Purchasers of new residential property, or potential new residential property, are to be burdened with administering payment of the vendor’s likely GST liability to the ATO as proposed by the Treasury Laws Amendment (2017 Measures No. 9) Bill 2017 (currently released in exposure draft).
Should this Bill be passed into law, the impacts of these changes will be far-reaching for vendors and purchasers of new residential property as well as their advisors.
These changes have been brought about by ATO concerns that some property developers are engaging in a practice referred to as ”phoenixing”, being the deliberate dissolution of their business to avoid its taxation obligations whilst essentially continuing the business in the name of a new entity. Treasury’s response has been to propose new measures which shift the burden of making the GST payment to the ATO onto purchasers of new residential premises, or potential residential land.
It is proposed that the new system would work as follows:
When do the provisions apply?
Where there is a taxable supply of new residential premises or potential residential land.
How much does the purchaser withhold and when is payment to the ATO due?
Purchasers of new residential premises or new subdivisions of potential residential land must make a payment to the ATO of one eleventh of the purchase price. In essence, the amount that the purchaser is required to forward to the ATO is the anticipated GST liability of the vendor. Such amount becomes payable to the ATO when consideration for the supply (other than consideration provided as a deposit) is first provided. In ordinary circumstances, this would be at settlement.
One notable exception however, would be where the purchase price is payable in instalments. In such circumstances the GST liability for payment to the ATO would need to be made in full at such time as the first instalment is paid. This could differ from the settlement date.
What are the notice requirements?
Suppliers (i.e. vendors) of residential premises or potential residential land must provide to the purchaser a notification at least 14 days ahead of making the supply. Such notification is intended to help purchasers comply with the obligation to withhold by notifying the purchaser that a withholding obligation may exist and the purchaser may have to forward part of the purchase price to the ATO.
What if notice is not served?
The supplier (i.e. the vendor of real property) will commit a strict liability offence, the maximum penalty for which is 100 penalty units. This currently equates to a maximum penalty of $21,000. As is the case with strict liability offences, the defence of honest mistake of fact is open to be asserted by the vendor.
How does a purchaser make the withholding payment?
As many purchasers will not be registered for GST (think mums and dads), the purchaser must notify the ATO at least 5 days ahead of the payment so that the ATO can make arrangements to receive the withholding payment and apply it to the credit of the vendor. Withholders will not need to register for GST.
From when do the provisions apply?
Should the Bill become law, the provisions will apply to contracts settling on or after 1 July 2018. Importantly however, these provisions will not apply to contracts entered into before 1 July 2018 where consideration for the supply is to be provided before 1 July 2020. In this sense, there is a two year transitional period for pre-existing contracts.
What if the purchaser fails to withhold?
The purchaser will have committed a strict liability offence, the penalty for which will be 10 penalty units (currently $2,100). Again, the defence of honest mistake of fact would be open to the purchaser.
What if the taxable supply was one to which the margin scheme was used?
The obligation for the purchaser to withhold one eleventh of the purchase price exists regardless of whether the actual GST liability upon the supply will be less (for example, if the margin scheme was used). A credit system is to be implemented by the ATO which will allow vendors (suppliers) a refund for overpayments of GST made on their behalf.
Should these proposed provisions become law, there is no doubt that they will add to the complexity of purchasing Australian real property. In conjunction with the new foreign resident CGT withholding provisions, there is a real risk that settlements may be delayed given the notice requirements imposed on the vendor (at least 14 days’ notice to purchaser) as well as the purchaser (at least 5 days’ notice to ATO that withholding payment will be made).