On Melbourne Cup Eve, draft legislation was released following the Government’s announcement in the 2017-18 Budget to introduce new processes surrounding GST and property transactions. Broadly, the proposed legislation provides that purchasers of “new residential premises” or “new subdivisions of potential residential land” (both referred to as “NRPL” herein) are to remit any GST on the purchase price directly to the ATO as part of the settlement process (broadly, a withholding obligation).
These changes will affect taxable supplies of residential premises’ for contracts entered into on or after 1 July 2018, with transitional provisions applying where a contract is entered into prior to this date but where consideration is paid on or after 1 July 2020. We outline the important points below.
How will it work?
Sellers of residential premises or potential residential land (not necessarily “new”, but that are taxable supplies) will be required to notify the purchaser if the purchaser is required to withhold the GST. If the purchaser does have a withholding obligation, the seller must provide further details including their name, ABN, the withholding amount and the date payment is required to be made to the ATO. This notice must be provided at least 14 days before the supply is made (broadly, being settlement). This applies for contracts entered into on or after 1 July 2018 (there are no other transitional periods for notifications).
There are penalties proposed to apply to sellers for failing to provide the notifications. However, relief will be provided where the seller (in error) reasonably believed that the premises was not NRPL.
The withholding obligations apply to taxable supplies of NRPL (based on existing definitions in the GST legislation). The onus is on purchaser to determine whether the withholding provisions apply, and if so, withhold 1/11th of the purchase price from the seller. Penalties apply where the purchaser fails to withhold as required. Relief from penalties may be obtained where they reasonably believed the premises not to be NRPL based on the notification they received from the seller.
The purchaser must pay the withheld amount to the ATO on or before the day that the first consideration (excluding deposits as security) is paid. As a result, the GST obligation occurs upfront for contracts with instalments, unless the commissioner determines (by legislative instrument) to change the payment requirements (something to watch for in the future).
Where specific circumstances arise, the proposed legislation includes the ability to only withhold from a reduced purchase price. This may occur where the consideration is paid for multiple or composite supplies e.g. includes furnishings or is for part commercial property etc.
When BAS time rolls around, the seller includes both a payment for GST on the sale made, as well as a claim for the credit paid to the ATO by the purchaser. Note that the purchaser must have made the payment to the ATO, and simply having the amount withheld does not provide the seller with an allowable credit.
The purchaser may be able to claim a credit for the GST previously remitted to the ATO (subject to their own GST registrations).
Overall the GST outcome for all parties involved does not change to the current law, and rather it is the timing of payments that has been impacted.
The draft legislation allows for refunds to be obtained by relevant parties where the margin scheme applies, or where an error has occurred.
Where a sale is made under the margin scheme, the GST payable by the seller will be less than the amount withheld by the purchaser. As a result, the seller is able to apply for a refund of the GST that would ultimately be refunded following lodgement of their BAS. Where a purchaser withholds in error (however, is under the belief they need to withhold), the seller may apply for a refund of the withheld amount.
These refund provisions aim to assist in the discord between the timing of settlement and BAS lodgement. However, note that the margin scheme refunds only apply where an entity is not subject to monthly GST periods (as the cash flow impact is minimal here).
In both refund situations above, the seller must apply to the Commissioner in the approved form (yet to be released) at least 14 days before the end of the relevant GST period to which the payments are attributed.
The proposed changes target the act of ‘phoenixing’, whereby the time lag between settlement and BAS due dates allows for non-complying entities to dissolve their businesses to avoid repaying the GST to the ATO. While non-compliers are the targets, all taxable supplies of residential property/land will be impacted by the changes.
The increases in red tape and administrative duties will be noticed throughout the property industry, and the proposed penalties for failing to notify means it is important to consider these rules for each residential property transaction that arises.
Further, it will be important to bear in mind the cash flow impacts of the upfront withholding and ensure these are managed within the entities involved.
We are expecting increased scrutiny on refunds in this space as the ATO work towards getting their systems up and running to handle the requests. Our experience with the ATO’s implementation of the recent foreign property withholding obligations does not fill us with confidence on how this will be implemented.