Legislation has now been passed that will introduce a GST withholding tax (GSTWT) on sales of new residential premises or new residential subdivisions from 1 July 2018. The GSTWT was originally announced in the 2017 budget and released in exposure draft late last year (see our earlier bulletin). Important changes to the exposure draft legislation are noted further below. The new measure targets developers claiming GST credits throughout the construction phase and then failing to remit GST when the new premises and lots in residential subdivisions have been sold and settled.
The amount that must be withheld is 1/11th of the contract price. However, if the margin scheme applies, the recipient must withhold and remit 7% of the contract price. Generally, the amount must be paid to the ATO on or before the day on which any of the consideration for the supply (other than a deposit) is first provided.
Importantly, GSTWT does not apply if the recipient of the taxable supply is registered for GST, and acquires ‘potential residential land’ (ie land that is permissible to use for residential purposes but that does not contain any buildings that are residential premises) for a creditable purpose. This ensures that the obligation does not apply to certain business-to-business transactions.
Developers will be entitled to a credit for the amount paid to the ATO (meaning that it must actually be paid to the ATO, not just withheld by the purchaser).
The GSTWT also requires suppliers of residential land or ‘potential residential land’ (subject to limited exclusions) to notify the purchaser whether they are required to remit an amount to the ATO (among other things). While the notification must be made before settlement, the contract for sale should include notice of the application of the GST withholding regime to provide certainty to the parties at the time of execution. Penalties apply where the notification requirements are not satisfied.
The new withholding regime will apply to all contracts entered into from 1 July 2018, which is quickly approaching. The relevant timing for the application of the transitional rules is as follows:
Changes to the exposure draft legislation
Our earlier bulletin summarised the key technical aspects of the GSTWT. However, the new legislation as passed contains a number of changes, which in addition to the new 7% margin scheme rate noted above, include:
- Bank cheque as withholding – the purchaser can satisfy their withholding obligations by providing the seller with a bank cheque made out to the ATO for the GST withholding amount. This change addresses the risk that purchasers may withhold from the purchase price but not actually pay such amounts to the Commissioner, which would mean the vendor would not be eligible for a credit for the withheld amount.
- The rapid refund mechanism – where the margin scheme applies, quarterly BAS taxpayer vendors will not be able to apply for a rapid refund. This means that such taxpayers will be without the benefit of the difference between the 7% margin scheme rate and the actual GST on the margin if the margin scheme applies until their BAS is lodged and excess credits are refunded. The rapid refund mechanism is now limited only to circumstances involving errors.
- Property development agreements – for agreements entered into before 1 July 2018 there may be an agreed distribution or ‘waterfall’ payment arrangement, which provides for how the consideration for the supply of the property is to be distributed amongst the parties to the arrangement. To avoid parties to an arrangement being advantaged or disadvantaged as a result of the withholding obligation, transitional relief will apply if four application conditions are met.
- New exceptions – the new legislation now expressly excludes from the GST withholding measure, sales of:
- Commercial residential premises. Commercial residential premises are excluded to make it clear that a withholding obligation does not apply in relation to residential premises that are both ‘new residential premises’ and ‘commercial residential premises’.
- Residential premises created through ‘substantial renovation’ (as defined in the GST Act). This exclusion ensures that a purchaser does not have to determine whether renovations are ‘substantial renovations’ of the property, which may be difficult to assess at the time of purchase.
- GST Groups – When the legislation was first introduced in draft, there was an express exclusion for transfers between members of the same GST group. That exclusion has been removed on the basis that such transfers will be excluded from the withholding regime because they do not involve ‘taxable supplies’.