GST Withholding Regime on Property
Updated: Feb 7, 2020
During the 2017/18 budget the government publicised that they would be introducing a GST Withholding Regime for the property industry.
The withholding regime was introduced for the following reasons:
1. There have been a growing number of property developers that collect the GST component on a sale but do not actually pay this on to the ATO.
2. The time it takes for the GST to be paid onto the ATO. Usually vendors pay GST on the amount of taxable goods and services they provide. Vendors sell goods and services for a price that is inclusive of the GST component. The Vendor will then pay the GST component to the ATO when their BAS is due to be lodged. Although vendors collect the GST of a taxable supply at the time of sale there may be a three to four month delay before the vendor actually pays the GST to the ATO.
Important points to consider:
When will it come into effect?
Since 1 July 2018, for any new residential premises or subdivision purchased, the GST component will no longer be collected or handled by the Vendor. It will be the purchaser’s obligation and requirement to pay the GST component of the sale price directly to the ATO.
An important section of the legislation to note, Section 14-250 (1) and (2) states that the purchaser of new residential properties or land that has the potential to be a residential dwelling will be obliged to pay the GST on the purchase directly to the ATO.
The GST withholding regime will apply when:
The supply is a taxable supply
The property is either a new residential premises or potential residential land
How much GST to withhold
It is required that the purchaser withholds 1/11th of the purchase price of the sale.
The issue with the margin scheme is that more often than not the full amount of the GST being 1/11th is not being paid to the ATO. In most instances the amount paid to the ATO is significantly lower than the set GST rate.
Working out the GST based on the margin scheme is quite complex and many people find it difficult to understand. Due to the complexity of the margin scheme it would much wiser to hold the full amount of GST being 1/11th of the purchase price. This however creates cash flow discrepancies for the vendor. In the case of the Margin Scheme if a vendor overpays the ATO they will need to apply for a refund on the overpaid amount. The purchaser will need to pay the GST Withholding Tax to the ATO before or on the date that settlement is made. However depending on the contract and its terms and conditions GST may need to be paid prior to the actual settlement date. Provide the purchaser with a GST Withholding Notice
To ensure that the GST Withholding Regime is rolled out efficiently and effectively, there have been a number of rules put in place. One of the more significant rules is that the vendor is obligated to provide the purchaser with a GST Withholding Notice. The Notice will cover details such as if GST needs to be withheld and if so the amount. This notification must be provided to the purchaser no less than 14 days prior to reaching a settlement. What the GST Withholding Notice must state:
If the purchaser actually needs to make a GST Withholding Payment
If payment is required the notice must include:
Vendor’s name and ABN
The amount of GST payable to the ATO by the purchaser
Due date of payment
If some or all of the consideration is something other than money, what the GST-inclusive market value is of that consideration.
A key difference to make note of between the Withholding obligation and a GST withholding notice is that the obligation specifically applies to new residential properties or land that has a potential to be developed into a residential space. The withholding notice however covers any new or old residential property and any land that has a potential to be residential.
When a vendor can be penalised
If a GST Withholding Notice is not supplied by the vendor, serious fines will apply. A hefty fine of 100 penalty units will apply for the breach.
As mentioned above the Withholding notice must be provided on new and old residential properties and potential residential land. Failing to supply a notice even if no GST needs to be collected by the ATO will still result in a fine.
When a purchaser can be penalised
On the other hand a purchaser may also be fined. The purchaser has the obligation to withhold the GST from the purchase. Not doing so will result in a considerable fine of 10 penalty units.
Rules will be enforced and penalties will be given. The Explanatory Memorandum to the draft legislation states, “it is a defence if an honest and reasonable mistake is made about whether the property in question is new residential premises or existing premises, and consequently there was a failure to provide the correct notice.”
In order to avoid penalties vendors should first research and determine if the property is or is not a taxable supply. If so the vendor then needs to determine if the property is a new residential premise or fits into another category of residential premises.
Refunds of GST
In the instance when too much GST has been withheld, where the purchaser has made a mistake or where the margin scheme has been applied, there are two options a vendor can take in order to recuperate the overpaid GST:
Option one is to claim the overpaid GST as a refund as part of the vendors Business Activity Statement for the relevant period .
Alternatively there is also the option to seek a refund from the ATO using the “new refund mechanism”
The new refund mechanism was put in place to resolve the issue of the time between acknowledging that there had been overpaid GST and the next period the BAS can be lodged in order to submit a refund for the overpaid GST. In some instances the vendors will experience disruptions in their cash flow due to not being able to claim the overpaid GST in a timely period. The vendor will need to prove to the ATO that GST has been overpaid in order to secure a refund. This may include submitting margin scheme calculations to the ATO.
Tax payers that lodge their Business Activity Statement monthly are not eligible to use the new refund mechanism. In these circumstances the vendor must apply for the refund when they lodge their BAS.
In order to avoid cash flow disruptions it is suggested that the refund application be prepared prior to settlement. This allows the vendor to submit a refund application immediately after settlement has been completed. This may be of help to developers, in particular “mum and dad” developers.
Resolving Disputes regarding GST
The most common of disputes between the purchaser and the vendor consist of:
Disputes over if the residential property is considered to be a new residential premise or belongs to another residential category. For example in the instance of an existing residential property, where renovations on the property are so extensive that the property is now considered to be a “new” residential premises.
If the property in question is a taxable supply or GST free.
If the vendor in question needs to be registered for GST
Purchasers are advised to act with caution if they have any uncertainty as to whether or not the property is a taxable supply, as the penalties for not withholding GST is steep. If the purchaser does have doubts they should withhold the GST regardless to avoid any penalties and seek a refund if the premises is not a taxable supply.
Development Agreements with Owners
Land development agreements are becoming more popular between developers and land owners. This particular agreement entitles the land owner to receive a percentage of the sale of the developed property.
In most cases land development contracts usually incorporate a waterfall payment arrangement. This will outline how consideration will be distributed between the developer and the land owner. Typically the land owner will receive a portion of the funds to release them from their GST Liability to the Australian Taxation Office.
Since the GST withholding regime was implemented land developers have to tailor their contracts based on the new legislation as it will be the purchaser who will pay the GST not the land owner.
With regards to the withholding scheme and refunds of overpaid GST, it must be made clear in the agreement between the landowner and the developer, as to who will apply for the GST refund if applicable and how the refund will be distributed between the two parties.
The GST Withholding Scheme will apply to contracts that have been entered on or after 1 July 2018. In some cases this new legislation will apply to contracts entered before this date if the supply of the taxable product is provided on 1 July 2020 or later. This will affect many contracts already signed that have extended settlement conditions. An example of this would be large apartment developments where the purchaser purchases off the plan and the property will be built at a much later date.
Interestingly a vendor is not required to provide a withholding notice to the purchaser for any contract entered before 1 July 2018.
Transitional rules will be implemented for contracts entered before 1 July 2018 to prevent any windfall gain on GST that has already been paid under the withholding regime.
How to proceed
The way GST will be paid under the withholding regime is considerably different to the margin scheme. The penalties under the withholding scheme are considerable. It is essential that the vendor, purchaser and property developers understand the new legislation. If unsure or in doubt about how this will affect a transaction between the vendor and purchaser, professional advice should be sought immediately.