- The Federal Government announced a new GST withholding regime in the 2017-2018 Federal Budget which has now been passed by the Federal Government.
- The regime will apply to contracts of sale for new residential premises and new subdivisions which are entered into after 1 July 2018.
- Purchasers under these contracts of sale will now need to withhold a proportion of the purchase price and remit it directly to the Australian Taxation Office.
- This marks a significant change – currently, GST is collected by the Vendor at settlement and then remitted to the Australian Taxation Office directly by the Vendor.
Property Transactions Affected
The regime applies to contracts of sale entered into from 1 July 2018 for:
- new residential premises; or
- vacant land arising from subdivision of residential land; and
New residential premises include premises which have been constructed as new premises to replace demolished premises on the same land and premises which have not been sold as residential premises previously.
Subdivisions of potential residential land include premises in a plan of subdivision which have not been sold as potential residential land in the plan of subdivision previously.
New Requirements Placed on Purchasers
Purchasers are now required to withhold and remit a proportion of the GST on the purchase price specified in the contract of sale directly to the Australia Taxation Office. The amount due is dependent upon whether the margin scheme applies to the contract of sale and will be:
- 1/11th of the purchase price if the margin scheme does not apply; or
- if the margin scheme applies, 7% of the purchase price.
The proportion of the purchase price is calculated on the purchase price specified in the contract of sale rather than the adjusted purchase price due at settlement which takes into account any amounts adjusted between the Purchaser and the Vendor.
Purchasers must withhold and remit this amount on, or prior to, the date which any part of the purchase price is first paid (note this does not include payment of the deposit). For most affected transactions, this obligation will arise at settlement.
A Vendor’s Obligations
At least 14 days prior to the Purchaser’s obligation arising, the Vendor must provide the Purchaser with a written GST withholding notice outlining:
- whether the Purchaser is required to withhold and remit any amount; and
- if an amount is required to be withheld and remitted by the Purchaser, the Vendor’s name, ABN and the amount to be withheld and remitted.
If the Vendor fails to comply with this requirement, significant penalties may be imposed by the ATO.
The Vendor will be entitled to a credit for any payment made to the ATO by the Purchaser.
Concerns for Purchasers and Vendors
Although the Vendor will be entitled to a credit for any payment made, this may cause cashflow problems for Vendors around the time of their BAS reporting.
Further, on terms contracts or staged settlements it should be noted that when payments are made in instalments, the regime may apply so that the 1/11th payment will be withheld on the first instalment amount. Obviously, this will cause issues when the GST payable represents a large amount of the instalment amount.
If a Purchaser fails to withhold an amount, it will be liable to pay a penalty amount to the ATO that is equal to the withholding amount. If a Vendor fails to provide the required notice significant penalties may be imposed by the ATO up to 100 penalty units (currently $21,000 for individuals and $105,000 for corporations).
If you require any further information about the new GST withholding regime, please do not hesitate to contact our Property and Development team on 03 5445 3333.