Find out how you may be affected
From 1 July 2018 the complexity of property transactions increases. In addition to the Foreign Resident Capital Gains withholding, there is now a requirement to withhold on the sale of residential premises or potential residential land under the Goods and Services Tax (“GST”) residential property withholding laws.
It is important that all sellers, purchasers and their advisers are aware of their obligations under the law to avoid inadvertently incurring penalties.
Broadly, the GST residential property withholding law requires GST to be withheld unless the property transaction is specifically excluded or an action is taken by the seller. This will affect property transactions entered into from 1 July 2018, as specified in our previous article.
To better understand your obligations refer to the GST residential property withholding flow chart.
Learn more about the changes and what you need to do below.
What transactions does the legislation apply to?
The GST residential property withholding law applies to new contracts for residential premises or potential residential land (not necessarily “new”, but that are taxable supplies) entered into on or after 1 July 2018.
Additionally, it requires purchases of “new residential premises” or “new subdivisions of potential residential land” to remit GST directly to the Commissioner as part of the settlement process.
There are transitional provisions applying where a contract is entered into prior to 1 July 2018 but where consideration is paid on or after 1 July 2020.
What action is required?
Sellers of residential premises or potential residential land will be required to notify the purchaser whether or not they are required to withhold GST.
If the purchaser is required to withhold, the seller must provide further details including their name, Australian Business Number, the withholding amount and the date payment is required to be made to the Commissioner. This notice must be provided before the sale is made (broadly, being settlement). The time requirement has been relaxed from the proposed legislation.
The GST residential property withholding flow chart will assist sellers to determine whether notification of the GST residential property withholding is required.
Generally, if withholding is required, the amount payable will be 1/11th of the contract price adjusted for normal adjustments that apply on completion of similar transaction, however excludes settlement adjustments.
The law includes provisions for contracts using the margin scheme. As such, if the margin scheme is being used, the withholding payable will be the amount determined by the Minister (being a maximum of 9%) or if there is no such determination, 7% of the contract price.
If the sale is to an associate and the sale has no consideration or is for less than the GST inclusive market value, the withholding amount payable is based on the GST exclusive market value (based on existing definitions is the GST legislation). The withholding payment is due to the Commissioner on or before the date on which any part of the consideration for the sale (other than a deposit) is first provided. This timing remains unchanged from the proposed legislation.
Preparing for change – What you need to do
- Revisit internal procedures to ensure the GST residential property withholding rules are considered for every potential residential property transaction.
- Add a mechanism to ensure any withholding payments are actually made to the Commissioner. If the withholding is not paid to the Commissioner, no credit will be provided either to offset the GST liability on the sale or to obtain a refund of any excess GST withheld.
- Consider cash flow impacts as the introduction of the GST residential property withholding law will affect this. Therefore, plan for this and where required seek assistance from advisors and financiers.
- Review contracts to ensure they include a section on this law.
Where a withholding payment is not required, the seller may still be required to notify the purchaser that the GST residential property withholding rules do not apply.