New GST withholding regime for residential property May 17, 2018

From 1 July 2018, all residential property transactions will be subject to the new Treasury Laws Amendment (2018 Measures No. 1) Bill 2018.

The effect of this legislation will have a significant impact on both purchasers and vendors for sales of “new residential premises” and “potential residential land”.

Purchasers must withhold GST and instead remit the GST directly to the ATO on settlement or whenever consideration is first provided (excluding deposits).

The changes will apply to all contracts entered into after 1 July 2018.

Contracts entered into before 1 July 2018 are not covered by the new legislation so long as the purchase price is paid before 1 July 2020  (note: there are transitional rules for “waterfall” payment structures which are commonly used in property developments for contracts entered into before 1 July 2018).

How much GST is the purchaser required to withhold?

The amount required to be paid to the ATO depends on whether the margin scheme applies:

• If the margin scheme does not apply, 1/11^th of the contract price is to be remitted to the ATO; and
• If the margin scheme does apply, 7% of the contract price is to be remitted to the ATO.

These rates apply to the actual purchase price in the contract and do not take into account potential settlement adjustments. Failure on the purchaser’s behalf to withhold the GST and remit the amount to the ATO can incur a penalty equal to 100% of the amount payable.

What are the vendor’s obligations?

Vendors should begin to immediately notify purchasers in writing of their withholding requirements, if any.

Where there are any such obligations, vendors must inform purchasers of the amount to be withheld and when it must be paid. The penalty for failing to provide notice can be up to $21,000 for individuals and $105,000 for corporations.

Vendors will still be liable for the GST withheld; however they will receive a credit for the amount remitted by the purchaser to the ATO for that tax period.  Therefore any differences between the amount withheld and the vendor’s actual GST liability will not be rectified until their Business Activity Statement is lodged. This also means it is vital that vendors ensure the purchaser remits the GST to the ATO.

Key impacts

The GST withholding regime will have a substantial impact on parties dealing in new residential property from July 1 2018. Vendors must satisfy their notice requirements to the purchaser regarding GST withholding and purchasers must ensure they remit the correct amount of GST withholding to the ATO within the given timeframe. Property developers and financiers must also be aware of how this GST withholding will affect their cash flow as they will no longer receive the amount of GST at settlement.

This article was written by Josh Kaplan, Senior Associate and Olly Gagiero, Law Clerk

DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from marshalls+dent+wilmoth and other relevant experts.