GST Withholding

BY NATALIE SMYTH

The Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 received royal assent on 29 March 2018. The bill amends various tax legislation and requires some purchasers of real property to collect a seller’s GST liability at settlement and remit it directly to the ATO.

The bill was introduced following the 2015 senate enquiry on ‘Insolvency in the Australia construction industry” in an effort to reduce illegal phoenix activity by property developers. “Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements.”[1]

When did the new GST withholding obligations take effect?

The changes brought about by this new GST withholding legislation primarily affects Contracts entered into from and after 1 July 2018. The GST withholding requirements do not apply to Contracts entered into prior to 1 July 2018 provided that the consideration for the supply (other than a deposit) is first provided before 1 July 2020. Off the plan contracts entered into prior to 1 July 2018 could be affected if construction/plan registration is likely to be completed after the 1 July 2020 deadline.

What types of transactions are affected?

A Purchaser will have a GST withholding obligation if:-

1. The supply is by way of sale or long-term lease; and
2. The supply is of New Residential Premises or Potential Residential Land.

The withholding obligation will not apply, however, if the purchaser is registered for GST and acquires the property for a creditable purpose.

What is a Creditable Purpose?

“You acquire or import a thing for a creditable purpose if you acquire or import it in carrying on your enterprise (including acquiring or importing it in the course of the commencement or termination of your enterprise)” [2] If the property is acquired for private or domestic purposes, then it will not be acquired for a creditable purpose.[3]

What types of real property will be classified as New Residential Premises and Potential Residential Land?

Residential Premises will be New Residential Premises if they:

1. have not been sold previously as a residential premises and have not been previously the subject of a long-term lease; or
2. have been created through substantial renovations of a building – i.e whereby all (or substantially all) of a building is removed or replaced; or
3. if they have been built to replace demolished premises on the same land.

Potential Residential Land means “land that it is permissible to use for residential purposes, but that does not contain any buildings that are residential premises.”[4] The withholding obligations only apply to Potential Residential Land if the land is created by a property subdivision plan and the land is zoned for residential use under the local government planning schemes. If the planning schemes permit a number of uses for the land, and one of those uses is residential, then the land will be classified as Potential Residential Land.[5] Potential Residential Land does not include land that contains any buildings for a commercial purpose.

When must the GST withholding amount be paid?

It must be paid to the ATO on or before the day that the consideration for the taxable supply is first provide.[6] Generally, the consideration is first provided on the Settlement Date.

How much is the withholding amount?

The withholding amount is generally 1/11^th of the Contract Price, however, if the margin scheme applies, then the withholding amount will be 7% of the Contract Price. The Contract Price is the GST inclusive price stated on the Contract and does not take into account any normal adjustments to the Contract Price (for example, for rates or water).

If the parties had negotiated a reduction in the Contract Price, for example, in exchange for the satisfaction of a building and pest condition, then the Contract Price, for the purposes of calculating the GST withholding amount, would not be discounted by the agreed reduction.

Sellers Notification and Purchaser Notification Obligations  

Seller’s Notice

All sellers of residential property must issue a notice to a purchaser advising the purchaser whether they must make a GST withholding payment. This notice is not required, however, for supplies of New Residential Land or Potential Residential Land if the purchaser is registered for GST and is acquiring the property for a creditable purpose.

Sellers will need to conduct an A.B.N. search of the purchaser to confirm whether or not the purchaser is registered for GST, however, a seller can rely on a purchaser’s statement in the Contract as to whether the purchaser is acquiring the property for a creditable purpose.

If the purchaser is required to withhold the GST amount and pay it directly to the ATO, then the seller’s notice must state:

1. the seller’s name and ABN;
2. the dollar amount to be paid by the purchaser;
3. when the amount must be paid; and
4. the GST-inclusive market value of any non-monetary consideration.

The notice must be provided by the seller prior to the seller making the taxable supply. Even if the seller fails to notify the purchaser, the purchaser will still have a GST withholding obligation and must withhold the GST amount and remit it to the ATO on or before settlement.

Purchaser Notice

Purchasers also have an obligation to notify the Commissioner of Taxation of the GST amount payable on or before the due date for payment, and this is done via approved forms that are accessible via the ATO website.

What are the main implications for property developers and purchasers?

• Property Developers will need to consider the cash flow implications resulting from the new GST withholding laws. Previously, developers enjoyed the benefit of retaining the GST component from settlement as cash, as the GST liability was not required to be remitted to the ATO until lodgement of their next BAS.
• If a purchaser fails to comply with their GST withholding obligation on reliance of a seller’s incorrect notice and the ATO later deems that the supply was a taxable supply and that the purchaser should have withheld the GST and paid it to the ATO at the time of settlement, the purchaser could still be liable to pay the seller’s GST liability. It is therefore important for a purchaser to undertake reasonable enquiries as to whether the withholding obligations apply to the transaction and must not blindly rely on a seller’s notice in circumstances where it is evident that there is a GST withholding obligation.

If you are a property developer requiring assistance with contract drafting to ensure that your sale contracts cover the new GST withholding law notification requirements, then please don’t hesitate to contact our commercial solicitor Natalie via reception@justuslaw.com.

Alternatively, if you are a purchaser or seller of residential or commercial property in Queensland and you require advice with respect to the application of the new GST withholding laws, please don’t hesitate to contact our Residential or Commercial conveyancing departments via email on reception@justuslaw.com.

[1] https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Illegal-phoenix-activity/

[2] Paragraph 26 of the GSTR 2006/4 Goods and Services Tax Ruling Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose

[3] Ibid, paragraph 27.

[4] Section 195-1 A New Tax System (Goods and Services Tax) Act 1999 (Cth).

[5] Paragraph 24 , LCR 2018/4  Purchaser’s obligations to pay an amount for GST on taxable supplies of certain real property.

[6] Subsection 14–250(4) Taxation Administration Act 1953 (Cth).