Residential developers of all sizes from large scale to ‘Mum & Dad’ Developers
New GST legislation effective 1 July 2018 requires purchasers of new residential premises and potential residential land to remit the GST payable on the supply directly to the ATO.
Whilst the legislation has effect from 1 July 2018 it also applies to existing contracts and contracts entered into before 1 July 2018, where settlement occurs after 30 June 2020.
The current practice is that the purchaser pays the GST amount to the vendor and the vendor remits the GST to the ATO as part of their normal compliance.
Although it appears theoretically straightforward there are a number of practical problems:
In situations where the buyer incorrectly withholds GST on a non-taxable supply, the legislation is unclear as to whether the vendor can subsequently recoup this amount from the ATO. This may depend whether the contract is ‘plus GST’ or ‘GST inclusive’.
Where the vendor is not registered for GST, but GST is nevertheless withheld, there is no mechanism for the vendor to recover this GST from the ATO.
The law is clear in that there is no requirement to withhold where the purchaser is registered for GST and acquires potential residential land for a creditable purpose. It is, however, unclear as to how this applies where the purchaser acquires from a partly creditable purpose (i.e. to build, rent out and then sell residential accommodation).
The application of the law to tenants in common is clear, yet joint tenants and partitions remain unclear.
Contracts should be reviewed to identify those contracts that fall within or outside of the transition period.
Contracts will need to be updated to cater for the new withholding rules and to protect suppliers and purchasers.
Property development structures involving separate land owning and developer entities will need to consider the impact of the changes.
Settlement statements and the settlement process need to evolve to cater for the new rules.
Cashflow and bank finance arrangements should be considered.
To ensure any potential adverse consequences are mitigated and managed, please contact Andrew Nutman or Daren McDonald to discuss.
Associate Director, Tax
T 03 8635 1981
Partner, Business and Private Client Advisory
T 03 8635 1979