ALERT: Property Changes from 1 July 2018

The Treasury Laws Amendment (2018 Measures No 1) Bill 2018 received Royal Assent on 29 March 2018. The changes come into effect from 1 July 2018. The new rules require purchasers of new residential premises and potential residential land to remit the GST payable on the supply directly to the ATO.

2018-04-16

Property Changes from 1 July 2018

The Treasury Laws Amendment (2018 Measures No 1) Bill 2018 received Royal Assent on 29 March 2018. The changes come into effect from 1 July 2018. The new rules require purchasers of new residential premises and potential residential land to remit the GST payable on the supply directly to the ATO.

Application

The new rules apply to supplies by way of sale or long-term lease of new residential premises.

They also apply to supplies of potential residential land that is included in a property subdivision plan and that does not contain any residential buildings or buildings being used for commercial purposes such as a vacant block of land sold as part of a house and land package where the purchaser acquires the land prior to the commencement of construction.

New residential premises created as a result of substantial renovations are not subject to the withholding requirement.

In practice

Where a supplier makes a taxable supply of new residential premises or potential residential land the purchaser is required to withhold 1/11th of the price and pay this to the ATO on or before the day on which any part of the consideration for the supply (other than a deposit) is first provided. This will usually be at settlement.  However, for a contract under which the price is payable in instalments the GST amount will be due on or before the date for payment of the first instalment (not being a deposit).

Where the purchaser pays the withheld amount to the ATO the supplier will be entitled to a credit in its BAS equal to the amount paid by the purchaser.  This credit will then be offset against the GST liability on the sale of the property which the supplier is still required to report in its BAS

The purchaser must either pay the withheld amount directly to the ATO or provide the supplier with a bank cheque made out to the ATO.   Provided the purchaser retains a record of the bank cheque payment no penalties will apply to the purchaser for any delay in the ATO receiving the payment from the supplier. 

The amount to be withheld will be calculated based on the contract price for the sale of the property.  This therefore excludes settlement adjustments unless they are contractual adjustments which modify the price.

GST margin scheme

Where the sale is made under the GST margin scheme the purchaser is required to withhold 7% of the price. 

Where the actual GST applicable to a development sold under the margin scheme is less than 7%, the developer needs to seek a refund of the difference through the BAS lodgement process. 

Supplier notification obligations

The supplier is required to provide the purchaser with a written notice before the date of supply stating:

  • Whether the purchaser is required to withhold and make a payment to the ATO; and

  • If so, the supplier's legal name and ABN, the amount required to be paid and when the amount is required to be paid.

The notification must be provided in respect of all sales and long-term leases of residential premises not only taxable supplies of new residential premises.

Failure to provide the notice gives rise to a strict liability offence with a maximum liability of 100 penalty units, (currently equal to $21,000 per infringement). As a strict liability offence where a company is prosecuted under the criminal code the company will be liable for a penalty which is 5 times that amount.

Penalties for failure to withhold

If the purchaser fails to withhold and pay the required amount to the ATO, the purchaser will be liable to a penalty equal to the amount of the withholding obligation.

However, no penalty applies if the purchaser relied on a notice provided by the supplier which indicates that the purchaser is not required to withhold and there is nothing in the contract or other information known to the purchaser which makes it unreasonable for the purchaser to believe that the supplier's statement is correct.

Credits and refunds

If an amount is withheld in error the supplier can apply to the ATO for a refund outside of the BAS lodgement process.  The supplier must apply to the ATO at least 14 days before GST is payable on the supply.

In all other cases the credit and any available refund must be sought as part of the BAS lodgement process.

B2B transactions

The withholding obligation in respect of potential residential land is not intended to apply to B2B transactions. Therefore, where a recipient is registered for GST purposes, there is no withholding obligation. The only exception is where a GST registered purchaser does not acquire the land for a creditable purpose, such as when they acquire the land to build residential accommodation which they intend to rent out or purchase a block of land on which to build their personal residence.  In those circumstances, a withholding obligation will still apply.

Transitional rules

The new rules apply to all contracts of sale entered into on or after 1 July 2018.

Contracts signed before 1 July 2018 are not subject to the withholding requirement unless the consideration for the supply (other than a deposit) is to be provided on or after 1 July 2020. As such the new rules will apply to existing contracts and contracts entered into before 1 July 2018 where the consideration for the supply (other than a deposit) is not required to be provided until after 1 July 2020.

There are specific provisions that apply to existing development agreements with distribution clauses that are impacted by the withholding requirement.  These effectively deem the supplier to have received the GST amount for the purposes of the agreement between the parties so as not to disturb the existing arrangement.

To consider now

  • 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 feasibilities and cashflow projects should be reviewed and updated to factor in the change in timing of GST payments.

  • Settlement statements and the settlement process will of course need to evolve to cater for the new rules. Ensure that your conveyancing practitioners have implemented appropriate procedures for contracts affected.

  • Property development structures involving separate land owning and developer entities will need to consider the impact of the changes.

If you require a consultation on the likely impact this change will bring, please contact Andrew Nutman and Daren McDonald.

 

Andrew Nutman
Associate Director, Tax
ShineWing Australia
T +61 3 8635 1981
E [email protected]

Daren McDonald
Partner, Business and Private Client Advisory
ShineWing Australia
T +61 3 8635 1979
E [email protected]