The Federal Government announced, as part of the 2017/2018 Budget their desire to strengthen compliance of the GST Act on property transactions due to the view that some developers are failing to remit GST to the ATO. The changes would apply to purchasers of new residential premises and land in new subdivisions, whereby the purchaser will be required to remit the GST on the sale directly to the ATO as part of the property settlement.
What are the current rules and why the change?
Under the current law, the seller of new residential premises or subdivided land is required to collect GST from the purchaser as part of the sale price and remit this to the ATO through their Business Activity Statement.
The government has identified some developers are failing to remit the GST to the ATO, despite having claimed GST credits on the construction and development costs of the property.
The ATO have identified circumstances where developers are collecting GST from their customers on a property sale, then dissolving their company to avoid paying it to the ATO (known as ‘phoenixing’)- a clear situation of tax evasion in their view. In many cases the ATO have little hope of recovery as they will be listed as an unsecured creditor.
When will the changes apply?
The changes will come into effect 1 July 2018 on all new residential property or new subdivision of potential residential land transactions.
How will it work?
The purchaser will be required to make a payment of 1/11th of the consideration to the ATO directly, prior to or at settlement, effectively withholding a portion of the sale price from the seller.
Pre-existing contracts entered into prior to 1 July 2018 will fall under the transitional rules and not be subject to the new changes, provided consideration is paid before 1 July 2020.
For properties eligible for the margin scheme, GST on sale will be less than 1/11th of the purchase price. The purchaser however will still be required in this case to remit 1/11th regardless. The seller is then required to apply to the ATO for a refund of the excess GST withheld. We can see a significant disadvantage to property developers as a result of these new rules to cash flow and increased compliance.
An example (Exposure Draft – Explanatory material)
On 3 December 2018, Rick enters into a contract for the purchase of a new apartment with MortimerHomeCo for $700,000.
Settlement occurs on 6 June 2019. Rick’s conveyancer advises Rick that he will be required to make a payment to the ATO on or before 6 June 2019. Rick’s conveyancer makes a payment as his agent to the ATO at settlement of $63,636 (being the GST component of the purchase).
Because Rick has paid $63,636 to the ATO, he does not have to provide this amount to MortimerHomeCo, even though the contract price states that the consideration includes the $63,636.
MortimerHomeCo receives a credit for this amount in their June BAS, and does not then have to make a payment of the amount when paying their net amount for the period.
What does this mean for you?
Purchasers may become liable for GST that is not withheld and paid to the ATO correctly. It will become even more important to ensure you are seeking expert advice from your accountant and conveyancing solicitor to ensure you are complying with all of your obligations under the new rules when purchasing property or land.
Property developers will need to consider cash flow issues as they will no longer have the timing benefit of receiving the GST component on sale for the period of time between settlement and when the BAS is lodged and due.
If you have any questions on how these changes will impact you, please contact one of our experts at Hoffman Kelly.