From 1 July 2018, purchasers of new residential premises and new residential subdivisions must withhold the goods and services tax (GST) amount on the contract price at settlement and pay it directly to the Australian Tax Office (ATO).
Why were the GST laws amended?
It has been discovered that some developers were selling properties for a contract price that reflected their GST obligations but dissolved the entity before their next BAS lodgement to avoid remitting the GST to the ATO. Typically, a developer will obtain a cash flow benefit in holding the settlement proceeds for up to three months before their BAS and GST payment is due.
Phoenixing to avoid paying GST has grown significantly over the last decade. As of November 2017, the ATO has identified 3,731 individuals that have actively engaged in this activity over the last 5 years. These individuals controlled over 12,000 insolvent entities responsible for $1.8bn in debt that has been written off. The insolvent entities also claimed $1.2bn in input tax credits between 2013 and 2017.
It is important to note however that the ATO’s definition of phoenixing overlooks whether particular instances of phoenixing are legal or illegal. The legality of phoenixing depends upon the motivations and methods of phoenixing, as well as their interaction with the non-payment of tax liabilities.
What are the new requirements?
The amended GST laws requires purchasers of:
- new residential premises; and/or
- new residential subdivisions,
to withhold GST and pay it directly to the ATO on or before settlement. This will mean the purchaser must withhold and pay to the ATO:
(a) generally, 1/11th of the contract price;
(b) if the margin scheme applies, 7% of the contract price; or
(c) some other amount if directed by the ATO.
Under the new requirements, Developers are required to provide notice to purchasers of their obligations to withhold and pay GST to the ATO. However, if a Developer breaches this obligation, the purchaser’s withholding and payment requirements are not affected. As a purchaser of new residential property and subdivisions, it pays to understand your withholding obligations.
The GST laws now require developers to:
1. issue a written notice to the purchasers to withhold the GST amount of the contract price and pay that to the ATO.
The notice must be sent to the purchasers prior to settlement, and must include the developer’s name, ABN, the GST amount and the settlement date (i.e. date the balance contract price is payable). Failing to provide sufficient notice to the purchaser constitutes a strict liability offence but does not affect the purchaser’s obligation to pay the GST to the ATO.
2. report the GST amount in their Business Activity Statement (BAS)
Developers are entitled to a credit for the amount paid by the purchaser at settlement, or a refund, if the amount paid exceeds the actual GST liability.
The new GST laws apply to contracts that have been:
- entered into from 1 July 2018; and
- entered into before 1 July 2018 but the balance contract price is payable after 1 July 2020.
The amended GST laws however provide a transitional arrangement whereby parties who have entered into contracts before 1 July 2018 will be excluded from fulfilling the new GST withholding requirements, provided that the property transaction settles before 1 July 2020.
How much GST to withhold and paid to the ATO?
The amount of the payment required to be made to the ATO will be equal to:
- if the margin scheme is applicable – 7% of the contract price (unless otherwise directed by the ATO, but will not exceed 9%); and
- in all other cases – 1/11th of the contract price.
What about related party transfers of new residential property?
There is no love for developers looking to sidestep their GST obligations by transferring new residential properties to related entities, family members or staff for no consideration.
The amount payable for a supply between the developer and its associates (which is defined in the Income Tax Assessment Act 1936 to include any entities related to the developer) for no consideration or less than the GST-inclusive market value is taken to be 10% of the GST exclusive market value of the property.
“Associate” transferees still have the reporting and remission obligation as any purchaser does.
What should you do?
Developers and sellers of residential property generally need to be mindful of their legal obligations regarding notification to purchasers and reporting to the ATO.