New GST withholding provisions (GST withholding rules) coming into effect on 1 July 2018 are directed at “phoenixing” activity by some developer entities. Under the existing tax arrangements, in some instances the developer entity was dissolved at a time between the date of the receipt of the price (GST inclusive) from the purchaser on settlement of a contract, and the due date for payment of the GST to the ATO. This has resulted in a loss of tax revenue to the ATO. The new measures are designed to require that the GST is paid directly by the purchaser to the ATO, thereby addressing the risk that the tax revenue will not be recoverable from the developer entity.
The GST withholding rules apply to purchasers of “new residential premises”, and to purchasers of some new subdivisions of “potential residential land”. The rules require some purchasers to make a payment of part of the purchase price to the ATO, being usually 1/11th of the contract price, or 7% of the contract price if the margin scheme is used to calculate GST.
Purchasers of “potential residential land” who are registered for GST, and are acquiring the land for a creditable purpose, are not affected by the GST withholding rules.
The GST withholding rules will also not apply to a supply of “commercial residential premises” (such as a hotel, hostel, boarding accommodation school or anything similar to those), or to new residential premises that have been created through “substantial renovations” of a building (such as where all or substantially all of a building is removed or replaced, though not necessarily including removal or replacement of foundations, external walls, floors, roofing or staircases).
When do the GST withholding rules kick in?
The GST withholding rules commence for contracts settling from 1 July 2018, although the new provisions will not apply to a contract which is entered into before 1 July 2018 as long as the transaction settles before 1 July 2020.
The mechanics of the GST withholding rules
While it is the purchaser who is required to pay the GST to the ATO, it is the vendor who is required to make a determination of whether the particular land will trigger the GST withholding rules.
Broadly speaking, for contracts concerning land that triggers those rules, before contracts are exchanged the vendor must give the purchaser a written notice stating whether the purchaser will be required to remit the GST to the ATO. That notice must also state certain particulars, including the vendor’s name and ABN, the amount of GST that the purchaser will be required to pay, and when the GST will be payable. Failure to give a notice to the purchaser is an offence.
The purchaser is then required to pay the GST component of the price to the ATO on or before any of the balance of the purchase price (that is, any component of the price other than the deposit) is provided to the vendor.
If you would like to discuss the implications of the new GST withholding rules, for example for off the plan contracts, please contact us. Our email details are provided below.
Andrew Ferguson | Director | af@fergusoncraig.com.au
Peter Gow | Lawyer | pg@fergusoncraig.com.au