Purchasers of new residential premises and potential residential land will be required to withhold and pay any GST payable on the sale of land directly to the Australian Taxation Office (ATO).
When does the new regime come into effect?
The GST withholding regime will apply to supplies under contracts for sale of land entered into on or after 1 July 2018. Supplies under contracts of sale signed prior to 1 July 2018 with settlements expected to occur after 1 July 2020 will also be subject to the new regime.
How does it operate?
For all taxable supplies of new residential premises and subdivided lots sold as part of residential subdivision (i.e. apartments, townhouses, house-and-land packages but excluding renovated houses and commercial residential premises):
- purchasers will be required to withhold either 1/11th of the contract price (if the margin scheme does not apply) or 7% of the contract price (if the margin scheme does apply) on or before settlement and pay this directly to the ATO; and
- vendors will be entitled to a credit for the amount withheld, and then be liable for the correct GST amount on their Business Activity Statement (BAS) (see below).
Vendor’s notification obligation:
Vendors must provide a written notice to the purchaser before settlement specifying:
- whether the purchaser is required to withhold and make a payment to the ATO; and
- if so, the vendor’s name and ABN, the amount to be withheld, and when that amount must be paid to the ATO.
This notification obligation applies to a vendor of residential premises even where no withholding will be required (e.g. because the residential premises are not “new”).
Vendors failing to comply with this obligation are liable to pay a maximum penalty of $21,000 per infringement for non-companies and a maximum penalty of $105,000 per infringement for companies.
Purchaser’s withholding and payment obligation:
Purchasers must pay the GST directly to the Commissioner of the ATO however, it should be sufficient for purchasers to hand over to the vendor at settlement, a bank cheque payable to the Commissioner for the relevant withholding amount.
A purchaser who fails to withhold and pay the required GST, is liable to pay a penalty equal to the amount of GST payable on the sale of land.
If the purchaser reasonably relies on a notice from the vendor, advising that no requirement to withhold and pay the GST to the ATO it will not liable for the penalty. However, if the vendor does not provide a notice, the purchaser still has the obligation to withhold and the GST amount payable on the sale.
Consequence to the vendor’s BAS:
On the vendor’s next BAS, if the amount withheld was:
- equal to the GST payable, then the credit will offset the GST liability and no additional GST is payable by the vendor;
- less than the GST payable (because the margin scheme applied but the GST payable was more than 7%), then the credit will offset part of the GST liability, and the remaining GST liability will be payable by the vendor; or
- more that the GST payable (because the margin scheme applied, but the GST payable was less than 7%), then the credit will offset the GST liability and the balance will be refundable to the vendor.
Implications of the new regime:
The main implication for vendors will be the cash flow impact of having to remit GST before settlement, rather than when the BAS is lodged with the ATO. Therefore, it will be important for vendors to consider any financing arrangements and covenants to ensure that cash flow can be adequately managed under this new regime.
Given that each purchaser must receive written notice relating to the new withholding regime as noted above, the most practical way of dealing with this is by including appropriate clauses in the contract for sale.
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