New GST Withholding Rules on Residential Properties
If you're a property developer then you should know about the changes to GST withholding rules for residential property.
With effect from 1 July 2018, relevant purchasers will be required to withhold GST from the amount paid on certain purchases of real property and remit the GST directly to the Australian Taxation Office (ATO) as part of the settlement process.
It's a significant change from how GST is currently managed, where the developer collects the full proceeds of the sale and remits the GST to the ATO in their next BAS. This can occur up to three months after settlement. The reforms are aimed at preventing developers from dissolving the business before the next BAS lodgement to avoid remitting the GST.
For some developers, the changes would have a significant impact on cash flow because the purchaser would be required to pay the GST portion to the ATO directly.
The fact that the vendor no longer receives the GST amount between settlement and BAS lodgment will reduce the cash held by the business and then may impact working capital requirements and bank covenants.
The reforms apply to the sale or long-term lease of:
- New residential premises (other than those created through a substantial renovation and commercial residential premises); or
- Subdivisions of potential residential land.
When it comes to determining the amount that needs to be paid to the ATO this will generally be 1/11th of the contract price. However, if the margin scheme applies to the sale the purchaser needs to pay 7% of the contract price instead.
If the parties involved in the transaction are associates, then the purchaser will generally need to pay 10% of the GST-exclusive market value of the property.
For supplies between associates for nil or inadequate consideration, the withholding amount is 10% of the GST exclusive market value.
For sales made to multiple purchasers (e.g. tenants in common), each purchaser is treated as being a separate purchase of a separate sale and the withholding amount is determined in proportion to the acquisition.
Purchasers of properties will need to pay 1/11th of the full sale price after 1 July 2018, directly to the ATO at settlement.
The vendor must supply a notification advising that the payment is required and the amount that is to be paid.
From 1 July 2018, the vendor will no longer collect and remit GST on the purchase price of the residential premises.
Instead, the vendor must notify the purchaser in writing that the GST needs to be paid to the Commissioner and advise the amount that must be paid. In general, this notification will need to include:
- the name and ABN of the entity that made the supply;
- when the purchaser is required to pay that amount to the Commissioner (generally settlement date); and
- where some or all of the consideration is not expressed as an amount of money (e.g., sale of property for cash plus another property) - the GST-inclusive market value of the consideration that is not expressed as an amount of money.
The vendor will receive a credit for the amount that has been paid by the purchaser to the ATO (if the amount was simply withheld but not paid these amounts cannot be claimed). If the vendor's net amount for the tax period is in a credit, a refund will be made.
Failing to comply is not inconsequential. An administrative penalty of 100 penalty units ($21,000) applies to the vendor for the failure to give a notice to the purchaser and to the purchaser for failure to withhold.
In addition to the administrative penalty, a criminal penalty of 100 penalty units also applies to vendors for failure to give the required notice to the purchaser of their obligation to withhold.
The implementation period for the new measure is extremely short but the ATO has released the online forms required for purchasers of new residential premises or potential residential land to remit part of the purchase price to the ATO.
The GST property settlement withholding notification form (form one) is used to advise the ATO that a contract has been entered into for the supply of new residential premises or potential residential land in which there is a withholding obligation. The purchaser or their representative can submit the form at any time after a contract has been entered into and prior to the date the withholding obligation is due. Usually, that will be the settlement date but if the contract is an installment contract it will be the date the first installment is paid.
The GST property settlement date confirmation form (form two) is used to confirm the settlement date.
The purchaser or its representative can submit form two at the time the withholding obligation becomes due, either when the first installment is paid or at settlement, or as soon as practicable thereafter.
Download PDF: New GST Withholding Rules on Residential Properties
Last updated July 2018. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.