Are you ready for the GST withholding regime?

Changes to the payment of GST on new residential property are due to take effect from 1 July 2018.  The changes are an administrative measure which although not imposing a new tax, do have significant ramifications for property developers as it will impact the settlement process and cash flow.

The changes apply to sales of “new residential premises” and “potential residential land” such as new apartments, house and land packages and vacant residential land.  Commercial residential premises such as hotels and new residential premises created through substantial renovation are excluded from the changes.

What is changing?

Purchasers will be required to withhold and pay GST directly to the ATO thus representing a significant departure from the standard position where the vendor receives all funds at settlement and then satisfies its GST obligations in accordance with its standard reporting requirements in its Business Activity Statement (BAS).

The purchaser is required to pay the amount to the ATO on or before the day on which any of the consideration (other than the deposit) is paid. This will almost always be settlement unless any consideration is paid in advance of settlement in which case the whole of the withholding obligation will apply from the time of the first payment.

What is the rate of withholding?

The rate of withholding differs depending on whether the margin scheme is applied.

1. 1. if not, the rate is 1/11^th of the GST inclusive purchase price set out in the contract;
   2. if so, the rate is currently set at 7% of the GST inclusive price (however the legislation reserves the right for the Minister to lift that percentage to a rate not exceeding 9%).

The withholding rate is applied to the purchase price set out in the contract, ignoring any adjustments.  This does not impact the vendor’s actual GST liability which is still calculated based on the adjusted price.  This means that there is likely to be some discrepancy between the amount withheld by the purchaser and the vendor’s actual GST liability under the law (with the excess or shortfall being paid or refunded in accordance with the vendor’s BAS).

What are the vendor’s notification requirements?

All vendors of “residential premises” or “potential residential land” (not just new residential premises) must not complete the sale without first having notified the purchaser in writing of its withholding obligations. Failing to do so results in an offence which can be subject to significant penalties.

Where the withholding obligation does not apply, the vendor only needs to notify the purchaser of that information.  However, where the withholding obligation does apply, the vendor must notify the purchaser of:

1. 1. the name and ABN of the vendor;
   2. when the purchaser is required to pay that amount to the Commissioner;
   3. where the consideration is not expressed as an monetary amount – the GST inclusive market value of that consideration; and
   4. such other matters as specified in the regulations (of which there are presently none).

How is the vendor credited for GST paid on its behalf?

Vendors will be entitled to a credit for the amount of any payment made to the ATO by the purchaser with the credit then taken into account in calculating the vendor’s net amount of GST payable for that tax period.  Practically, this means that vendors will have to wait until lodging their BAS to receive a refund for any excess GST which may have been paid by the purchaser.

It is also important to note that the vendor will only receive a credit for amounts actually paid to the ATO by the purchaser and so vendors and their advisors will need to ensure that the GST amount is actually paid by the purchaser in order to discharge the vendor’s GST liability.

Business to business transactions

Importantly, the withholding obligation does not apply where the purchaser is registered for GST and is making the acquisition for a creditable purpose, meaning that business to business transactions where, for example a developer on sells the development parcel to another business, will not be subject to the withholding regime.

Transitional period

For contracts entered into before 1 July 2018, there will be a two year transitional period in which no withholding obligation will apply – so for these contracts the obligation will only arise if consideration is paid after 1 July 2020.

For contracts entered into after 1 July 2020, the withholding obligation will apply irrespective of when the contract settles.

There are also transitional rules for certain property development agreements entered into before 1 July 2018 which provide an income ‘waterfall’ that is affected by the changes.  These rules operate to preserve the position of the parties so that neither party is left worse off as a result of the legislative amendments.

Practical implications

Property developers will need to consider how the changes will impact the timing of payouts to their mortgagee and associated feasibility implications.  For example, given that GST is now paid out of each settlement, it will take longer for the developer to payout their mortgagee.  This means that the loan will not be repaid as quickly and interest will be payable on the outstanding loan amount.

A vendor must give notice of the application of the GST withholding regime to purchasers, as noted above.  To ensure compliance with this section we recommend that vendors given notice to the purchasers by way of special condition under the contract of sale.

To ensure the GST is actually paid to the ATO by the purchaser we recommend that the vendor retains the cheque at settlement.  We have prepared special conditions to require the purchaser to deliver the cheque to the vendor whilst also providing protection to the purchaser so they can evidence to the ATO that they have discharged their remittance obligations.  We also note that once payment directly to the ATO is effected in PEXA, concerns regarding the actual payment of the GST withheld amount will no longer be an issue.

Where to from here?

Property developers and vendors will need to ensure they have appropriate procedures in place for any contracts entered into after 1 July 2018 (or contracts entered into before then which may settle after 1 July 2020).  We have developed special conditions for contracts and procedures to account for the changes and can assist you in implementing these changes.

Authored by:
Biljana Apostolova, Partner
Brihony Boan, Partner
Wesley O’Brien, Lawyer