Mar 2018 4 Minutes
Property Industry Alert! – New GST Withholding Rules
To counter “phoenixing“ activities in the property industry, the Government announced in the 2017-2018 Budget new GST withholding rules for purchasers of new residential premises or new potential residential land (e.g. new lots in new subdivisions of residential land). Introduced into Parliament on 7 February 2018 these new rules will have a severe impact on the cashflows of developers supplying new residential premises and/or newly subdivided residential land.
The essential aspects of the Bill are outlined below:
- The legislation is currently before Parliament and has yet to receive Royal Assent to become law. However, when the legislation is passed, the new rules will apply from 1 July 2018, with some transitional measures included.
- As of 1 July 2018, purchasers will have a GST withholding obligation when they acquire taxable supplies of new residential premises and subdivisions of potential residential land from a developer.
- If the supply by the developer is fully taxable, 1/11th of the contract price is required to be withheld by the purchaser (from settlement consideration) and remitted to the ATO (by the purchaser) on or before the day that consideration is due (e.g. settlement date). Thus the developer will only receive the net proceeds on the sale after the purchaser has deducted the GST component from the consideration payable.
- Special rules apply where consideration is payable in instalments by a purchaser. In these cases, the full GST is payable before the day that a purchaser makes the first instalment payment. This is a major cashflow issue for purchasers if they are paying by instalments.
- For taxable supplies made under the margin scheme, a flat withholding rate of 7% of the contract price (excluding settlement adjustments) applies.
- A developer will still need to report the GST payable on its relevant BAS, but will receive a credit for the GST withheld (this is not an input tax credit). However, the entitlement to a credit is contingent on the purchaser having paid the GST required to the ATO.
- Developers are required to notify purchasers of the requirement to withhold GST prior to supplying the property (e.g. usually settlement).
- The two exception to these rules are:
a. On the purchase of potential residential land - where the purchaser is registered for GST and the potential land is acquired for a creditable purpose (eg. for further development by the purchaser) , no withholding is required by the purchaser;
b. No withholding is required on supplies of commercial residential premises (eg. hotels, motels).
- Transitional rules apply to exclude these measure from applying where the contract was entered into prior to 1 July 2018 and consideration is provided prior to 1 July 2020.
- The additional administrative requirements are significant as are the penalties for non-compliance by both suppliers and purchasers.
Once the legislation is passed, it is likely the ATO will provide further guidance on the practical implications of these measures. However from a practical side, we can foresee significant delays and negative cashflow pressure for developers under the new measures.
For example, where a developer is seeking GST refunds on margin scheme property sales (ie. actual GST payable on the margin is less than the flat rate of 7%), the ATO will need to verify the margin scheme calculations and ascertain that the purchaser has remitted the GST to the ATO prior to releasing the refund to the developer. This process is rarely a matter that can be finalised in a few days with the ATO.
Furthermore, where a purchaser withholds consideration but does not remit the amount to the ATO, a developer will be in an untenable situation as it has received 7% less in consideration on the sale and will also be denied a credit from the ATO as the purchaser has not physically paid the withheld amount to the ATO.
Administratively it forces developers to consider the GST positions well before the sale of their residential premises and sub-divided lots, and requires that they put in place additional compliance systems to be ready to comply with these new rules prior to 1 July 2018.
We recommend developers consider the potential impact of these new GST withholding measures in the coming months to ensure they understand the rules and ensure internal systems are ready to comply with the new rules as of 1 July 2018.
If you would like to discuss these matters further, please contact Juanro Prinsloo.