One of the more significant tax measures to be brought before Federal Parliament on its resumption in February is proposing to give effect to the Government's 2017-18 Budget measure requiring purchasers of new residential premises (or subdivisions) to withhold GST on the sale consideration from 1 July 2018, and remit it directly to the ATO as part of the settlement. This is in lieu of the vendor who, under the ordinary operation of the GST provisions, as the supplier, has the liability to remit GST to the ATO.
The proposed measures do not broaden the base by expanding the land transactions that are subject to GST, the rate, nor the calculation of GST that would otherwise be payable. GST has always been charged on new residential premises and subdivisions.
An Exposure Draft of the proposed legislation was circulated for consultation and received extensive comments from industry and professional bodies. On 8 February 2018 a Bill for the new measures was introduced before Parliament as part of Treasury Laws Amendment (2018 Measures No. 1) Bill 2018. The measures as tabled were substantially altered from the Exposure Draft taking on board many, but not all, of the concerns expressed during the consultation period.
The key changes proposed by the Bill include:
- Where an entity and a term with existing definition under the GST Act (and for this article grouped under “new residential premises”) makes a taxable supply of new residential premises or a new subdivision of potential residential land. Instead of the purchaser paying the total consideration (subject to contractual adjustments) to the supplying entity, the purchaser will be required to make a payment of a portion of the ‘contract price’ to the ATO directly prior to or at the time consideration is first provided (other than as a deposit).
- The amount to be withheld and paid to the Commissioner will be dependent on whether the supply is made under the margin scheme. If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price (or the ‘price’ of the supply if the contract does not specify a contract price). If the margin scheme applies to the taxable supply, the purchaser must withhold 7% of the contract price or price, or a greater amount that has been determined by the Minister in a legislative instrument, however any determination cannot require payment of more than 9%. If the amount withheld and remitted proves greater than the vendor’s GST liability the vendor will need to claim a credit in its next BAS.
- Unless the purchaser is registered for GST and acquires the land for a creditable purpose, an entity making the supply of residential premises or potential residential land (not just new residential premises) for sale or long term lease must provide a notification to the purchaser before making the supply providing relevant details to the purchaser. Broadly speaking, for supplies of residential premises or potential residential land that is not new residential premises, the vendor need only notify the purchaser that they are not required to withhold. For supplies of what would be new residential premises the notice must additionally include, amongst other things, the amount that must be paid to the Commissioner and time required for payment.
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Failure by a vendor to properly notify a purchaser is a strict liability offence and subject to statutory penalty; it is not necessary to establish fault in failing to make any or all of the required representations. The only defence available (under the Criminal Code) is if the vendor can show they have made an honest mistake of fact, for example if the vendor made an honest and reasonable mistake about whether the property was new residential premises or existing premises; and - An entity that makes a taxable supply of new residential premises will be entitled to a credit in its BAS for the amount of the payment made by the purchaser to the ATO (to in effect offset the GST debit required to be disclosed in the BAS for having made the taxable supply) thereby preventing double taxation.
Of significance, entitlement to a GST credit is conditional on the GST that has been withheld being actually paid by the purchaser to the ATO. That is, if the purchaser withholds from the consideration payable to the vendor an amount for GST to be directly remitted to the ATO, and whether fraudulently or innocently fails to actually remit that amount to the ATO, the vendor will not receive a credit in their BAS and consequently remain liable to the ATO for GST on the sale.
Further, unlike other withholding regimes such as the PAYG system that impose a penalty on the withholder for failing to withhold and remit a withheld amount to the ATO and a right for the ATO to recover from the withholder the amount withheld, the proposed withholding measures do not expose the purchaser to subsequent recovery action from the ATO for the withheld non-remitted amount. This is a contractual matter between the vendor and purchaser. Purchasers will however be liable to statutory penalties.
As a consequence these proposed measures represent a significant shift in the due diligence and risk of GST non-compliance to a purchaser as well as a vendor. This is despite, by reason of the vendor’s required notification to the purchaser of the amount required to be withheld, time of payment and other requisite information, the purchaser having no excuses for non-compliance. The scheme of the legislation is simply that the purchaser does not have to calculate the remission amount, that is for the vendor to advise.
If suppliers of new residential premises are not to suffer a significant loss from non remittance by purchasers their representatives at settlement will need to ensure the purchaser’s remittance to the ATO of the GST amount.
To enable this, we consider supporting provisions in contracts for sale will be required allowing a vendor means to ensure that a purchaser remits the relevant GST amount to the ATO, at best by entitling and authorising the vendor to remit on the purchaser’s behalf. On the other hand purchaser’s representatives will want to be able to ensure that the purchaser is not exposed to suffering a penalty for non-remittance.
The measures apply to supplies of new residential premises for which consideration (other than a deposit) is first provided on or after 1 July 2018 (with a 2-year transitional period for pre-1 July 2018 contracts where the consideration is provided before 1 July 2020). Given this, vendors of new residential premises need to quickly review, amongst other things, current contracts, settlement procedures and financing arrangements to protect their position with respect to these proposed changes as finally legislated. Real estate agents and conveyancers will also need to update their systems, contracts and practices to build the withholding mechanism into their notification and transaction processes to ensure compliance.
