Since its introduction in 2000 by the Howard Government, the goods and services tax in Australia (or GST as it is commonly known) has represented more than 12% of all revenue collected. This makes GST the one of the biggest sources of revenue for the Commonwealth Government, second only to income tax. It is of no surprise then that the Government would be looking to improve its collection of GST.
Originally announced as part of the 2017-2018 Federal Budget, the Government has now passed legislation significantly changing the way GST is handled on the sale of new residential property. From 1 July 2018, purchasers of new residential property must pay the GST component of the purchase price to the Australian Taxation Office (‘ATO’) directly instead of to the vendor. The Government has explained these changes are necessary to “clamp down on GST evasion in the property development sector”.
To what transactions does the new withholding scheme apply?
The GST withholding requirements apply to the sale or long-term lease (generally leases or licences for a term of at least 50 years) of the following types of real estate:
‘New residential premises’ that have not been created through substantial renovations of a building. A ‘new residential premises’ is defined under the existing GST law as premises that have not previously been sold as residential premises and have not previously been the subject of a long-term lease, or contain a building that has been built to replace demolished premises on the same land;
‘New residential premises’ that are not ‘commercial residential premises’ (i.e. a hotel, motel, inn, hostel, boarding house, premises used to provide accommodation in connection with a school, certain ships, a marina at which one or more of the berths are occupied by ships used as residences, a caravan park, a camping ground or anything similar); and
Land that it is permissible to use for residential purposes, but that does not contain any buildings (‘potential residential land’), and is included in a property subdivision plan (e.g. strata plan or land subdivision) and does not contain any building that is in use for a commercial purpose.In our view, the above categories will mostly affect those conveyancing transactions commonly referred to as ‘off-the-plan’ purchases.While the transitional provisions exempt any contract made before 1 July 2018 from the GST withholding requirements, they will apply to any part of the purchase price is paid after 1 July 2020. This effectively means that the withholding regime will apply to all conveyancing transactions involving the above property categories if they settle after this date regardless of the contract date.
What does a vendor need to do?
Before selling any residential property (not just new residential property in the above list), a vendor must give a prospective purchaser a written notice stating whether the purchaser will be required to make a GST withholding payment to the ATO and, if so, include the following:
The vendor’s name and ABN;
The amount that the purchaser will be required to pay to the ATO;
When the purchaser will be required to pay that amount;
If some or all of the purchase price will not be expressed as an amount of money, the GST inclusive market value of that part of the price; and
any other matters specified in the regulations.
If the vendor fails to give the above notice, then the ATO can fine them up to $21,000.
What does a purchaser need to do?
If the purchaser is not registered for GST, they must deduct the GST component from the purchase price and pay it to the ATO on or before the date that the purchase price (other than the deposit) is paid to the vendor. In the vast majority of cases, this will be the settlement date under the contract. However, where the price is payable by instalments, the obligation to pay the full GST amount to the ATO will arise when the first instalment is due. If the purchaser fails to make the required payment to the ATO on or before settlement, the purchaser is liable for a penalty equal to the GST amount.
It is important to note that the purchaser’s obligation to make the required payment to the ATO is not dependent on the vendor giving the requisite notice as outlined above. However, the purchaser may be absolved from liability if the vendor gave them a notice stating that the premises are not new residential premises or indicating that the purchaser will not be required to pay an amount to the ATO and, at settlement, there was nothing in the contract or any other circumstances relating to the sale that made it unreasonable for the purchaser to believe that the vendor’s statement was correct.
The amount to be paid to the ATO is a percentage of the GST-inclusive purchase price specified in the contract, disregarding any usual adjustments for outgoings, and will depend on whether the vendor will be applying the margin scheme to the supply. If the margin scheme will be applied, then the rate will be 7% of the purchase price (although the Government has the power to increase this as long as it does not exceed 9%). Otherwise, the rate will be 1/11th of the purchase price.
Changes to the NSW Law Society Contract
The contract for the sale of land that is commonly used in New South Wales, which is prepared by the NSW Law Society, has been amended to reflect the new withholding scheme (called a ‘residential withholding’ payment in the contract). The main changes in the 2018 contract include:
A new yes-no box to indicate whether or not the purchaser must make a GST withholding payment at settlement;
A new section that sets out the particulars required to be disclosed to a purchaser. Interestingly, in relation to the amount of GST to be withheld, the NSW Law Society is advising that when a property is sold at auction and the amount is not completed, the vendor must provide all these details in a separate notice to the purchaser within 14 days of the contract date; and
New clauses have been inserted in the standard conditions that allow the purchaser to make the required GST payment. These clauses inter alia require the purchaser to produce evidence that they have submitted the required notification form to the ATO at least five days before settlement.
Implications for purchasers and vendors
Vendors of all residential property will need to ensure they comply with the notice requirements under the new withholding scheme and purchasers must ensure they pay the GST payment when they are buying new residential property. In some cases, simply relying on the vendor’s notice will not be a sufficient excuse for the purchaser not making the required payment. A failure to comply with either requirement could see the purchaser and the vendor facing heavy penalties.
If you require assistance with a property development or conveyancing transaction, please contact HPL Law Group on (02) 9905 9500.