Disclaimer: GST is possibly the most boring topic known to man. We did our best to make this update bearable. We don’t think we succeeded. However, it’s none the less really important as it effects anyone looking to purchase property.
Under the Taxation Administration Act 1953, A New Tax System (Goods and Services Tax) Act 1999 and Income Tax Assessment Act 1997, purchasers of new residential premises and new residential subdivisions will be required to withhold the GST on the purchase price of the new property at settlement and pay that money directly to the Australian Taxation Office (ATO).
Why are things changing?
Basically, the government is cracking down on tax evasion. Here’s what the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP had to say about the new laws:
“This measure targets illegal phoenix activity in the property development sector. It puts an end to the problem of some developers collecting GST on new properties but then dissolving their business to avoid remitting the tax when it is owed to the ATO,”
“The new arrangements will increase compliance with tax law, level the playing field for compliant businesses, and secure GST revenue for the states and territories to provide essential services that Australians rely on.”
Under current laws a vendor remits GST on sales via their normal Business Activity Statement (BAS). Behind the changes there have been concerns that some developers were claiming input tax credits but not paying the GST.
Will it effect the purchase price?
Highly unlikely – certainly not from a tax perspective – and considering the competitive space that the new-product residential market is in, we highly doubt the market would accept anything. The new rules will require a slightly more complex settlement process, with higher risk for the purchaser and their conveyancer, so there may be some increases in legal and finance fees.
Vendor obligations (developers, that’s you!)
Vendors will be required to give buyers written notice of the ATO requirement, the vendor’s ABN, along with the amount to be paid and the payment date.
The vendor can apply to the ATO for a refund of the GST payment where an error was made, but that must happen within 14 days of settlement, or be claimed as part of a standard BAS return.
How will the new rules work (and what happens if you get it wrong)?
For individual buyers, the rules will apply to new residential properties and land in a subdivision, which includes land sold as part of a house and land package (but prior to any construction). Properties that have undergone even a major renovation will not be effected by these changes.
The purchaser, will be required to withhold and pay direct to the ATO 1/11th of the price when any part of the price (other than the deposit) is paid. This will usually be at settlement, however with a term contract the full amount will be payable to the ATO when the first instalment is paid to the vendor, rather than at completion.
The amount of the GST is based upon the contract price of the property, but can be adjusted if the contract allows for price variations during construction of a residence.
If a purchaser does not withhold and pay the GST liability to the ATO, a penalty equal to the amount of the GST (1/11th of the sale price) will apply – not an inconsiderable sum!
However, if the purchaser does not get the correct details from the vendor and providing the purchase contract does not address the obligation, then any incorrect payments to the ATO will not incur a penalty. The obligation rests with the vendor to provide accurate information.
Another exemption is that a business to business transaction is generally exempt, however if the purchase is for their own personal residence the withholding rules will still apply.
DEVELOPERS – What should you be doing to prepare?
As the new rules apply in only a few weeks time, it’s time to act – as a developer, you need to make sure that:
- Your lawyers are on top of this and prepared to meet the new requirements on your behalf;
- Consider cash-flow implications – if you’ve previously been using the GST portion from sales proceeds for general cash flow, pending remittance to the ATO in your BAS, be very clear that you won’t be getting this anymore;
- Make sure your project’s lender(s) are aware of how much they’ll be receiving from settlement proceeds, as well as ensuring that this won’t cause an unintended covenant or condition breach.
PURCHASERS – What do you need to do?
When you consider the potential extent of penalties involved for non-compliance, it’s essential for purchasers to:
- Unless you’re a qualified lawyer, DON’T EVEN THINK ABOUT ACTING FOR YOURSELF when completing the settlement for a new property purchase;
- Seek professional advice from lawyers and conveyancers when signing a contract and ahead of settlement.
Developers costs have always factored in GST and the changes are only a new method of tax administration and payment, so understand that the new rules do not and will not impact on the price that you pay for a new property.
Looking to buy a new home or investment property, or looking to develop?
We have significant capability and experience acting for property developers, as well as having experienced home lending staff on hand to assist purchasers. Chat to us about how we can help you get the finance you need.