GST changes for Residential Property
Are you a purchaser or vendor of new residential or potential residential land? Maybe you’re a party to development agreements or perhaps you’re a landlord or tenant under long term leases (50 years or more) affected by the GST withholding regime. If you belong to any of these categories it’s important that you’re aware of the new GST treatment that came into affect as of 1 July 2018.
As of 1 July 2018 the ATO has introduced a new regime that requires recipients of new residential or potential residential land to remit the GST applicable directly to the ATO on or before settlement, effectively shifting onus from suppliers to purchasers in order to remove the time lag in GST payment to the ATO. This means prior to settlement a vendor must provide notice to the purchaser if it is selling any residential premises or potential residential land and advise the purchaser of the correct GST treatment.
It is important to note that these new rules apply to supplies for which any of the consideration is first provided on or after 1 July 2018, whether a contract for the supply was entered into before, or after the commencement of the new rules. However an exception arises where the contract for supply was entered into before 1 July 2018, and consideration for the supply is provided before July 2020, providing a two-year transitional period for pre-existing contracts.
What do we mean by new and potential residential property?
New residential premises means any property that has not previously been sold as a residential property or results from the construction of a new building to replace demolished premises on the same land, but for these purposes does not include premises that have undergone a substantial renovation, or commercial residential premises.
Potential residential land means land which is permissible to be used for residential purposes but does not yet contain any buildings which are residential premises. The withholding regime will not apply to the supply of land:
- which includes a building used for a commercial purpose or
- where the purchaser is registered for GST and the acquisition is for a ‘creditable purpose’.
If you’re a vendor and think you might be affected, this is what you need to do:
Suppliers of residential premises (not only ‘new’ residential premises) or potential residential land must provide the purchaser with a notice stating whether or not the purchaser is required to make a payment to the ATO.
The notice needs to set out, among other things:
- the vendor’s name and ABN;
- the amount that the purchaser has to withhold (1/11th or 7-9% if the margin scheme is applied of the unadjusted, GST inclusive contract price); and
- when the purchaser has to pay the withheld amount.
The supplier will then be entitled to GST credit for the withholding payment made by the purchaser.
Other things to consider or be mindful of under this new withholding regime particularly as a supplier:
- cash flow projections;
- mortgage repayment schedules; and
- it is also advisable that warranties should be sought when selling potential residential land to a GST registered entity to ensure that the acquisition is for a creditable purpose and not for personal or domestic use.
In addition where there are development agreements containing ‘waterfall’ payments to account for GST liability, these should be reviewed and amended to ensure that one party does not receive an unintended windfall.
What if you fail to comply?
Of course failure to comply with notice or withholding obligations carries heavy penalties. Failure of the vendor to provide a notification to the purchaser regarding GST withholding is a strict liability offence and can result in penalties of up to $100,000 for companies and in excess of $20,000 for individuals.
The purchaser is strictly liable to pay to the ATO the amount that the purchaser was entitled to withhold from the contract consideration. Failure by the purchaser to withhold the GST gives rise to an administrative penalty under existing provisions (equal to 100% of the amount to be withheld).
It is important to keep abreast of these changes as the ATO continues to crack down on illegal phoenix activity and the continuous improvements to and availability of data the ATO has access to, makes it all the more imperative that all measures are in place.
If you’d like further information in regards to this new regime and how it may affect you please do not hesitate to contact our office.
Author: Jessica Pol