On 6 November 2017, the Treasury released Draft Legislation outlining the new Good and Services Tax (GST) measures coming into play from 1 July 2018. Provided the Draft Legislation is passed without change, below is a summary of the key concepts that will apply to the sale and purchase of “new residential” property.
Who does it affect?
The Draft Legislation affects recipients of a taxable supply under Schedule 1 Subdivision 14E 14-250 (2) of the Taxation Administration Act 1953. That is, it affects Purchasers of a taxable supply in relation to the above subsection by requiring Purchasers to pay the GST amount on the supply to the Australian Taxation Office (ATO) (and not the Vendor).
Under the proposed subsection, the taxable supply relates to the sale and purchase of “New Residential Premises” or “Potential Residential Land”. Both terms are defined in A New Tax System (Goods and Services Tax) Act 1999 as:
New Residential Premises: Residential premises that:
(a) Have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or
(b) have been created through substantial renovations of a building; or
(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.
Potential Residential Land: Land that:
(a) Is included in a property subdivision plan; and
(b) Has not previously been sold as potential residential and included in the property subdivision plan. The payment must be paid on or before the day of the consideration (that is any payment other than the initial deposit) for the supply is first provided or a date provided by the ATO.
What is the amount owed?
Provided the property being transacted fits into either of the abovementioned categories, the Purchaser will be required to pay the amount equating to 1/11 of the purchase price (being the GST amount of the purchase price) to the ATO.
GST Withholding Notice Requirement
The Draft Legislation imposes further obligations upon the Vendor, as the supplier of the residential premises or potential residential land. In this regard, the Vendor must serve a GST Withholding Notice upon the Purchaser at least fourteen (14) days before settlement.
The notice must state, amongst other things:
- Whether the Purchaser will be required to make a payment under section 14-250 in relation to the supply; and
- If the Purchaser is required to make such a payment, the notice must also include:
a. The Vendor’s name and ABN;
b. The amount due by the Purchaser to the ATO;
c. When the amount is due; and
d. If part or all of the consideration is something other than money, what is the GST inclusive market value of that consideration.
It should be noted that if the Vendor fails to provide the GST Withholding Notice to the Purchaser, the Vendor may face a fine up to $21,000.00.
That said, the Legislation provides a limited exception to the application of the sanction. Section 14-250 (5) states that the Vendor will not be liable to the penalty if, “at the time you gave the notice, you reasonably believed that the premises were not new residential premises”, in accordance with the definitions provided above. The explanatory memorandum added that the Vendor must have had an honest and reasonable mistake in relation to determining whether the property in question fit either of the categories to which the Draft Legislation applies. The Legislation does not provide a test for reasonableness.
For the Purchaser, failing to withhold the GST amount required is noted as a strict liability offence with a potential fine up to $2,100.00.
Refunding Excess Payment
If, for instance, the margin scheme applies to the calculation of the GST, the amount due to the ATO will be less than the 1/11 figure required by the Draft Legislation. In such a case, the Vendor can recover the excess amount by either:
- Claiming a refund as part of their Business Activity Statement (BAS) for the period; or
- Applying for a refund from the ATO through the new refund regime. The new refund regime will be put in place in cases whereby the Vendor lodges their BAS on a quarterly basis. The process is designed to protect the Vendor from having to pay out of pocket for the excess GST until the BAS has been lodged and refunds received. The refund regime simply requires the Vendor to prove that they are entitled to the refund.
The Government recognised that the current laws of GST associated with new residential property is lacking. Under the current system, the Vendor is required to remit GST to the ATO through its BAS. That said the Government realised that some property developers are failing to remit the GST due. In an effort to remedy the potential tax evasion issue, the Government is now shifting the onus of remitting GST to the Purchaser. The Government has also brought additional obligations for the Vendor in regard to the GST Withholding Notice Requirement.
Both Purchasers and Vendors must observe the new responsibilities correctly otherwise they will be at risk of being sanctioned with hefty penalties.
If you have any queries in relation to the above related matters, please do not hesitate to contact Peter Crittenden on email@example.com or Ben Wong on firstname.lastname@example.org or by phoning (02) 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.