New Residential Developments Contracts from the 1st July will require the purchaser to pay the GST direct to the ATO.
The Government wants to prevent the loss of GST contributions from “phoenix” operators.
Simply speaking, a phoenix operator would setup a company to complete a residential development project. During the development the company would claim GST refunds for land purchase and development costs on each BAS.
Once completed the company would sell the new residential premises or residential lots which will include GST in the sale price.
However, a phoenix operator would not remit the GST, or lodge the BAS’s subject to the GST Collections on sale to the ATO but rather distribute all sale proceeds to other related parties (after paying financiers). By the time the ATO issues assessments to the company for the unpaid GST, it is often too late. The company has no assets and it may be in the process of being wound up.
In the absence of the proposed reforms, the 2017 Budget Papers estimate lost GST revenue from phoenix activities would have been $660 million over the next 3 years.
The proposed measures are intended to beat phoenix operators by requiring purchasers to withhold GST from the purchase price and to pay this amount directly to the ATO.
Start date is 1st July 2018.
However, for contracts signed prior to 1 July 2018, the new measures will not apply if the purchase price is paid before 1 July 2020.
This effectively provides a 2-year transition window for current off-the-plan sales.
It should be noted that all contracts which complete after 1 July 2020 will be caught, even if the contract is entered before 1 July 2018. This will be relevant for off-the-plan sales that are not expected to complete for another 2.5 years or more.
Are there any exemptions for developers with a good GST history ?
Unfortunately No. All developers selling new residential or residential land will be caught.
Vendor / Developer must issue notice to purchase?
It is expected that most developers will look to include the required notice in the contract for sale. In other words, it should be largely a “tick the box” exercise whereby the vendor simply needs to mark the Contract to indicate whether GST withholding will or will not apply.
Information required to be disclosed to the Purchaser :-
- Developer’s Name & ABN
- The Amount the Purchaser needs to withhold & pay to the ATO
- When the Purchaser needs to make the payment
- If the Purchaser includes any non-cash payment (such as land swaps), the GST-Inclusive market value of that part of the payment.
Generally 1/11th of the contract price, excluding settlement adjustments, however the amount may differ as following:-
|Situations where the amount to be withheld must be calculated differently||Amount to be paid by the purchaser|
|The margin scheme applies to the supply||7% of the contract price or price|
|The supply is between associates and is without consideration, or is for consideration that is less than the GST inclusive market value of the supply||10% of the GST exclusive market value of the supply|
|There is a mixed supply, for example only partly a supply of new residential premises or potential residential land, or commercial use.||A reduced amount using a reasonable apportionment of the contract price or price multiplied by the applicable rate.|
|There are multiple purchasers (not joint tenants)||7% (margin scheme) or 1/11th of the contract price or price for their % interest in the property purchased|
What Type of Property Sales are effected?
This obligation applies to taxable supplies that are:
- that is included in a property subdivision plan; and
Some property transactions are excluded from the new measure, such as:
- commercial residential premises (for example hotels and motels)
- new residential premises created by “substantial renovations”
- potential residential land included in a property subdivision plan that contains a building that is currently in use for a commercial purpose – for example, a factory or shop being operated in an area where local zoning permits mixed use
- taxable supplies of potential residential land between GST registered businesses where the purchaser acquires the property for a creditable purpose.
- sales of commercial premises, for example office units, factories and retail shops where land is zoned commercial use only
- industrial land or farm land where zoning prevents residential development
What about instalment contracts?
Purchaser’s withholding obligation to withhold the full GST is triggered on the payment of the first instalment of the contract price, excluding the deposit.
Do the changes put the ATO ahead of other secured creditors?
If a residential development goes into receivership, banks and secured creditors generally rank ahead of the ATO in regards to the purchaser’s withholding of GST, however new legislation may put the GST payment to the ATO ahead of other secured creditors.
A contract for $550,000 at settlement, the $50,000 of GST will be paid by the purchaser directly to the ATO. The developer will only receive the net proceeds of $500,000. Those net proceeds may be all that the bank can recover from the developer. Accordingly, it would be the bank, not the ATO, who misses out on the $50,000 of GST.
What are the penalties for non-compliance ?
The maximum penalty for non-compliance for a developer is 100 penalty units, which currently totals $21,000.
Worked examples: Purchaser to remit GST on property transactions
- Typical withholding at settlement
On 3 December 2018, Mary enters into a contract for the purchase of a new apartment with High Rise Developments Co for $770,000.
The contract of sale included the required notice providing relevant details to enable Mary to withhold and remit the correct amount of GST payable to the ATO at settlement.
Settlement occurs on 6 March 2019. Mary’s conveyancer advises Mary that she will be required to make a payment to the ATO on or before 6 March 2019. Mary’s conveyancer makes a payment as her agent to the ATO at settlement of $70,000 (being the GST component of the purchase).
Because Mary has paid $70,000 to the ATO, she does not have to provide this amount to High Rise Co, even though the contract price states that the consideration includes the $70,000.
High Rise Co receives a credit for this amount in their March 2019 BAS, and does not then have to make a payment of the amount when paying their net amount for the period.
- Withholding on land where premises not built
John buys land in a new master-planned development. The vendor selling the land has also indicated the purchase of the land is subject to the construction of a new home built on that land by an agreed developer.
John agrees to this condition and the vendor prepares a land contract, and a building contract is drawn up separately. John settles on the land first, withholds the GST on the contract price of the land and remits that to the ATO at settlement.
As the contract for the construction of the house is for the supply of goods and services and not land, the withholding does not extend to the supplies under this contract. GST on those supplies is paid in the usual way.
- Contract paid by instalments
Bob enters into a contract for a penthouse apartment with High Rise Co, the developer, for $11m on 24 June 2019.
The parties agreed to pay a 10% deposit on exchange of contracts ($11,000,000@10% =$1,100,000), and then two equal installments of $4,4450,000 each. The first installment is due on 24 June 2020, and the second is due on 15th January 2021.
Bob is required to make a payment to the ATO of $1,000,000 (GST Component) in addition to the $4,445,000 on the first installment on 24 June 2020. Bob notifies the ATO five days before the payment is due, and then pays this amount on 24 June 2020.
Bob then pays the full second installment of $4,450,000 on 15th January 2021 at settlement.
Cash flow would be:-
- $1,100,000 (10% deposit) 24th June 2019 date of contract
- $1,000,000 (100% of GST upfront on 1st Installment) +$4,450,000 = $5450,000 24th June 2020
- $4,450,000 on last installment at settlement 15th June 2021
If you would like further information, please feel free to contact our office.