GST Withholding obligations for certain residential property transactions

With the arrival of the 2017/2018 Federal Budget, the Australian Government announced a new GST withholding regime that is aimed at ensuring the correct GST is remitted to the Australian Taxation Office (“ATO”) in certain residential conveyancing transactions.

The Treasury Laws Amendment (2018 Measures No.1) Bill 2018 was introduced into Parliament on 7 February 2018 and as of 28 March 2018, is in the second reading debate before the Senate. It will not become operative until 1 July 2018 at the earliest, however lobbying has occurred for a delayed commencement date.

The need for reform

Currently, supplies of new residential premises are generally subject to GST and the supplier remits the GST to the ATO in their next Business Activity Statement (“BAS”), which can be up to three (3) months following settlement. Reform was proposed to combat the increasing number of unscrupulous property developers who sell new residential premises or new lots in a subdivision (which is a taxable supply), collect GST from the Buyer on settlement and liquidate the development company, rather than remitting the GST to the ATO through their BAS, despite having claimed credits for GST on the development costs.

The ATO becomes an unsecured creditor for the outstanding GST liability which is usually extinguished in the liquidation (unless a dividend is paid, which is rare), with the developer only having to set up a brand new entity with a clean slate to carry on its enterprise. This is commonly referred to as “phoenixing activity”, which has seen over $1.8 billion dollars in lost GST revenue in the last five (5) years.

Explanation of the regime

1. The new regime is due to commence from 1 July 2018. It requires a seller to provide a “GST Withholding Notice” (“Withholding Notice”) to the Buyer at least 14 days from settlement which sets out:-

• How GST is to be treated, the amount to be withheld and when same must be remitted to the ATO;
• The Seller’s name and ABN;
• If the consideration includes something other than money, the GST inclusive market value of same.

2. Where an entity (Seller) makes a taxable supply of new residential premises or a subdivision of potential residential land through a sale or a long term lease (ie a lease exceeding 50 years), the recipient (Buyer) must remit the GST component of the transaction to the ATO when the consideration (ie purchase price) is first provided for the supply.
3. The term “new residential premises” is defined in section 40-75 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“GST Act”) to include new residential premises that have not previously been sold as residential premises or have been built to replace demolished premises on the same land.
4. The term “potential residential land” is vacant residential land included in property subdivision plans by way of a sale or long term lease that is permissible to use (ie zoned) for residential purposes, where the subdivision does not contain any buildings that are used for a commercial purpose. It is intended to cover house and land packages where construction takes place after settlement of the land.
5. The amount to be withheld by the Buyer is 1/11^th of the higher of the GST inclusive contract price or market value or 7.00% if the margin scheme is to apply.
6. The Seller must give a Withholding Notice in all transactions concerning residential property, however the obligation to withhold GST only applies where a taxable supply is made, as opposed to a GST free or input taxed transaction, such as one involving an existing residence.
7. The Seller’s failure to provide the Withholding Notice is a strict liability offence, attracting a penalty of up to 100 penalty units or a maximum of $21,000.00 for an individual and up to $105,000.00 for a corporation. A penalty can still be imposed for failure to give Notice even if ultimately, there is no GST on the transaction.
8. The Buyer is liable to remit the GST to the ATO. Where there is more than one Buyer purchasing as tenants in common, each Buyer is treated as receiving a separate supply in proportion to their interest to be acquired. Where the Buyers purchase as joint tenants, they are treated as having received a single supply and each has an obligation to make the payment. Failure to do so may result in a penalty of up to 10 penalty units or $2,100.00. The Seller remains liable to pay GST on any taxable supply.
9. The regime is subject to a two (2) year transition period. Any contract for new residential premises or a newly created lot in a subdivision that is entered into before 1 July 2018 will not be affected if settlement occurs before 1 July 2020. However, the regime will apply to all contracts that settle after 1 July 2020, regardless of when they were entered into.
10. No withholding will be required where the Buyer is registered for GST and acquires the property for a credible purpose for which an input tax credit may be claimed. Please refer to GSTR 2008/1 and contact our office for further information regarding credible purposes.

