Property and the New GST Withholding Regime

Ordinarily, vendors (sellers) pay GST on the value of the taxable supplies that they make. Vendors will sell goods or services for a price that includes a GST component. When it comes time to lodge their BAS, the vendor will then pay that GST component to the ATO. There may be a three or four months delay between a vendor receiving a purchase price (including the GST component), and having to pay the GST to the ATO.

In recent times, the ATO and the government have become increasingly concerned that some property developers collect the GST on a sale, but ultimately do not pay GST. The ATO have also publicly acknowledged that their enforcement and detection methods are not effective.

New GST Withholding Regime 

In the 2017/18 Budget, the government announced that it would introduce a GST withholding regime for the residential property industry, effective 1 July 2018 (the GST withholding regime). Assuming the legislation is passed as is, here are the key takeaways that people involved in the sale or purchase of property need to be aware of.

GST withholding — When does it apply?

From 1 July 2018, all purchasers of new residential premises or new residential subdivisions (where the vendor is registered for GST) will be required to pay the GST component of the purchase price directly to the ATO (and not to the vendor).

How much GST to withhold?

The purchaser must withhold 1/11th of the (GST-inclusive) price payable under the sale contract. However, the margin scheme will often apply to the sale of new residential premises. This will usually mean that the ultimate GST payable by the vendor is less than 1/11th of the price, sometimes far less. Margin scheme calculations can be complex and are often not well-understood. Forcing a vendor to disclose their margin (which is something they will probably not want the purchaser to know) and requiring the parties to agree on the precise application of the margin scheme would be unworkable. Unfortunately, it means that any vendor using the margin scheme will need to seek a refund of the overpaid GST from the ATO

Penalties — vendor

If a vendor fails to provide a GST withholding notice serious penalties apply, with 100 penalty units payable for breach of the strict liability offence (i.e. $21,000). The penalties can apply to the supply of any residential premises or any potential residential land, regardless of whether the premises are new residential premises or certain potential residential land. That is, the failure to provide a GST withholding notice, even one which states that no amount of GST needs to be withheld by the purchaser, can still attract serious penalties.

Penalties — purchaser

On the purchaser’s side, the failure to withhold is a strict liability offence which attracts penalties of 10 penalty units (i.e. $2,100).. For that reason, property owners and developers should ensure they are across the new rules. If there is any doubt about the characterisation of a transaction, advice should be sought as early as possible. Special issues arise for long-term contracts and land development agreements under the withholding regime. Going forward, land development agreements will need to be tailored to address the new rules.

So we will watch this space and follow how the legislation passes through parliament and any changes that may come from that process. In the meantime all builders, developers as well as new home and land buyers need to be aware of these pending issues commencing in July 2018.