Purchasers of 'new residential premises' or 'new residential subdivisions' will be required to remit the GST component of the purchase price directly to the Australian Taxation Office (ATO) in respect to all contracts exchanged from 1 July 2018.
The changes were announced by the Federal Government in the 2017/2018 budget and were in an effort to combat a perceived non-compliance with GST law from the property development industry. According to the Government, 355 individuals controlling over 13,000 entities in 2015/2016 engaged in a practice known as 'phoenixing'. 'Phoenixing' is where a developer collects GST on the purchase price of a property (a taxable supply) but dissolves the collecting entity before their next Business Activity Statement (BAS) is lodged to avoid remitting the GST. The ATO has estimated that the practice of 'phoenixing' has resulting in the loss of $2 billion in taxation revenue for the 2015/2016 tax year.
Purchasers now liable to remit GST
The recent amendments to the Tax Administration Act 1953 (Cth) will apply to all contracts for sale:
- that are exchanged after 1 July 2018
- which were exchanged prior to 1 July 2018 but where the consideration payable under the contract is paid after 1 July 2020, (Affected Contracts).
Purchasers under Affected Contracts will be liable to pay an amount of GST to the Commissioner if they are the recipient of a taxable supply that is, or includes, a supply of a 'new residential premises' or a 'new residential subdivision'.
Specific exclusions apply where the supply is for:
- new residential premises created through 'substantial renovations of a building'
- commercial residential premises
- potential residential land
- included in a property subdivision plan and containing a building in use for commercial purposes
- where the purchaser is registered for GST and acquires the property for a creditable purpose.
If the purchaser is liable to pay an amount of GST, then that payment must be made on or before the date that any consideration for the property is paid (other than consideration paid by way of a deposit). In most instances this will be completion of the property;
The amount paid by the purchaser must be 1/11th of the consideration for the property. However, where the margin scheme applies, the Minister may determine that an amount between seven per cent and nine per cent of the consideration to be paid applies. Currently the rate is seven per cent, although this rate can be amended by the Minister at a later date.
The ATO has implemented a new set of forms for purchasers to use when notifying the ATO of their remittance obligations. These new forms and procedures are set out in detail on the ATO's website.
What is 'new residential premises'?
The term 'new residential premises' is defined in section 40-75 of the Goods and Services Tax (GST) Act 1999(Cth) (GST Act). A premises is considered to be 'new residential premises' if the premises has:
- not previously been sold as residential premises
- been created through substantial renovations of a building
- been built to replace a demolished premises on the same land.
What is 'new residential subdivisions'?
The definition of 'new residential subdivisions' in the Exposure Draft is broad. It includes any 'potential residential land' contained in a subdivision plan which has not previously been sold.
'Potential residential land' is defined in section 195-1 of the GST Act, and means land that is permissible to use for residential purposes, that does not contain any buildings that are used for residential premises. This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not contain any residential premises.
What is 'commercial residential premises'?
'Commercial residential premises' is defined in section 195-1 of the GST Act and includes but is not limited to:
- a hotel, motel, inn, hostel or boarding house
- premises used to provide accommodation in connection with a school
- a caravan park or a camping ground.
In addition to the changes set out above, a vendor under Affected Contracts will also be prohibited from making a supply of 'residential premises' or 'potential residential land' unless, before completion, it has provided the purchaser with a written notice specifying:
- the vendor's name and ABN
- the amount that the purchaser is required to withhold
- the date on which the purchaser is required to make the payment
- any other matters specified in the applicable regulations.
A vendor will face a fine of up to 100 penalty units (approx. $21,000) if it fails to provide a purchaser with the written notice referred to above.
A vendor does not have to provide the written notice referred to above if the supply is of commercial residential premises, or potential residential land where the purchaser is registered for GST and acquires the potential residential land for a creditable purpose.
Importantly, this change will affect all residential sales, not just the sale of newly constructed dwellings or newly subdivided lots (being the original intention of the legislation).
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.