Although a purchaser will be the responsible party for withholding the GST and making the payment to the ATO, the legislation makes the developer responsible for identifying whether GST is required to be withheld, and if so, how much is to be withheld.
What does the new law apply to:
For properties sold with a contract date after 1 July 2018 (or dated before 1 July 2018, but settling after 1 July 2020), that are “new residential premises” or “potential residential land”, the purchaser will be required to withhold GST, and remit this directly to the ATO.
The amount to be withheld:
If the margin scheme does not apply, the purchaser must withhold 1/11th of the purchase price.
If the margin scheme does apply, the purchaser must withhold 7% of the purchase price. This is regardless of the actual GST liability under the margin scheme calculation. The reconciliation will occur when the vendor lodges the next BAS.
When will this be withheld:
Typically the purchaser’s obligation to withhold & remit payment will arise at settlement, however care needs to be taken when the purchase price is payable via instalments.
Vendor’s notice to purchaser:
A developer will have to identify whether a supply is subject to GST withholding and notify the purchaser in writing. The vendor must provide their name, ABN, amount to be withheld (ie. Margin scheme or no margin scheme), and when the purchaser is required to pay the amount to the ATO.
Of particular caution for developers is that the requirement to give notice applies to all “residential premises”, not just “new residential premises”, so care must be taken in assessing your GST position well before settlement is due.
What needs to be done – commercial & practical considerations:
This onerous requirement on developers raises a number of considerations that must be kept in mind for developers of “new residential property” and “potential residential land”, over and above the taxation consequences.
Matters to consider include:
- Ensuring standard contracts are updated to ensure compliance with this new legislation;
- Ensure appropriate notice is given to the purchaser for each and every contract;
- Ensuring cash flows are managed due to the payment of GST being brought forward from BAS lodgement date to date of settlement (payment of GST potentially up to almost 4 months earlier than under the old system, depending on lodgement cycles);
- Similarly where the mandated 7% withholding rate under a margin scheme sale is greater than actual GST payable on final margin scheme calculation, this “hole” in your cash flow is considered;
- Ensuring funding arrangements consider the impact of the withholding mechanisms;
- Ensuring that the purchaser has correctly withheld AND remitted to the ATO;
- Ensuring the correct reconciliation of credits for purchaser withheld amounts paid to the ATO with subsequent BAS lodgements.
- Development agreements/Joint Venture agreements will need to ensure GST withholding obligations are considered in dealing with distributions of sale proceeds.
Developers can face penalties of up to a maximum of $105,000 for failing to notify a purchaser correctly of their withholding requirements. Purchasers who fail to withhold and pay a required amount to the ATO will face a penalty equal to the amount of GST payable.
There are very limited defences or chances of appeal against these penalties.
Hoffman Kelly are a property development specialist accounting firm offering advisory & taxation services to a wide range of property developers across Australia.
For further information or a detailed discussion of your needs, please do not hesitate to contact one of our property development experts.