As part of the 2017/2018 Federal budget, the Australian Government announced its intention to change the way in which GST is collected from property developers/vendors for new residential premises and new subdivisions of potential residential land.
Under this proposal, a purchaser will be required to pay a component of the purchase price to the Australian Taxation Office (ATO) in satisfaction of GST obligations.
Draft legislation has now been released by the Government. A copy of the draft legislation can be found here.
What will change?
Under the proposed legislation a purchaser of “new residential premises” or “potential residential land” in a new subdivision will need to withhold 1/11th of the purchase price due to the vendor and instead pay this amount to the ATO.
Under the GST Act:
- Residential premises are considered to be ‘new’ if any of the following apply:
- the property has not previously been sold as residential premises;
- the residential premises has been created through substantial renovations; or
- the residential premises replaces a demolished building on the same land.
- “Potential residential land” is residential land that does not contain any buildings that are residential premises. To be new, the land must not have been sold as “potential residential land” before.
Generally, the withholding amount must be paid on or before the day that the consideration for the property, other than the deposit, is first paid. In most instances, this will be at the time of settlement.
Once the GST is paid by the purchaser, the vendor will receive a credit when lodging its usual business activity statement with the ATO.
A refund is contemplated where the margin scheme applies, or where payment (or part of it) was made in error. Time limits and other requirements apply.
Certain exclusions have been proposed to the withholding arrangement.
Disclosure obligations
In addition to the above changes, the draft legislation includes disclosure obligation requirements for vendors.
To comply with these disclosure obligations, at least 14 days before a supply is made (generally being the sale of the property) a vendor must notify the purchaser as to whether the purchaser is required to make a payment to the ATO. If the purchaser is required to make a payment, the vendor must provide the required information to enable them to do so. Penalties apply for failure to give notice.
It is expected that in practice, vendors will include the required notice in their sale contracts.
What sales will be affected by these changes?
If the legislation is passed these changes will only affect those sales where the purchase price, excluding the deposit, is paid on or after 1 July 2018, regardless of the contract date.
Transitional arrangements
Certain exemptions are proposed in respect of existing contracts as follows:
- the withholding requirements will not apply:
- to contracts entered into prior to 1 July 2018 where the consideration is paid before 1 July 2020 (effectively providing a two year transitional period); and
- in respect of certain property development arrangements entered into prior to 1 July 2018 where the party responsible for paying the GST would receive a windfall under the new arrangement.
- the disclosure requirements will not apply to contracts entered into before 1 July 2018
The proposed legislation is open for public submissions until 20 November 2017.
For more information or discussion, please contact HopgoodGanim Lawyers’ Commercial Property or Taxation teams.