GST Withholding Regime on New Residential Property

The new GST withholding regime was first announced as part of the 2017-18 Federal Budget and contains a number of substantial changes.  This regime has now become law. From 1 July, 2018 purchasers of new residential properties and subdivisions will be required to withhold, from the purchase monies otherwise payable to the vendor, and remit GST directly to the ATO. The GST withholding regime will use new and existing withholding tax provisions and imposes obligations on both purchasers and vendors. Changes Where currently the vendor receives all funds at settlement and then satisfies its own GST obligations in accordance with its standard reporting requirements, purchasers will now be required to withhold and pay the vendor’s GST directly to the ATO. The purchaser must pay the amount to the ATO on or before the day on which any of the consideration (other than the deposit) is paid. In most cases this will be on settlement, unless any consideration is paid prior to settlement.  If this is the case, the withholding obligation will apply from the time of the first payment. Withholding Rate The rate of withholding differs depending on whether the margin scheme is applied. a) if not, the rate is 1/11^th of the GST inclusive purchase price set out in the contract; b) if so, the rate is currently 7% of the GST inclusive purchase price. The withholding rate is applied to the purchase price set out in the contract and is not inclusive of any adjustments for rates, levies or other adjustments under the contract. Vendor’s Notification Obligation Before completion, all vendors of “residential premises” or “potential residential land” (not just new residential premises) must notify the purchaser in writing of its withholding obligations. If notice is not given it is an offence which can be subject to significant penalties. The vendor must notify the purchaser of: a) the name and ABN of the vendor; b) when the purchaser is required to pay that amount to the ATO; c) where the consideration is not expressed as an monetary amount – the GST inclusive market value of that consideration; and d) such other matters as specified in the regulations. If the withholding obligation does not apply the vendor must still notify the purchaser of this. Penalties Failure to give notice will be a strict liability offence. However, if the vendor can show that an honest mistake of fact has been made a penalty may not be incurred (subject to the ATO’s discretion). Failure to make a withholding payment will give rise to an administrative penalty under the existing provisions and the purchaser may be liable to a penalty equal to the withholding amount. However, the penalty will not apply if a purchaser can show that they relied upon the vendor’s notification and it was not unreasonable to do so, or if the supplier was provided with a bank cheque for the GST withholding that is payable to the ATO. Vendor Credits & Refunds A vendor that makes a taxable supply to which the GST withholding regime applies will still need to report the amount of GST payable in its BAS and will be entitled to a credit for the amount paid by the purchaser to the ATO. Any refunds which are not part of the BAS process will only be made if an amount is withheld in error and there will be timing restrictions. Transitional Period The new withholding obligation will apply to contracts entered into on or after 1 July 2018. However, the withholding regime will not apply to contracts entered into before 1 July 2018, except where the consideration for the supply is first provided after 1 July 2020. Practical implications Property developers will need to consider how the changes will impact the timing of payouts to their mortgagee and associated feasibility implications.  For example, given that GST is now paid out of each settlement, it will take longer for the developer to payout their mortgagee.  This means that the loan will not be repaid as quickly and interest will be payable on the outstanding loan amount. A vendor must give notice of the application of the GST withholding regime to purchasers, as noted above.  To ensure compliance with this section we recommend that vendors give notice to the purchasers by way of special condition under the contract of sale.