The Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth) (Act) has introduced a new GST withholding regime (Regime) which applies to certain residential real property transactions.
The Regime imposes GST withholding obligations on purchasers of certain residential real property and requires them to withhold and remit GST directly to the Commissioner of Taxation. The Regime can also apply to certain long term leases.
In addition the Regime imposes obligations on vendors to provide written notice to purchasers.
Why impose a GST obligation on purchasers?
The Regime is an integrity measure designed to prevent some property developers from intentionally avoiding their GST obligations. Non-complying property developers have been known to claim input tax credits on inputs used in the construction process and then fail to remit GST to the Commissioner after making taxable supplies of new residential premises.
When do the GST withholding and notice obligations apply?
The GST withholding obligations apply in relation to taxable supplies of the following:
- new residential premises (other than those created through substantial renovation and other than commercial residential premises); and
- subdivisions of potential residential land (where the subdivision does not contain any buildings used for a commercial purpose). A withholding obligation only arises in relation to the supply of potential residential land if the recipient (e.g. the purchaser) is not registered for GST, or if the land is not acquired for a creditable purpose.
The measures apply where the contract is entered into:
- on or after 1 July 2018; or
- before 1 July 2018, but only if consideration (other than the deposit) is first provided after 1 July 2020.
Some common transactions where the GST withholding obligations will apply include off-the-plan residential sale contracts and contracts for the sale of vacant residential land.
The obligation to withhold is imposed on the recipient of the supply (i.e. the purchaser/lessee).
The notice obligations in the Regime operate more broadly than the withholding obligations and are in relation to supplies of 'residential premises' (not just new residential premises) and 'potential residential land'. These obligations are imposed on suppliers (i.e. vendors/lessors). They do not apply to a supply of 'commercial residential premises' or to a supply of 'potential residential land' to an entity which is registered for GST and which acquires the land for a creditable purpose.
Purchaser's liability – the GST withholding obligation
Broadly, purchasers are now required to pay one eleventh of the contract price to the Commissioner on or before settlement. If the margin scheme applies generally 7% of the contract price must be paid by the purchaser to the Commissioner.
Previously, it was the vendor's sole responsibility to remit the GST in respect of a taxable supply to the Commissioner. The GST withholding obligations in the Regime mean that the purchaser must remit the GST to the Commissioner.
A failure to comply with the Act can have serious financial consequences for a purchaser. Broadly, a purchaser who fails to pay the relevant amount to the Commissioner will be liable for an administrative penalty equal to that amount, unless:
- they relied on a notice from the vendor indicating that the property was not new residential premises or that they were not required to pay an amount to the Commissioner and there was nothing in the contract or in the circumstances that made it unreasonable for them to rely on the notice; or
- they are able to show that they provided the vendor with a bank cheque payable to the Commissioner for relevant amount on or before the date of settlement.
Vendor receives credit for withheld amount
Where a purchaser has remitted the amount to the Commissioner under the Regime, the vendor is entitled to a credit for that amount on their business activity statement.
Vendor's obligation to notify
Vendors will be required to provide purchasers of residential premises or potential residential land with a written notice prior to settlement of the contract.
The written notice needs to state whether the purchaser will be required to make a payment to the Commissioner and if the purchaser is required to make a payment the notice must also state the vendor's name and ABN, the amount the purchaser is required to pay the Commissioner and the date the purchaser will be required to pay.
The failure by a vendor to give the required notice is a strict liability offence. The maximum fine that can be imposed by a Court is 100 penalty units (currently, $21,000) for individuals or 500 penalty units (currently, $105,000) for corporations. Alternatively, the Commissioner may impose an administrative penalty of 100 penalty units ($21,000).
Want some help?
Although justified by the Government as an integrity measure to protect the GST tax base, the Regime brings with it compliance burden and risks for vendors and purchasers.
It will complicate the conveyancing process and comes on top of the recently introduced CGT withholding obligations.
Whether you are a residential property developer or a purchaser in the market for a new residential property and require advice regarding the new law, Bartier Perry can assist you to simplify and minimise its impact.
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.