The Australian government has recently introduced a Bill to change the GST law to require purchasers of new residential property to withhold GST from the purchase price and remit it to the ATO. This is an attempt to force compliance in the property sector. This Bill was introduced into Parliament on February 7, to deal with a number of non-compliant property developers, who employ what's known as ‘phoenixing techniques’ in order to avoid remitting GST payments to the Australian Tax Office (ATO). These changes were announced in the 2017/18 Federal Budget.
Phoenixing is a practice whereby developers receive cash from the sale of their properties then dissolve their business before the next BAS was due in a bid to avoid paying GST.
Paying GST directly to the ATO
Currently, the property supplier remits GST to the ATO in their next Business Activity Statement (BAS) following settlement. This can be up to three months after settlement of the property.
Under the new measures, the obligation is now with the purchaser of ‘new residential property’ or ‘potential residential land included in a property sub-division plan’ to withhold and remit GST direct to the ATO. This removes the ability for developers to bank GST from sale proceeds for up to three months, and is likely to put a significant strain on their cashflow.
In general terms, new residential property is defined as premises that have not been previously sold as residential premises or have been built to replace demolished premises on the same land.
The proposed new law will commence on 1 July 2018, however for contracts entered into prior to 30 June 2018 where consideration is provided before 30 June 2020, transitional rules will apply. Under these transitional rules, the purchaser has no obligation to withhold GST.
An example of the transitional rules is as follows:
“Nick enters into a contract with ZYX Developments on 18 June 2018 to purchase a new apartment for $850,000.
Settlement for the property takes place on 19 May 2020 and no consideration is provided before that date. As settlement takes place before 1 July 2020, ZYX is not required to notify Nick of the withholding requirement, nor is Nick required to withhold GST.”
Added compliance burdens
While the proposed laws were introduced to put a stop to phoenixing, and many are pleased to see the curbing of these rogue developers, BDO fear that the extra compliance burden will have unintended negative consequences for real estate professionals including real estate agents and conveyancers.
With penalties potentially imposed on both the vendor and the purchaser, it is vitally important the administration process is correct.
To assist in the compliance burden, there is a strict requirement imposed on the supplier of the residential property to notify the purchaser in writing as to whether they are required to withhold GST and make payment to the ATO in respect of the supply at least 14 days before making the supply. The notification requirement applies to all residential property even if there is no requirement to withhold.
However, there will be no requirement to provide a notice where the purchaser is registered for GST and acquires the land for a creditable purpose or for the supply of commercial residential premises.
In the circumstances where the new measures apply, the vendor/developer must include the following detail in the notice to the purchaser:
- Name and ABN of the supplier/developer
- The amount of GST that the purchaser will be required to pay to the ATO
- When the amount is due to be paid to the ATO (ie settlement date)
- Where some of all of the consideration is not expressed as money – the GST-inclusive market value of the consideration not expressed as money (ie in kind consideration)
- Such other matters as specified in the regulations.
In the circumstances where the vendor/developer fails to provide the appropriate notice penalties will be applied.
Under the new arrangements, the obligation to withhold GST and make payment to the ATO rests with the purchaser. Where there are multiple purchasers, for example where a couple purchase a property as tenants in common, each purchaser will be treated as receiving a separate supply in proportion to their interest in the property and will each have an obligation to make a payment in proportion to their interest.
Where the obligation to withhold arises, the purchaser(s) will be required to withhold and pay to the ATO an amount equal to 1/11th of the total price of the supply of residential property. The purchaser(s) are required to pay the amount withheld to the ATO on or before the day that consideration for the supply (other than the deposit) is first provided to the vendor. In most cases, this will be the settlement date.
An example of the purchaser’s obligation is as follows:
“Thomas and Imogen acquire new residential property for $1.3 million. They acquire the property as joint tenants and the sale is not subject to the margin scheme.
In this case, Thomas and Imogen are taken to have received a single supply, and they have an obligation to withhold 1/11th of the purchase - $118,182.
They make a payment to the ATO at the time of settlement.”
Where the margin scheme applies to the sale of new residential premises, the purchaser(s) must withhold an amount equal to 7% of the contract price.
Failure to withhold by the purchaser will also be an offence and penalties will also be applied to the purchaser.
GST on property transactions is often incredibly complex, and calculating the GST payable can be a difficult job for even the most experienced of accountants. The compliance burden is now on real estate agents, conveyancers, legal advisers, vendors and purchasers to ensure the amount of GST the ATO requires, as well as when it is payable is done correctly.
Additionally, these new rules mean the ATO is now first in line for settlement proceeds, meaning the Commissioner, in effect, has priority over all creditors, including secured creditors. This may be of concern to investors and financers in real estate developments.
With specific notification timelines, real estate professionals, particularly conveyancers and solicitors, will need to be more prepared to ensure this increased administration is timely and efficient, and that a process is in place to minimise impacts on days on market, settlement timeframes and ultimately business cash flow.
It's important that those operating in the real estate industry seek the advice of an experienced business adviser in order to make the most of the lead up to 1 July 2018. BDO can help to ensure you don't get caught out by the GST changes. Contact Matt Laming today for more information.