Once the Treasury Laws Amendment (2017 Measures No. 9) Bill 2017 has been enacted, the responsibility for paying GST on certain real estate transactions will shift from developers to purchasers. This shift will require purchasers to withhold that part of the purchase price representing the GST liability of the developer and remit the withheld amount directly to the Australian Tax Office ('ATO').
Currently, the purchase price paid to developers includes an amount on account of GST. Developers are required to pay the GST they collect to the ATO as part of their Business Activity Statement at the end of each of their applicable reporting periods.
These changes, originally proposed in the 2017-2018 Federal Budget, have been introduced to address the growing trend of developers collecting GST as part of the property purchase price, and then taking steps to dissolve the company prior to remitting the GST collected, effectively avoiding paying the GST collected to the ATO.
Real property transactions involving new residential premises and potential residential land will be affected by the new legislation.
Residential premises can be classified as 'new residential premises' where:
- the premises have been significantly renovated;
- the property has not previously been sold as residential premises; or
- a new building has been constructed to replace a demolished building
'Potential residential land' is any land that is permitted to be used for residential purposes, but on which residential premises have not yet been constructed.
Impact of legislation
Under contracts for affected transactions dated on or after 1 July 2018, developers will be required to serve a withholding notice on purchasers at least 14 days before the date the supply is made (generally, this is the contract completion date). Failure to serve such notice is a strict liability offence.
After receiving a withholding notice, purchasers will be required to withhold and remit to the ATO one-eleventh of the purchase price on or before the date consideration for the supply (other than the deposit) is provided. This may be, but is not necessarily (for example, in the case of instalment contracts), the completion date for the contract.
The requirement to provide the withholding notice is linked to the date of supply, while the withholding requirement is linked to the payment by the purchaser. It is not clear from the draft legislation how this disconnect is to be managed, but it is in the interest of the purchaser to ensure that the contract obliges the developer to provide all the necessary details to enable the purchaser to remit the withheld funds to the ATO to avoid committing an offence by non-payment.
Additional consequences for developers
As developers will lose the utility of the GST funds following the changes, financiers are likely to increase pre-sale requirements to make up for the reduced amount being received by the developer at completion that could otherwise be used to repay obligations secured against the development property.
The loss of utility of the GST funds will have implications for the cash flow of developers. For example, if the parties elect to use the margin scheme, the amount required to be paid by the purchaser will be greater than the actual GST liability of the developer, and the developer will be required to wait until the end of the reporting period to receive a refund.
How to prepare for 1 July 2018
In order to prepare for the changes, the service of a withholding notice should be added as a settlement trigger to contracts for the sale of new residential premises and potential residential land.
Special consideration will need to be given to instalment contracts to ensure that both parties can comply with their new obligations, and whether a new seller's warranty should be added to contracts for the sale of real estate other than new residential premises and potential residential land to provide purchasers with the comfort that they have no withholding obligation.
For contracts signed prior to 1 July 2018, the new withholding requirements will not apply if the contract settles prior to 1 July 2020. This transitional period will allow developers and purchasers to address the changes required by the proposed new legislation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.