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Buyer (and Seller) Beware – New GST withholding regime from 1 July 2018

Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (the New GST Withholding Regime) became law on 29 March 2018, with effect from 1 July 2018.

It will change the party responsible for remitting GST to the ATO under the sale (or long term lease for more than 50 years) of “new residential premises” and subdivisions of “potential residential land”. This applies where the price (other than the deposit) is first provided (usually at settlement) on or after 1 July 2018 regardless of when the contract was entered into.

If a contract for sale was entered into before 1 July 2018 and settlement is before 1 July 2020, the New GST Withholding Regime will not apply.

What do the changes mean?

Under the current regime, a purchaser pays the full amount including GST to the vendor at settlement. The vendor then remits GST to the ATO.  From 1 July 2018, the purchaser will be responsible for satisfying the vendor’s GST liability by withholding and remitting GST to the ATO directly. The vendor will have an obligation to notify the purchaser of its responsibility to remit GST to the ATO.

A key reason for the change is that as of November 2017, the ATO estimated 3,731 vendors have evaded paying GST to the ATO by dissolving their businesses before their next BAS lodgement, a practice known as “phoenixing”, totalling $1.8 billion in debt written off by the ATO.

The GST a purchaser must pay to the ATO will be an amount equal to:

  1. if the margin scheme applies (usually the case for off-the-plan residential sales), 7% of the contract price of the sale (with the legislation allowing for this rate to be increased to 9%); or
  2. if the margin scheme does not apply, 1/11th of the contract price of the sale.

Any difference between the GST amount withheld by the purchaser, which is based on the contract price, and the vendor’s actual GST liability, which is based on the adjusted price at settlement, will be adjusted under the vendor’s next BAS lodgement.

The GST must be remitted to the ATO on or before the date of settlement.

If a purchaser remits GST to the ATO, the vendor will be entitled to a credit after the vendor has been assessed by the ATO for the period in which that GST was remitted.

How will the purchaser know its obligations to withhold and remit GST?

The vendor will have an obligation under the New GST Withholding Regime to provide written notice to the purchaser (Notice) prior to the sale, detailing:

  1. whether the purchaser is required to withhold and remit GST under the sale to the ATO;
  2. the name and ABN of the vendor;
  3. the applicable GST amount to be withheld and remitted;
  4. when the purchaser must remit GST;
  5. where the consideration is not expressed as an monetary amount, the GST inclusive market value of that consideration; and
  6. such other matters as specified in the regulations (of which there are presently none).

A vendor’s requirement to provide a Notice to the purchaser will apply to the sale of all “residential premises” and subdivisions of “potential residential land”.

If a vendor fails to provide a Notice to the purchaser, the vendor may be penalised currently $21,000 (for an individual) or $105,000 (for a company).

The only circumstances where a vendor would be exempt from providing notice to a purchaser are if:

  1. the sale is for “commercial residential premises”; or
  2. the purchaser is registered for GST and acquires the land for a creditable purpose.

Key impacts

Vendors (particularly developers) will need to factor into their financial forecasting the impact of not having the temporary benefit of GST funds available for their cash flow and reduction of debt. Vendors will also need to claim GST credits on their next BAS lodgement after purchasers have remitted GST to the ATO.

Importantly, purchasers must be aware of their obligation to remit GST under a sale and vendors must be aware of their obligations to provide a Notice to purchasers.

The Contract for Sale and Purchase of Land 2018 Edition has been updated for this purpose, namely:

  1. a new tick-a-box choice has been inserted on page 2 for vendors to indicate whether a sale is subject to the New GST Withholding Regime. In this way, vendors are able to satisfy their obligations to provide a Notice to purchasers;
  2. a new Warning 12 has been inserted to alert parties to the New GST Withholding Regime;
  3. a new clause 13.13 has been inserted to provide guidance for payment of GST and the provision of evidence of such payment; and
  4. clause 16.7.1 has been amended to reflect that the amount payable under the sale to a vendor at settlement is reduced by the GST that is to be withheld.

For more information regarding the New GST Withholding Regime please contact Tony Clarke.

This article was written by Michael Huynh, Lawyer – Commercial.