Another withholding in conveyancing – GST and new residential premises
WHO SHOULD READ THIS
- Buyers, developers and financiers of new residential premises or land within a subdivision in Australia.
THINGS YOU NEED TO KNOW
- From 1 July 2018, buyers of new residential premises or land within a subdivision may need remit 1/11th of the purchase price directly to the ATO.
- Developers must notify buyers of the obligation, and buyers must notify the ATO of an intended withholding payment.
WHAT YOU NEED TO DO
- Review existing and pro forma contracts to consider the potential impact.
- Update pro forma contracts to reflect the new withholding regime and its specific requirements.
- Understand the implications on working capital, financing, modelling and projections.
Draft legislation establishing another withholding regime, requiring buyers of new residential premises and land within a subdivision to pay goods and services tax (GST) on the purchase price directly to the Australian Taxation Office (ATO), has been released and The Treasury consultation process has now closed.
What are the provisions?
Buyers must withhold the GST amount (1/11th of the purchase price) and pay this directly to the ATO on or before the settlement date (or another time determined by legislative instrument) rather than the seller. They must give notice of the intended payment to the ATO at least five days before they are required to make the payment.
Developers must issue a notice to withhold to buyers at least 14 days prior to settlement, which must provide the developer’s name and ABN, the GST amount and the payment date (i.e. the settlement date). Failure to notify buyers is a strict liability offence, though it will not affect the enforceability of a contract.
Developers must report the actual GST amount through their Business Activity Statement (BAS), and are entitled to a credit for the amount paid by the buyer at settlement, or a refund if the amount paid exceeds the actual GST liability.
What contracts are captured?
The regime applies to both:
- ‘new residential premises’, being premises not previously sold as residential premises, and
- ‘potential residential land’, being land permissible for use for residential purposes which does not contain buildings that are residential premises, where that land is included in a property subdivision plan.
Practically, the provisions will apply to any off-the-plan residential development, though other smaller transactions may also be captured.
The changes will take effect from 1 July 2018, and will apply to all contracts where the purchase price is paid after 1 July 2020 (regardless of the contract date). Transitional relief will apply to all contracts entered into before 1 July 2018, so long as the purchase price is paid before 1 July 2020.
What about the margin scheme?
The withholding provisions still apply where a developer applies the margin scheme, meaning that 1/11th of the purchase price will be withheld and remitted, notwithstanding the lower liability under the margin scheme. The developer will need to obtain a refund from the ATO through their BAS, though a refund mechanism has been proposed for developers with quarterly tax periods.
What about contracts where the purchase price is paid in instalments?
Where an instalment contract is entered into for residential premises, the first part-payment of the purchase price (excluding any deposit) will trigger the buyer’s withholding obligation on the whole GST amount, irrespective of the instalment amount.
What are some of the key issues?
- Currently, developers enjoy a cash flow benefit when receiving sale proceeds, as the purchase price includes the GST amount and they have up to four months to remit this to the ATO. The changes remove this benefit (effectively reversing it in favour of the ATO), so developers will need to consider how the changes impact their working capital, finance arrangements, modelling and projections.
- Financiers will need to factor this withholding into their assessment of funding and eventual repayment. As 1/11th of the purchase price will be withheld at settlement, those funds will not be available to repay the development funding, and it may take longer for that to be repaid in full. When determining any presale requirements, financiers should ensure that the value of qualifying presales reflects this, potentially by setting a GST exclusive aggregate value requirement, which assumes a full 10% GST (notwithstanding that the margin scheme may otherwise apply).
- Developers need to comply with the legislative requirements around notifying buyers of the withholding, as non-compliance will result in strict liability penalties, currently up to $21,000 per offence.
- Developers can elect to lodge their BAS monthly or quarterly to obtain their GST credits. However, under the draft legislation developers can only receive refunds for any overpayment of the GST liability as part of their quarterly BAS lodgment.
- Under the draft legislation, developers may only claim a credit from the ATO if the GST amount is actually paid. The obligation to pay falls on buyers, so developers will need to ensure that there are positive obligations in contracts that require the buyer to notify and remit the GST amount to the ATO immediately on settlement.
- The draft legislation requires developers and buyers to notify the ATO of the GST amount being withheld at least 14 and five days from settlement respectively, however the GST amount is calculated on the purchase price plus or minus the usual settlement adjustments (e.g. rates, land tax, body corporate levies and insurance). As the actual consideration to be paid is generally not determined until a few days prior to settlement, minor discrepancies will likely occur, resulting in small GST liability and credits being determined by the ATO when developers lodge their BAS.
- Buyers will need to ensure they pay the GST amount being withheld to the ATO, though the requirement for this to be done ‘on or before’ the settlement day poses significant practical difficulties, and it is expected that a grace period will be allowed. Buyers may be subject to a penalty where they fail to pay the required amount to the ATO.
What you should do next
Developers should seek legal advice to ensure contracts for residential premises are properly drafted or amended to comply with the proposed legislation. Developers should also consider the cash flow and other financial impacts of the changes on their current and future residential developments.
Financiers of developers will need to factor in the effect of the withholding provisions when assessing funding requests, particularly in relation to presale requirements and the number of settlements required for repayment.
Buyers should ensure that they are aware of and comply with their withholding obligations, whether or not those are described in the contract.
Further alerts will be published as the legislative process continues and the draft legislation eventually comes into effect.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.