The Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 was introduced on 7 February 2018, proposing to introduce a new GST withholding scheme on supply of residential property by amending the Taxation Administration Act 1953 (Cth).
The purpose of the amendments are to tackle the non-compliance of GST law in the property development industry.
The Bill, once passed, will apply to transactions where any of the consideration (other than the deposit) is first provided on or after 1 July 2018.
The amendments will not affect transactions which the contract is entered into before 1 July 2018 and any of consideration (other than deposit) is first provided before 1 July 2020.
Current law
Currently, if an entity makes a taxable supply of new residential premises (i.e. the developer selling new residential property), the purchaser will pay the GST amount (usually 10% of the purchase price) to the vendor as part of the consideration of the purchase. The vendor will then remit this GST amount to ATO at the time of lodging its next BAS.
The government is concerned about the increasing number of developers avoiding their GST liabilities by dissolving their business after the sale of property and before their next BAS lodgement.
New law
Under the new law, the responsibility to remit GST to ATO is shifted to the recipient of a taxable supply.
Instead of paying the GST amount to the vendor, the purchaser now must withhold and pay to ATO the GST amount on or before the day when a consideration (other than the deposit) is first provided for the transaction. If there is no consideration and the transaction is between associates, the GST must be paid to ATO on or before the day when the supply is made.
The GST withholding amount will be 1/11 (or between 7%-9% if the GST Margin Scheme applies) of the contract price (or the market value if the transaction is without consideration).
The vendor will then be entitled to a GST credit for the amount of GST paid by the purchaser.
The new scheme obviously has a cash flow disadvantage on the vendors, who will now only receive the GST exclusive purchase price at settlement.
The supplier's obligation to provide notice
The new law applies to the taxable supply (by way of sale or the provision of a long term lease – lease term of more than 50 years) of:
- new residential premises that are not:
- created through a substantial renovation; or
- commercial residential premises (i.e. hotels, service apartments); and
- potential residential land that is included in a subdivision plan. A potential residential land is a vacant land that is permissible to use for residential purposes (i.e. zoned residential).
The supplier's obligation to provide notice
Under the new law, when there is a supply (by way of a sale or a long term lease) of residential premises (unless it is commercial residential premises) or potential residential land (unless the recipient is registered for GST acquires the land for a creditable purpose), the supplier (i.e. vendor) must, before making the supply, give the recipient (i.e. purchaser) a written notice stating whether the recipient needs to withhold GST and provide the necessary details.
If the supplier fails to provide the notice or makes an incorrect representation in the notice:
- it does not release the recipient from the withholding obligation; and
- the vendor will be committing an offence and will be subject to a heavy fine.
The purchaser is personally liable to pay the GST amount to ATO if it fails to withhold the GST without the appropriate notification.
Accordingly, unless the recipient receives a notification stating that it is not required to withhold GST, the recipient should always pay the GST amount to ATO to avoid liabilities. It is then up to the vendor to apply for a refund if it is withheld in error.
These are obviously added risks to both parties of the transaction if there is a non-compliance of the process. It is therefore important that the parties have lawyers to assist them with the compliance in GST related transactions.
How can I learn more?
David Wang.
Special Counsel.
David specialises in commercial and property law. He has extensive experience assisting clients with commercial transactions and negotiations, property acquisition & development, retail & commercial leasing, structuring investments & conducting legal due diligence, foreign investment related issues and trade marks.
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