaser’s GST obligations may be a final liability. If that is in fact the case, the ramifications for developers may be more significant. Unless the developer discloses its GST costings and calculations, it may not be possible for purchasers (even those who are wise to the intricacies of GST on property transactions) to accurately calculate the GST payable on the transaction.
Developers may not wish to disclose or make public their GST costings and calculations.
Even if the developer discloses its GST costings and calculations, it may be unreasonable to expect purchasers to manage complex GST calculations. For that reason, any final tax imposed on purchasers may be imposed under a simplified final withholding tax regime and that could sound the death knell for the margin scheme.
In any event, purchasers who have contracted on GST inclusive terms would be incentivised to adopt the most conservative (and perhaps the least sophisticated) method of calculating GST so as to extinguish his or her liability as taxpayer. If the purchaser overpays GST to the ATO, and the vendor’s share of the net price is thereby reduced, what rights of review or objection will the developer have in relation to the purchaser’s final GST liability? The vendor may have no review rights if the tax is imposed ultimately on the purchaser.
The new proposal also has ramifications for lenders. Importantly, the full proceeds of sales usually required by lenders will be reduced by the GST deduction.
By shifting the GST obligation to purchasers, the amount of GST remitted on sales by the purchasers may exceed the forecasted GST liability for the development. Apart from the potential impact this may have on the developer’s ‘bottom line’, it may affect the lender’s security in several ways. For example:
- If the GST payable by the purchaser to the ATO is non-final (eg, as an interim withholding to be applied towards the developer’s GST liability) – the GST amount paid to the ATO at settlement may substantially exceed the developer’s final GST liability.In those circumstances, we would expect the developer to be able to claw back the difference as a refund but the refund would normally be paid to the developer following its next BAS, which will be after settlement and after the lender’s security has been discharged.
- If the GST payable by the purchaser is a final tax – where the purchase price is inclusive of GST, the purchaser will be incentivised to adopt the most conservative method of calculating GST to ensure that the purchaser discharges his or her own obligation.That may result in the purchaser overpaying GST which may in turn reduce the net sale proceeds available to the vendor, including a receiver or mortgagee in possession.
What you should do now
The proposalis currently scheduled to commence on 1 July 2018. All new contracts that may complete after 1 July 2018 should be reviewed before exchange.
It is not clear how the new rules will apply to:
- existing off-the-plan contracts where settlement will occur after 1 July 2018; and
- contracts exchanged between 9 May 2017 to 1 July 2018 where settlement will be after 1 July 2018.