Following the passing of the Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth) certain sales of new residential premises and potential residential land will have the Goods and Services Tax (GST) withheld at settlement by the purchaser and paid directly to the Australian Taxation Office (ATO).
The withholding regime will apply to contracts for the sale of:
- premises that have not previously been sold as residential premises;
- residential premises that have been created through substantial renovations of a building; and
- residential premises that have been built, or contain a building that has been built, to replace demolished premises on the same land.
The regime comes into effect for new residential sale contracts entered into on or after 1 July 2018, and relevant contracts entered into before 1 July 2018 where settlement occurs after 1 July 2020.
The new GST withholding regime also introduces a requirement for anyone who sells, or supplies under a long term lease, new residential premises or potential residential land to:
- advise a purchaser in writing prior to settlement that the new regime applies; and
- advise the amount the purchaser will be required to pay to the ATO at settlement.
The Government has stated the purpose of the regime is to prevent developers selling properties for a GST inclusive purchase price, but winding up their business before the next tax reporting cycle to avoid remitting that GST to the ATO. To preclude this type of ‘phoenixing’, the new regime removes the current gap between when GST is paid by the purchaser and when the vendor is required to report and pay to the ATO. Instead, the vendor will receive a credit at the time of reporting for any payment made to the ATO by a purchaser.
Vendors will be required to advise a purchaser prior to settlement that the regime applies and advise the amount of GST required to be withheld at settlement, equal to one-eleventh of the GST inclusive contract price, or 7% of the contract price if the margin scheme applies.
If the vendor is a related entity of the purchaser and the sale is made for no consideration or for less than market value, the amount to be withheld will be 10 per cent of the GST exclusive market value of the property.
Parties cannot contract out of the new regime; avoiding notification does not relieve the purchaser from withholding the relevant amount. Additionally, failure to notify is a strict liability offence and penalties will apply. The regime requires vendors to notify prior to settlement, however it would seem the most efficient means is to make disclosure by way of special condition.
Purchasers will be required to notify the ATO of the withholding and make payment. Failure by a vendor to notify that the regime applies will not excuse a purchaser’s requirement to pay, and penalties will apply for failure to comply.
The obligation to make payment falls on all purchasers, who can be jointly liable for the whole amount of withholding, or separately liable for a part of the withholding, depending on how purchasers acquire the title.
For example, if two purchasers, Matthew and Amy, purchase a new residential property for $1.1 million as tenants in common in equal shares (50/50), the GST withholding is 1/11th (assuming the margin scheme does not apply) or $100,000.00. As tenants in common holding a 50 per cent share of the title, Matthew and Amy are each obligated to withhold $50,000.00 or 50 per cent of the overall withholding amount. Matthew could provide a cheque or electronic payment and discharge his obligation, even if Amy did not.
If, however, Matthew and Amy purchased as joint tenants, then they would both hold an equal share in the whole title, and so they are jointly obligated to withhold $100,000.00 or the whole withholding amount. Either one of Matthew or Amy could provide a cheque or electronic payment and discharge the obligation for both of them.
Procedure at settlement
Compliance is achieved by producing a bank cheque at settlement for the amount of the withholding for paper settlements, or including an electronic payment direction within an electronic settlement platform. It is yet to be confirmed how an electronic payment will be recorded by the ATO and correctly allocated to the relevant vendor for cross-referencing when the vendor prepares their Business Activity Statement (BAS).
Clause 15B.6 of the new special condition 5A for contracts of sale prepared by the Law Institute of Victoria and the Real Estate Institute of Victoria (REIV/LIV Contract) merely states an electronic settlement complies if the amount is ‘included in the settlement statement’ requiring payment to the ATO.
Given current difficulties with payments to the State Revenue Office for land tax, it has been suggested reporting for purchasers may be a two-step process – one step to notify of an impending payment and receive a payment reference, and the second step to remit payment at settlement.
Clause 15B.4 of the REIV/LIV Contract states that a purchaser ‘must’ engage a legal practitioner or conveyancer to conduct the settlement. This is presumably to avoid self-represented purchasers who may be unaware of the new regime falling foul of the strict penalties for non-compliance.