As we start down the slippery slope towards the end of the 2017-18 financial year, conveyancers, solicitors, buyers and developers alike need to come to terms with the likely impact of the Treasury Laws Amendment (2018 Measures No.1) Act 2018 (Treasury Act) on real property transactions.
With the Treasury Act commencing on 1 April 2018, buyers (yes… buyers!) rather than the developer (or the supplier) must now withhold and pay directly to the Australian Taxation Office the GST payable on a taxable supply that is made by way of sale or long term lease of:
- new residential premises; or
- potential residential land that is included in a property subdivision plan and which does not contain any building that is in use for a commercial purpose.
However, the withholding regime will not apply to new residential premises which have been created through substantial renovations.
The amount to be withheld by buyers will be equal to:
- 1/11th of the purchase price identified in the contract for sale;
- where there is no purchase price, 1/11th of the GST exclusive market value; or
- where the margin scheme applies, 7% of the purchase price (or GST exclusive market value where there is no purchase price).
The amount must be withheld and paid to the Australian Taxation Office on the day on which consideration is first provided. In most circumstances, this will be on the day of settlement.
The Treasury Act applies to all contracts under which any consideration (other than the deposit) is first provided on or after 1 July 2018, though there is an exemption for those contracts entered into before 1 July 2018 and under which the consideration is first provided before 1 July 2020.
So what are the practical implications of the Treasury Act? Well, for a developer, they will still need to account for the GST amount in its BAS and will be entitled to a credit for the GST amount once paid by the buyer to the ATO. They will also need to give buyers notice specifying whether the buyer is required to withhold payment from the supply, and if relevant, the amount to be withheld and paid to the ATO.
It would be prudent for developers to consider a review of their existing developments and future sales to ensure both administrative processes and contract terms facilitate the requirements of the withholding regime.
Whilst the intention of the Treasury Act is to discourage GST avoidance, we expect the changes will be somewhat detrimental to developers and likely to lead to increased transaction costs.