Home » Buying or selling – does the new GST withholding regime affect you?
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Argent Law

2 Stawell Street, Melbourne (Richmond) VIC 3121 (03) 9571 7444

From 1 July 2018, a new regime has been introduced for the sale of new residential property or new residential land where purchasers will have to pay the GST portion of the sale price directly to the Australian Taxation Office (ATO) as part of the settlement process.

 

So why is GST applicable to new residential land? Why is the purchaser collecting tax on behalf of the ATO?

Previously, some property developers were making taxable sales of new residential properties but were then failing to remit the GST collected from the sale to the ATO. They achieved this through schemes such as dissolving or ‘phoenixing’ their business before their next BAS lodgement, therefore not paying the tax forward to the ATO.  This new regime is directed at such business owners who were avoiding payment.

 

What do you need to know?

The new regime applies to any sale of new residential property or new residential land only.

Firstly, in order for property or land to be defined as residential, it must be developed for the purpose of being lived in and must not be used for retail or commercial purposes.

Residential premises cease to be new residential premises if it has been used for a period of at least five years since it was constructed solely for the purpose of being a rental property.

 

What is the new residential property?

New residential property includes a newly built house, apartment or townhouse that has not been lived in previously.

 

What is the new residential land?

New residential land means land that’s sole primary use is to be built on and developed for residential use.

The withholding obligation will continue to apply each time vacant residential land is sold if the land is yet to be built on. Therefore if the land is sold twice, the withholding obligation applies, each time the land is sold.

 

How do I know how much to withhold?

The amount of GST to be withheld may vary as follows:

  • If the property is sold ‘plus GST’ then an amount of 1/11th of the contract price must be remitted to the ATO; and
  • If the property is sold applying ‘margin scheme’ then the amount of 7% of the contract price must be remitted to the ATO.

This means that at settlement, a cheque for the GST tax component must be rendered by the purchaser.

An exception to the withholding tax is if the purchaser is registered for GST. If the Purchaser is registered for GST no amount is to be withheld.

 

How to know if this regime applies to you?

Any contract of sale entered into from 1 July 2018 onwards for the sale of new residential premises or new residential land is required to follow the new regime. Taking into consideration the contracts previously entered into, a transition period for the following situations has been made:

  • If the contract of sale was entered into before 1 July 2018 and payment of the consideration (settlement) takes place before 1 July 2020, this regime does not apply;

However,

  • If the contract of sale was entered into before 1 July 2018 and payment of the consideration (settlement) takes place after 1 July 2020, this regime does apply.

 

What do you need to do as a Vendor?

If you are a vendor and have entered into a contract of sale for new residential property or land, you must provide notice to the purchaser prior to settlement whether this regime applies to the sale or not.

The notice provided must outline details of the individual or entity the payment will be made on behalf of and how much is to be paid to the ATO.

Should you discover the regime is not applicable and a payment is made to the ATO on your behalf at settlement, you must advise your accountant who will apply for a GST credit on your behalf.

 

What do you need to do as a Purchaser?

If the new GST regime is applicable to your purchase, you must make payment to the ATO on behalf of the vendor either prior to or at the time of settlement.

If the vendor fails to provide adequate notice to you prior to a settlement regarding payment and you make payment to the ATO, you cannot be penalised for making this payment.

If settlement takes place electronically, your lawyer may make payment electronically to the ATO. If bank cheques are exchanged, the bank cheque may be handed over to the vendor or at settlement or sent directly to the ATO post-settlement.

Purchasers are not to register for GST just because they have a withholding requirement

If you believe your property sale or purchase may be affected by the new GST withholding regime or would like further information, contact the team at Argent Law to discuss.

 

 

mel
Mel McMillan
mel@argentlaw.com.au