Buyers of new residential premises or potential residential land must now withhold GST from contract price and pay directly to ATO
Thursday, 13 September 2018
Michelle Maynard, Partner at Carbon Accountants and Business Consultants, discusses the new GST withholding regime for the sale and purchase of a new home or piece of land. In order to tackle illegal phoenix activity where developers or sellers would dissolve the business post-settlement and keep the GST, the law now places the onus on the buyer to remit the GST to the ATO, she writes.
Purchasing a new home or piece of land – are you aware of your possible GST obligations?
From 1 July 2018, buyers and sellers of ‘new residential premises’ or land in certain subdivisions of ‘potential residential land’ are subject to a new GST withholding regime.
Previously, a buyer paid GST to the seller/developer as part of the contract price, on certain property transactions (where there was a taxable supply). The seller was then required to remit this GST to the ATO in their Business Activity Statement (“BAS”) for the period that included the sale.
It was identified that there were multiple instance. Referred to as illegal phoenix activity, where developers/sellers would collect GST on sale, but then dissolve the business post settlement and not remit the GST to the ATO. In order to combat these instances, the GST laws have been changed to put the obligation to remit GST on the buyer not the seller.
Now the onus is on the buyer to remit GST to the ATO
From 1 July 2018, it is now the buyers of ‘new residential premises’ or land in certain subdivisions of ‘potential residential land’ who are required to withhold an amount from the contract price. They are then required to remit this withheld amount directly to the ATO on or before settlement.
Sellers are required to provide notice, in writing prior to settlement, to the buyers advising if they are required to withhold and pay GST to the ATO on the purchase. The seller’s notice must also include the GST withholding amount and time for payment, if the transaction is subject to GST withholding.
What transactions does this new GST regime apply to?
For contracts entered into, on or after 1 July 2018, the new GST withholding regime applies to a buyer of:
new residential premises: are residential premises where any of the following apply to the premises:
- they have not previously been sold (or subject to a long term lease) as residential premises
- they have been created through substantial renovations (but note new residential premises of this kind are excluded from the withholding obligation)
- they are new buildings which have been built to replace demolished buildings on the same land.
Note: residential premises cease to be new residential premises if they have been used solely for renting for a period of at least five years since they were constructed
potential residential land: is defined as land that it is permissible to be used for residential purposes but does not contain any buildings that are residential premises (for example houses and strata units). Local government zoning may permit a mixture of residential or commercial use but that is still considered potential residential land
The above regime also applies to a lessee under a long-term lease (a long term-lease is generally a lease for a period of at least 50 years) entered into, on or after 1 July 2018.
In order for the withholding obligation to apply, the transaction must be a taxable supply. Withholding is not required if the transaction is GST-free, input taxed, or not treated as a taxable supply. It is the seller’s obligation to advise this to the buyer in writing.
The regime will not apply to sale contracts that were entered into before 1 July 2018 as long as the property transaction settles before 1 July 2020.
Amount of GST withholding payable by buyer to ATO and timing for payment
The buyer must withhold and pay to the ATO:
1/11th of the ‘contract price’; or
7% of the ‘contract price’ where the margin scheme applies.
These fixed percentages apply to the contract price, and any settlement adjustments are not taken into account.
The buyer must remit the GST withholding amount to the ATO on or before the day of the consideration for the supply is provided – which is usually at settlement in most instances.
In respect of transactions where GST is required to be withheld, penalties will apply to:
sellers who do not provide the buyer with the proper written notice regarding the GST withholding; and
buyers who fail to withhold and remit the GST to the ATO on or before settlement
These penalties won’t apply if:
- the buyer had relied upon a notification from the seller (where such reliance is deemed reasonable), or
- if the buyer provided the seller with a bank cheque, payable to the ATO for the required amount of GST.
What is the impact?
Buyers and sellers need to be aware of their new obligations under the new GST regime and ensure that:
sellers provide the relevant and timely notification to buyers; and
buyers withhold and remit the correct amount to the ATO.
As most property transactions are guided by settlement agents and conveyancers, those who deal in the property sector, for both the seller and buyer, will need to ensure that they are across the new rules and the obligations of their clients are met.
Michelle partnered with Carbon in 2017, bringing a wealth of experience in accounting and bookkeeping. Her extended suite of services covers everything from tax accounting, planning and estimates, to cloud integration, payroll and SMSF. Michelle started her career as a cadet in the Australian Taxation Office, then as a graduate at PwC. Before joining Carbon, she was a manager at PKF, bringing a wealth of knowledge and experience to the team at Carbon. Michelle specialises in providing tax and accounting advice to SMEs and HNWIs and their family groups, working to achieve the most effective strategies for them, both financially, tax effectively, and to help achieve their desired lifestyle.
Contact Michelle at Michelle.firstname.lastname@example.org You can also connect with Carbon Accountants and Business Consultants via Facebook, Twitter and LinkedIn
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