The Treasury Laws Amendment (2018 Measures No 1) Act 2018 (the Act), was passed by the Senate on 28 March 2018 and given Royal Assent on 29 March 2018. The Act fundamentally changes the way GST is collected and paid for on the supply of new residential premises.
The Act provides for the changes announced by the Government as part of the 2017-18 Federal Budget, requiring purchasers of new residential premises to remit GST on the purchase price directly to the ATO (for example, as part of the settlement process).
This is a major shift away from how GST has traditionally been accounted for on such transactions, where the GST is remitted and reported by the supplier to the ATO in the relevant Business Activity Statement (BAS).
The new law provides that where an entity makes a taxable supply of new residential premises or a subdivision of potential residential land by way of sale or long term lease, the recipient of the supply (ie, purchaser) will be required to make a payment of part of the consideration (the GST amount) to the ATO directly, prior to or at the time consideration is first provided for the supply (other than where money is provided as a deposit).
However, this 'withholding obligation' does not apply if the recipient of the new residential taxable supply is registered for GST, and acquires potential residential land for a creditable purpose. This ensures that the obligation does not apply to certain business to business transactions, such as a developer purchasing newly subdivided land from another developer.
Calculation and Payment of the GST Amount
In calculating a purchaser's GST liability on a supply of new residential premises or a subdivision of potential residential land, the Act provides that a purchaser must remit 1/11th of the 'contract price' for the supply, or where such an amount does not exist, the price for the supply.
The 'contract price' is the amount specified in the contract for sale, subject to normal adjustments that apply on completion of transactions of that kind. Where the GST margin scheme applies to the supply, the purchaser may calculate their GST liability as 7% of the contract price.
The Act provides that payment of the GST amount to the ATO should occur prior to or at the same time consideration is first provided for the supply. This outcome aligns with the standard GST attribution rules, as the tax period in which consideration is first paid is generally when the supplier is required to pay the amount to the Commissioner.
In situations where there may be multiple recipients, such as where a couple may purchase a property as tenants in common, each recipient is treated as receiving a separate supply in proportion to their interest in the property. Thus, the amount of the GST payment that each recipient is required to make is proportionate to their interest in the property.
In order to assist purchasers manage the GST payment process, an entity making a supply subject to the new rules must not make a supply without providing a detailed notification to the purchaser.
The notification must state whether the new rules apply to the transaction, and include:
- the name and Australian Business Number (ABN) of the supplier;
- the amount the recipient will be required to pay to the ATO; and
- when the recipient will be required to pay the amount.
Where the supply does not require a payment to be made to the recipient to the Commissioner (eg, because the supply is an input taxed supply of existing residential premises) then the notification may simply provide this information.
Where a supplier fails to provide such a notice to the recipient, the supplier will have committed a strict liability offence and be subject to a penalty of 100 penalty units, or AUD 21,000 per offence (as at 5 April 2018). Where a corporation is convicted of an offence, a court may impose a penalty of up to five times the stated maximum penalty (or up to 500 penalty units or AUD 105,000 per offence).
Entitlement to Withholding GST Credits
A supplier that makes a taxable supply to which the new rules apply is entitled to a GST credit where another entity (i.e. the recipient/purchaser) has made a payment to the ATO. The amount of GST credit is equal to the amount of payment.
A credit entitlement does not arise merely because an amount has been withheld from the supplier, and is rather contingent on that amount actually being remitted to the ATO. The policy intention of this requirement is to ensure that the integrity of the credit system is not undermined by purchasers failing to remit GST amounts, but does raise administrative questions, such as how a supplier can test or validate whether the amount has been remitted.
Application and transitional provisions for pre-existing contracts
The regime will apply to supplies for which any of the consideration is first provided (other than consideration solely provided as a deposit) on or after 1 July 2018.
There is an exception to this general rule where a contract for the supply was entered into before 1 July 2018 and consideration for the supply is first provided before 1 July 2020. In situations where the exception applies, then the purchaser does not need to withhold and remit the GST to the ATO. There are also special transitional relief rules with respect to property development agreements (and waterfall payments under such agreements) if certain requirements are met.
Impact on suppliers
Suppliers of residential property captured by the new rules should consider their standard contractual terms to review compatibility with the new withholding regime and to ensure appropriate GST outcomes, particularly for existing and future settlements that may straddle the transitional period.
Additionally, the standard form of the notification required to be issued by suppliers should be reviewed to ensure compliance with the notification requirements imposed by the new rules. In this context, it is important to note that unlike the relatively recent changes involving foreign resident capital gain withholding clearance certificates, no government standard notification exists as yet under the regime for GST withholding.