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.
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.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.