The Federal Government has passed legislation that will require purchasers of new residential properties to remit the GST directly to the Australian Taxation Office (ATO) as part of settlement. The measures were first announced in last year’s Federal Budget.
The legislation specifies:
- purchasers of new residential property will be required to withhold 1/11th of the purchase price and pay this to the ATO;
- the developer will receive a credit for this GST through the normal GST business activity statement lodgement;
- a reduced withholding tax rate of seven percent can be used where the margin scheme has been applied;
- developers will now be required to provide purchasers with information that assists them in determining whether the withholding applies; and
- special transitional provisions are included for project delivery agreements.
This change will take effect on 1 July 2018, however, the Government has announced it will introduce a transitional arrangement to this budget measure, which will exclude contracts signed before 1 July 2018, as long as the transaction settles before 1 July 2020.
Consequences for developers and property sellers
The loss of use of the GST funds for a period on the sale of the development 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.
Another result may be that financiers may 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.
Developers will need to factor in the consequences of this new legislation into their projected cash flow analysis for each development. Failure to do so could have significant financial consequences.
Sellers must also be careful in identifying if the property is a taxable sale of “new residential premises” or “potential residential land” (both defined terms), and thus subject to the withholding rules.
Consequences for Buyers
A supplier must provide a notice in writing to the buyer before selling any residential premises or potential residential land stating whether the buyer needs to withhold the GST or not. The supplier's notice may either be in the contract for sale, or in a separate document.
A failure by the supplier to provide the notice doesn't affect the buyer's obligation to withhold an amount if the property is a taxable sale of new residential premises or potential residential land.
Penalties may apply to a supplier for failing to provide the required notification and/or the required details. If the buyer is required to withhold, the supplier must provide:
- their name and ABN
- the amount that must be withheld
- when it is due to be paid to the ATO.
The buyer must make a payment to the ATO on or before the day which settlement occurs.
A buyer (or their conveyancer) needs to lodge Form 1: GST property settlement withholding notification using the details provided by the supplier. This form is lodged online prior to settlement and enables a buyer to obtain a unique payment reference number (PRN) and lodgement reference number (LRN).
The PRN and LRN are required to enable the buyer to complete and lodge Form 2: GST property settlement date confirmation on or before settlement and make the withholding payment to the ATO.
We understand that forms and instructions will be available on the ATO website shortly.
The changes place much responsibility on buyers and their settlement agents.
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 buyers with the comfort that they have no withholding obligation.
Developers will need to make sure their cash flow is revised to take account of potential delays in receiving the GST credit.
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 buyers to address the changes required by the new legislation.
Implications for us all
These changes are a significant change in the way in which the GST operates. They will place burdens on ordinary people not otherwise part of the GST reporting system and levy harsh penalties for non-compliance.
The new legislation increases compliance procedures for settlement agents, who should be passing on their additional costs to the purchaser.
For a more detailed discussion on this matter please contact your local RSM office.