New GST rules – Purchaser GST withholding on sales of new residential premises

As a result of ‘phoenixing’ activities, whereby some suppliers/developers have been collecting GST from purchasers on sale of properties and not remitting it to the ATO, the Government announced counter-legislative measures in the 2017-18 Budget.  The Government announced that under these measures, from 1 July 2018 purchasers of new residential premises or new potential residential land (e.g. new lots in new residential subdivisions) would remit the GST on the purchase price directly to the ATO as part of the settlement process. 

On Wednesday 7th February 2018, the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (“the Bill”) was introduced into the House of Representatives. This Bill contains a number of changes to the previous draft bill that was issued on 6th November 2017 for the purposes of public consultation. The main changes are outlined below.

• The scope of the withholding rules has been narrowed and now only applies to taxable supplies of new residential premises (other than those created through a substantial renovation) and subdivisions of potential residential land by way of sale or long-term lease. The withholding rules do not apply to taxable supplies of commercial residential premises.
• The withholding rules do not apply where the purchaser is registered for GST and the potential residential land is acquired for a creditable purpose. Further, there is no requirement for the supplier/developer to notify the purchaser in these circumstances.
• The supplier/developer must notify the purchaser of their withholding requirements before making the supply (i.e. normally settlement), but the requirement to make this notification at least 14 days before the supply has been removed.
• For taxable supplies made under the margin scheme, a new 7% rate of withholding has been introduced; however, as a result the previously proposed early refund process for suppliers/developers subject to quarterly tax periods has now been removed.

In terms of some of the specifics included in the Bill, please note the following:

The Basics

• Subject to the transitional rules, where a purchaser receives a taxable supply of new residential premises (other than those created through a substantial renovation or commercial residential premises) or new potential residential land (i.e. a new subdivided residential lot) by way of sale or long-term lease - a GST withholding obligation will apply. 
• If the taxable supply is fully taxed, 1/11^th of the contract price (excluding settlement adjustments) or the GST-inclusive price of the supply will be withheld by the purchaser and paid to the Commissioner.
• If the margin scheme applies to the taxable supply, 7% (or a greater amount not more than 9%, that has been determined by the Minister in a legislative instrument) of the contract price excluding settlement adjustments or the GST-inclusive price of the supply, will be withheld by the purchaser and paid to the Commissioner.
• The purchaser is required to pay to the Commissioner this GST amount on or before the day that consideration for the supply (other than consideration provided as a deposit) is first provided to the supplier. 
• In the majority of cases consideration will be provided on the settlement of a property and the GST will be payable to the Commissioner by the purchaser on the settlement date.  However, where consideration is to be paid in instalments the purchaser must pay the Commissioner the full amount of GST on or before the day they make the first instalment payment. Money that is held as a deposit is generally not held to be consideration.
• The Commissioner has discretion to vary the day of the purchaser’s payment to the Commissioner for types of supplies where unintended consequences might arise.  This power to vary the payment day is expected to be limited to where payments are required over a number of years (e.g. Land Rent Scheme in the ACT).

Fully taxable supplies

Where a fully taxable (non-margin scheme) supply is made by the supplier/developer:

• The purchaser will withhold 1/11^th of the contract price excluding settlement adjustments, or the GST-inclusive price for payment to the Commissioner with the balance payable to the supplier/developer. 
• The supplier/developer will receive a credit for this GST amount (i.e. not an input tax credit) in its relevant BAS and will not thus have to make another payment of this amount when paying their net amount for this tax period.
• The entitlement to a credit arises on the assessment of the supplier/developer’s net amount for the tax period to which the supply has been attributed, but is contingent on the purchaser having paid the GST amount to the Commissioner.
• The following example illustrates how we understand the measure might apply:

The Bill provides two specific examples of fully taxed sales under the new arrangements – one handled by a traditional settlement scenario and another handled by an online conveyancing portal (e.g. PEXA). 

