The payment of goods and services tax (GST) in respect of certain new residential property sales has recently been turned on its head!
Commencing 1 July 2018, buyers of new residential premises (other than commercial residential premises or new residential premises created through substantial renovation) or subdivisions of potential residential land (by way of sale or long-term lease) are required to withhold an amount representing the GST, and remit this to the ATO.
The reason for this change (that is, shifting the GST withholding and remittance obligations from the seller to the buyer) is a reported high level of non-compliance by property developers with their GST obligations — whereby after selling properties and collecting GST from the buyer, some developers would then dissolve their business without remitting the GST to the ATO.
Whether acting for the buyer or seller of these two styles of property, tax agents may be called upon as follows.
Sellers may require assistance in:
- determining which sales are subject to the regime
- calculating the amount (representing the GST) to be withheld
- notifying the buyer of certain matters including whether and how much withholding is required
- calculating and remitting any GST payable for the tax period to the ATO after taking into account any credit for the amount remitted by the buyer.
Buyers may require assistance with:
- submitting certain forms to the ATO to first obtain information from the ATO and secondly confirm settlement has taken place
- making the payment of GST withheld to the ATO.
Where the property sale is subject to the new regime, generally the amount to be withheld will be either 1/11th of the GST-inclusive contract price or, alternatively, 7% of the contract price where the margin scheme is used. The payment of this withheld amount will generally be required to be made by the buyer to the ATO on the day of settlement.
As outlined below, under the new regime, both the seller and buyer have certain obligations. Failure to discharge these obligations can lead to six-figure fines being imposed by the ATO.
To assist buyers in complying with their obligations, sellers of residential or potential residential premises must notify the buyer in writing of certain matters before settlement. Unlike the withholding obligation (which only applies to new residential premises or new subdivisions of potential residential land), the notification obligation applies to the supply of all residential premises (both new and existing) or potential residential land. This includes so-called “Mums and Dads” selling existing/old residential property such as the family home.
However, the seller does not need to provide a notice in respect of potential residential land where the buyer is registered for GST and acquires the land for a creditable purpose. Notice is also not required where the sale is of commercial or commercial residential premises (see earlier).
Where the sale does not require an amount to be withheld and remitted to the ATO (for example, because it is an input taxed sale of residential premises that are not new) the seller only needs to make a notification to the buyer that there is no withholding obligation. On the other hand, where an amount must be withheld, the seller must identify this in the notice, and also state the exact amount that must be paid to the ATO as well as providing certain other information including the seller’s ABN. Notification of this information will typically be provided in the sale contract.
For their part, buyers are required to provide certain documentation to the ATO. Form 1 (available on the ATO website with accompanying instructions) must be provided to the ATO advising it that a contract has been entered into that requires a withholding. This can be submitted any time after a contract has been signed, but prior to settlement.
Form 2 (also available on the ATO website) is used to confirm the settlement date and can be submitted at the time of settlement and when the payment has been made to the ATO. Instructions for completion are also available on the ATO website.
Where a taxable supply is made to which the regime applies, the seller is entitled to a GST credit limited to the amount paid to the ATO by the buyer. Once the buyer has paid the GST withholding amount to the ATO, the ATO will make a credit available to the seller in a GST property credit account and send an email (either to the seller or their tax agent) to confirm this. The ATO will then apply this credit against the seller’s activity statement account once the seller lodges their activity statement for the tax period in which the payment is made to the ATO.
This new regime is a significant change to the former rules, where the seller remitted GST in the normal manner to the ATO following the sale; with no additional paper work or notification involved. Given this substantial change – and the potential penalties for both parties for non-compliance – it’s essential that tax agents are across this new regime.