Under the new GST withholding regime for new residential premises or potential residential land which commenced on 1 July 2018, in most cases, a purchaser's obligation to withhold an amount for GST and pay it to the ATO will arise at settlement when the balance of the purchase price is paid and the deposit is released to the vendor.
However, a purchaser's liability to pay the GST amount to the ATO can crystallise prior to settlement when consideration other than a true deposit is paid prior to settlement. Accordingly, caution should be used when dealing with payments purporting to be deposits. In particular:
- if a deposit is released prior to settlement (whether by agreement or under legislation eg. pursuant to section 27 of the Sale of Land Act 1962 (Vic)), the GST withholding liability may arise at the time of the release of the deposit and the purchaser may be liable to pay the GST amount to the ATO at that time and not on settlement;
- if a deposit exceeds 10% of the purchase price, the ATO may not consider this to be a true deposit and a GST withholding liability may crystallise on payment of the deposit; and
- if only part of a deposit is paid or a deposit is paid by instalments, this may not be considered to constitute a true deposit by the ATO and so could crystallise the GST withholding liability.
Further, in respect of options:
- if an option may be characterised as a conditional contract of sale (rather than an irrevocable offer), the payment of the option fee may trigger GST withholding obligations; and
- if an option fee is treated as a deposit upon the exercise of the option, the ATO may also not consider this to be a true deposit.