How these new obligations will affect both developers and purchasers
Treasury has released draft legislation which proposes a new process for the remittance of GST to the ATO for property transactions that relate to the supply of “new residential premises”.
Why the Changes
The purpose of these new rules is to shift the obligation to remit GST from developers onto purchasers to alleviate the ATO’s concerns with developers liquidating their companies prior to remitting their GST on sales.
Summary of Withholding Obligations for Purchasers
- Generally, most purchasers of “new residential land” and “potential residential land” (Such as the subdivision of land into residential lots and the sale of home and land packages) will be responsible for withholding and remitting 1/11th of the purchase price directly to the ATO at settlement.
- Purchasers must pay 1/11th of the purchase price irrespective of whether 1/11th of the purchase price reflects the actual GST liability for the transaction. For example, where the margin scheme applies and the GST liability is less than 1/11th of the purchase price, purchasers must still remit 1/11th of the purchase price to the ATO and the developer must seek a refund for the difference from the ATO.
- The payment of GST must be made on or before the date which the consideration for the purchase (other than the deposit) is first provided, which most often than not will be settlement.
- These new withholding obligations have the potential to create cash flow issues for developers, particularly as they will no longer have the cash flow benefit of having temporary access to GST collected at settlements.
Summary of Notification Obligations for Developers
- Developers will be required to provide written notice to their purchasers at least 14 days prior to settlement advising how much GST is required to be withheld (if any), when it is to be paid and the vendor’s ABN.
- Unlike the withholding obligations, these notification obligations apply to the supply of any residential premises not juts new residential premises.
- Failure to comply with these notification obligations is an offence and carries penalties.
Refund Mechanism and Tax Credits for Developers
- Developers will continue to report the amount of GST payable in their BAS.
- Where the GST is paid by the purchaser to the ATO, a credit will be available to the developer.
- Where the amount of GST payable is less than the amount withheld and remitted by the purchaser (for example where the margin scheme applies) a net credit will be available to the developer.
- To alleviate cash flow issues caused by this new process, there is a refund mechanism available where developers can apply to the ATO to receive a refund equal to the difference between the amount of GST paid and the amount of GST that should have been payable under the margin scheme.
- Refunds are also available where a purchaser has withheld and paid the GST to the ATO in error.
When the New Regime Takes Effect
If the legislation is passed, these new withholding obligations will likely apply to contracts settling on or after 1 July 2018.
A transitional period is likely to be implemented.
Our firm will continue to keep our clients updated with any further developments.