How will the new GST withholding regime impact your development?

The ATO has released a draft of the legislation which will give effect to the proposed new GST withholding requirements for buyers in new developments announced by the Treasurer in this year’s budget speech. Partner Matthew Raven has produced this brief summary.

Who is affected?

The proposal will affect all developers of apartments and residential land. Unlike the foreign residents CGT withholding regime, there is no ability for developers to obtain an ATO clearance so it will apply to all sales once the new regime is in place.

How will it work?

Buyers will be required to withhold 1/11th of the purchase price and pay it to the ATO on settlement. The 1/11th applies even where the developer is applying the margin scheme. Buyers will have to withhold the amount even if the contract requires the full purchase price to be paid to the seller at settlement.

Developers receive a credit for amounts paid to the ATO when they lodge their next BAS and will be able to apply for a partial refund where the margin scheme has been applied.

Developers will have to give buyers a notice stating the amount to withhold at least 14 days before settlement. Significant penalties apply if the correct notice is not given.

What happens if the buyer doesn’t pay the withholding amount to ATO?

Developers are not entitled to a credit unless the amount is received by the ATO. To partially reduce the risk to developers of non-payment, buyers will be required to notify the ATO of their intention to make a payment 5 days before settlement and to give a further notice when they make the payment. This means the ATO will be able to identify quickly if a payment has not been made by a buyer when required. However the fact remains this represents something of a risk for developers, particularly where dealing with a self-acting buyer.

When does the new regime start?

The proposed changes will affect all contracts entered into from 1 July 2018. However the withholding obligations will apply to all settlements from 1 July 2020 regardless of when the contracts were entered into.