New GST withholding regime for purchasers of new residential premises and new subdivisions of potential residential land

From 1 July 2018 purchasers of new residential premises or of new subdivisions of potential residential land that are taxable supplies will be required to pay 1/11th of the purchase price directly to the Australian Taxation Office (ATO) at settlement, if  the exposure draft legislation released by the Government on 6 November 2017 passes in its current form.  Subject to limited exceptions under proposed transitional rules, the new GST withholding obligation will apply even if a vendor applies the GST margin scheme.

If a purchaser fails to remit the GST amount  to the ATO, the purchaser is liable for a penalty of that amount and the vendor continues to have liability for the GST on the taxable supply. 

Vendors making a taxable supply of residential premises (that is, whether ‘new residential premises’ or otherwise), or a supply of land that may be used for residential purposes (that is, zoned for residential or rural living), are required to provide the purchaser with a GST withholding notice at least 14 days before settlement whether or not the purchaser is required to pay 1/11 of the purchase price to the ATO. The requirements to notify purchasers if there is a requirement to remit the 1/11 is far-reaching encompassing supplies of residential premises or residential land zoned as part of the urban growth zone. Parties to a property transaction will need to act cautiously and may need to seek a private ruling from the ATO to confirm whether supplies of residential premises or residential land are in fact subject to GST.

If the vendor does not notify the purchasers, the vendor is liable for a penalty of $21,000 and the purchaser is liable to pay the amount unless the purchaser “reasonably believes” the premises not to be new residential premises. The purchaser must also notify the ATO 5 days before they intend to make the payment (assuming a payment is required).                             

For vendors that account for GST on a quarterly basis, a new rapid refund scheme will be available when the margin scheme applied to the sale or the payment by the purchaser was made in error. The ATO must refund the amount when it is “fair and reasonable” to do so. The utility of this measure is questionable as most developer vendors account for GST on a monthly basis. This raises the question as to whether after consultation (see below) refunds under the rapid refund system will also be available on a monthly basis.

The proposed legislation contains a sunset clause so that purchasers who enter into contracts for the sale of new residential premises or for subdivisions of potential residential land before 1 July 2018 and provide the first consideration (other than the deposit) before 1 July 2020 will not be required to pay 1/11 of the purchase price to the ATO. The brevity of the sunset clause is unhelpful for vendors who are now entering into contracts which are not expected to settle until after 1 July 2020.

The proposed measure will have significant cash flow implications for developer vendors who currently use the delay between settlement and GST remission at lodgement of business activity statements to offset borrowing or cashflow costs. Where sales are made under the margin scheme, the amount paid to the ATO by the purchaser will exceed the developer’s GST liability which could impact on financing arrangements and banking covenants. In addition, developers will also need to make changes to systems, planning, and processes to comply with the new rules.  Land development agreements will also need to be reviewed. 

For further information, please contact:

Rod Payne
Principal
T: 03 5226 8541
E: rpayne@ha.legal

Dianne Sisak Penjalov
Senior Associate
T: 03 5226 8582
E: diannes@ha.legal