Margin scheme supplies

Where a margin scheme supply is made by the supplier/developer

• The purchaser will withhold 7% of the contract price (excluding settlement adjustments) or the GST-inclusive price for payment to the Commissioner and the balance will be payable to the supplier/developer. 
• This is the case even though the actual GST amount may be less (or more) than the 7% required to be withheld by application of the margin scheme. 
• The supplier/developer will receive a credit for this GST amount (i.e. not an input tax credit) in its relevant BAS and will not thus have to make another payment of this amount when paying their net amount for this tax period.
• The entitlement to a credit arises on the assessment of the supplier/developer’s net amount for the tax period to which the supply has been attributed, but is contingent on the purchaser having paid the GST amount to the Commissioner.

Notice to purchaser obligation

To help purchasers meet their compliance burden there is a requirement for the supplier/developer of residential premises or a residential subdivided lot to notify the purchaser in writing of whether the purchaser will be required to make a payment under the new amendments. 

Unlike the withholding obligation outlined above, this notification is required to be made by a supplier/developer in respect of ALL supplies of residential premises or new subdivided residential lots (even if they are not new) by way of sale or long term lease.

However, there is no requirement to provide notice where the purchaser is registered for GST and acquires the land for a creditable or for supplies of commercial residential premises.

This notice is required to be given before the supplier/developer makes the supply.  

If the purchaser is required to make a payment then the supplier/developer must include the following matters in the notice to the purchaser:

• Name and ABN of the supplier/developer
• The amount of GST that the purchaser will be required to pay to the Commissioner
• When that amount is due to the Commissioner (e.g. at settlement)
• Where some or all of the consideration is not expressed as money – the GST-inclusive market value of the consideration not expressed as money (e.g. in kind consideration)
• Such other matters as specified in the regulations

Penalties can apply to the supplier/developer for failure to notify the purchaser as appropriate as well as to the purchaser for failing to withhold or make payment to the ATO.

Transitional Rules

• Transitional rules apply whereby any contract for the supply of new residential premises or a new subdivided residential lot was entered into before 1 July 2018 and consideration for the supply is first provided before 1 July 2020.  These transitional supplies will not fall under the new regime described above. 
• Under these transitional rules the purchaser need not withhold the GST and will instead, as is currently the case, pay the entire purchase price to the supplier/developer and the supplier/developer will pay the GST directly to the ATO via its BAS.
• Specific additional transitional provisions are included for property development agreements under which new residential premises or new subdivided residential lots are sold and there is an agreed distribution of funds by means of “waterfall” payment arrangements. These arrangements may not have contemplated the new withholding rules where they were entered into prior to 1 July 2018 and the special provisions ensure that the parties to the arrangement are not advantaged or disadvantaged as a result. These transitional rules apply if the following four conditions are met:

1. the arrangement is entered into before 1 July 2018;
2. the arrangement provides for the distribution of the GST liability to the supplier/developer (for the payment of the supplier/developer’s GST liability for the taxable supply); or

the arrangement provides for the adjustment of the distribution of the consideration to take into account the supplier/developer’s GST liability;

1. where, if the distribution occurred, the parties would not be in the same position as they would if the withholding amount was not paid; and
2. a withholding payment has been made in relation to the taxable supply.

Our Observations

There is a lot of information to digest in the changes outlined above, but one thing is very clear - this new law will have a huge impact on the cash-flow of suppliers/developers once implemented.  Further, the additional administrative requirements of this new regime - for both the supplier/developer and the purchaser will be significant.

The practicalities of the implementation and how exactly the ATO’s systems will handle this regime change is not yet clear, particularly in respect of:

• Reconciling credits given to suppliers/developers where the purchaser has already remitted the GST
• Whether  refunds of GST payable to suppliers/developers where the margin scheme is applicable will be held up by the ATO for further verification (in the same way that GST refunds often are)

It is hoped that the ATO provides further guidance on these practical matters in due course.

In the meantime, we encourage our clients to consider the potential implications of the new GST withholding rules and understand the changes that may be required internally to comply as of 1 July 2018.