On 29 March 2018 amendments were made to the GST laws requiring purchasers of new residential premises or subdivision of potential residential land to withhold an amount from the contract price and remit it to the ATO on or before settlement (GST withholding).
Legislation has now been passed to “clamp down” on GST evasion in the property development sector.
From 1 July 2018, purchasers of new residential premises and new residential subdivisions will generally be required to withhold the GST on the purchase price at settlement and pay it directly to the ATO.
Property developers will also need to give written notification to purchasers regarding whether or not they need to withhold.
The new obligations are primarily aimed at ending the practice of some developers collecting GST on new properties before dissolving their business prior to remitting such tax to the ATO.
The amended legislation includes a transitional arrangement that excludes sale contracts entered into before 1 July 2018 as long as the property transaction settles before 1 July 2020. This will provide certainty for sale contracts that have already been signed.
How will GST withholding work in practice?
- Developer needs to work out whether the supply is subject to GST withholding, calculate the amount and give notice to the purchaser.
The requirement to give a notice extends to all ‘residential premises’ – not just ‘new residential premises’. The effect is that a developer will need to consider the GST treatment well before settlement to comply with the notice requirement.
The notice will need to set out at the very least:
- the developer’s name and ABN;
- the amount that the purchaser has to withhold; and
- when the purchaser has to pay the withheld amount.
Failing to provide this statement carries penalties up to $21,000.
2. Amount to be withheld will be one of these two:
- 10% of the contract price (before any settlement adjustments); or
- if the parties have agreed that the margin scheme applies, 7% of the contract price
3. The vendor is entitled to GST input tax credits for the withheld amount the purchaser pays. This means if the purchaser withholds an amount from the supplier, but does not pay it to the Commissioner, the supplier will not be entitled to input tax credits.
4. Note that a long term lease (i.e. more than 50 years) is treated as a sale and subject to the new provisions.
New rules may be confusing so make sure to contact your boring accountant if in doubt.
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