Changes to the treatment of GST in the sale of residential land
Effective 1 July 2018, there will be changes to the GST legislation applying to sales of “new residential premises” and “potential residential land”. The changes have been implemented in order to ensure GST is properly paid when buying and selling land in New South Wales. This is an effort by the Government to stop, or minimise impact of techniques (such as, phoenixing vendor entities) aimed at avoiding payment of a GST liability.
This change means a GST payment is now due on settlement, and although the vendor must notify the purchaser of their GST liability, the purchaser is now responsible for withholding, and remitting the GST portion directly to the Australian Taxation Office (“ATO”).
What’s Captured and What are the Exclusions?
These legislative changes affect residential contracts for sale and purchase of land. These include (but not limited to):
- “New residential premises” which is taken to include houses, units, and flats (not an exhaustive list and excludes vacant land); properties not previously sold as residential premises; or new buildings which replace demolished buildings on the same land.
- “Potential residential land” includes, for example, properties as part of a subdivision plan and that do not contain residential buildings, or buildings being used for commercial purposes (for example, a house and land package where the purchaser acquires the land prior to the commencement of construction).
You should be aware, “commercial residential premises” as well as “new residential premises” that have been created through substantial renovations and some types of “potential residential land” may be excluded from remitting to the ATO under the new laws but careful consideration should be given to your particular circumstances when determining if the exclusion applies. Further, if you have entered into an option agreement to buy or sell residential property, but have not exercised the option before 1 July 2018, this new law may affect you.
The amount a purchaser must withhold, varies depending on the contract. The following scenarios may apply:
- For fully taxable supplies the GST amount is 1/11th of the contract price.
- For margin scheme supplies the GST amount is 7% of the contract price.
- For supplies between associates for no consideration or less than the market value, the GST amount is 10% of GST exclusive market value of the supply.
You’re a purchaser
You do not need to register for GST, just because you are required to withhold an amount on settlement. Your obligation to withhold GST is not affected if the vendor fails to provide the required information and notification to withhold these monies. If however, you fail to withhold and remit to the ATO the amount required after receiving the vendor’s notification, you will be liable to the ATO for the amount of the withholding under the contract.
You’re a vendor
You must notify the purchaser, by providing your ABN and legal name, if the purchaser is required to make a remittance to the ATO on settlement. Failure to provide such notification will result in a fine of approximately $21,000.00 per infringement, or more where the vendor is a company.
If an amount is withheld in error, you can apply to the ATO for a refund provided you make this application 14 days before GST becomes payable. In all other instances, if you are eligible for a refund, this must be sought as part of your BAS lodgement process, and you should liaise with your accountant regarding this process.
All transactions entered into on or after 1 July 2018 in respect of residential land will be subject to the new laws. This legislation will not affect most contracts entered into before 1 July 2018. However, where a contract has been entered into before 1 July 2018, and consideration (other than deposit) is provided on or after 1 July 2020, then the parties must comply with the legislative changes.
If you are a developer, or have entered into a property development arrangement (“PDA”), there may be specific transactional provisions which apply to you in order that the parties are not affected by this withholding requirement.
To avoid parties to a PDA being advantaged, or disadvantaged as a result of the withholding obligation, transitional relief will apply if the following conditions are met. Namely:
- The PDA must have been entered into before 1 July 2018, with at least one party supplying development services to the supplier (vendor) of property to which the new measure applies.
- The distribution of consideration under the PDA either requires an amount must be distributed to the vendor for the payment of the vendor’s GST liability (taking into account entitlements to input tax credits) or distributions of the consideration, between the parties, must be adjusted to take into account the vendor’s GST liability.
- If the distributions under the arrangement were to be made when an amount has been withheld, and the parties would not be in the same position as they would have been in if there was no withholding obligation.
- A withholding payment has been made (for example, to us by a purchaser) in relation to the taxable supply of the property.
Where you have entered into a PDA prior to 1 July 2018, and if these four conditions have been satisfied, an extra distribution of GST may not be required. If you are unsure if you satisfy these conditions, please contact our office so that we may discuss your PDA.
What we will do
We will ensure that all contracts entered into on or after 1 July 2018 cover off on the new legislative requirements, whether you are a purchaser, or vendor. If you have already entered into a contract, we will review your contract, if we haven’t already, to ensure your contract reflects the proposed changes.
If you have any further queries regarding this article or require clarification regarding any specific GST application against your particular property, please contact Marissa Dimarco on (02) 4927 2900.