Practical tips for developers, buyers and industry professionals

• We anticipate that certain regulatory bodies, including the Real Estate Institute of Queensland (“REIQ”) will shortly begin updating their standard form contracts with express provisions with respect to GST withholding and notification requirements.
• Online conveyancing platforms, such as PEXA will also be updated to incorporate a withholding option, which will allow for immediate and electronic remittance of GST directly to the ATO.
• There will be mechanisms where parties to a transaction can apply to the ATO for a private ruling for the characterisation of GST in particular, unusual or complex transactions.
• The Seller will be the one to receive the withholding credit, once the GST on a transaction has been remitted to the ATO. This is set off against the Seller’s BAS liability.
• GST is imposed on the Purchase Price or Market Value and not any adjusted price (ie after settlement calculations, rebates, discounts, concessions etc).
• GST liability arises where the consideration is first paid, which in most cases will be on settlement. Instalment contacts providing for payment of the purchase price by instalments could trigger liability to remit the GST before settlement and on the date that the first instalment is made.
• Deposits are not treated as consideration and will not trigger any GST liabilities. That said, deposits that are forfeited or that are to be released early to the Seller may be deemed to apply as consideration for the taxable supply, therefore triggering GST liability at the time of forfeiting or release. The express contractual terms will need to be carefully scrutinized and tailored legal advice provided surrounding such contracts.
• Developers should review their contracts which have already been executed in conjunction with their development timelines and determine whether settlements are expected before 1 July 2020. Where the Contracts are signed before 1 July 2018, they are within the transitional period and no withholding is required. If contracts are expected to settle after 1 July 2020, withholding will be required, irrespective of when they are signed. 
• Developers should then consider the effect the regime will have on their cash flow, financial projections and funding arrangements, particularly those with staggered advances or drawdowns upon reaching of certain milestones or with respect to staged developments, where sale proceeds from completed stages are required to fund subsequent stages. 
• A Seller using the Margin Scheme that is concerned about cash flow may, at least 14 days before the end of the relevant tax period, seek an advance refund of the difference between any Buyer withholding and the Seller’s actual GST liability under the Margin Scheme, either through a credit in their BAS or through the ATO’s new refund scheme. Please contact our office for further information about this refund scheme.
• Buyers remain relatively unaffected, save for the obligation to ensure that an additional amount (or a bank cheque) is held and forwarded to the ATO upon settlement of a transaction where the GST withholding obligations apply. The Buyer’s conveyancing records can be used to prove compliance with its obligations in any subsequent audit that the ATO may undertake.
• Joint Venture Agreements and Development Agreements may also be subject to the new withholding regime. Careful consideration needs to be given to, how GST is to be characterised and which entity will bear the GST liability on any taxable supply (and if more than one, then in what proportions). It is now the Buyer who bears the responsibility to remit GST to the ATO and it was previously common practice for a Development Agreement to place this obligation on the land owner. There are express provisions in the Bill which prevent one party to a Development Agreement entered into prior to 1 July 2018 from receiving a significant benefit, at the expense of the other. That said, there is no such protection afforded to Joint Venture Partners after this date and GST withholding must be taken into account when preparing the requisite agreements.
• Transactions that are undertaken with a purchase price that is lower than market value (for example, between related family members, for nominal consideration or by way of gift) or involving only a proportional interest in a property (for example the transfer of a 50% interest) are not excused from the notification requirement and/or the withholding obligation because GST will be imposed on the higher of the GST exclusive purchase price or the market value of the property. Evidence of market value will need to be provided to calculate both transfer duty and/or any applicable GST.

Although the Bill is still subject to Parliamentary scrutiny, the proposed changes will have significant cash flow implications for developers and sellers who use the delay between settlement and when their next BAS fall due to their advantage in their financial management, borrowing or overhead costs.

Marino Law acts for a number of individuals and corporations that are likely to be affected by these new changes. To discuss how these new laws will impact on your personal circumstances, please contact one of our experienced property and commercial lawyers today for tailored legal advice, so that you are prepared to manage these changes once they become law. An update to this article will follow closer to the date of proposed enactment.