Property Developers and GST: New Draft Laws to Ensure Compliance
A new Bill has been introduced into Federal Parliament which makes amendments to several tax Acts aimed at strengthening compliance by property developers with their obligations to remit GST to the Australian Taxation Office (ATO).
Currently, vendors collect GST on property transactions at settlement and remit it to the ATO as part of their business activity statement process.
The Federal Government has become concerned about 'Phoenix" property developers who collect GST on sales and then dissolve or declare bankruptcy before remitting GST to the ATO, resulting in lost receipts which are not recoverable.
The Government suggests that "phoenixing" has resulted in the ATO writing off $1.8 billion in lost GST revenue over the past five years.
The new laws are designed to prevent the loss of GST revenue that occurs in these circumstances and to quicken up the payment process.
If passed, the amendments will apply to transactions of:
- new residential premises; and
- potential residential land that:
2.1 is included in a plan of subdivision of existing land; and
2.2 which has not previously been sold as potential residential land included in the subdivision plan;
New residential premises are those which:
- have not before been sold as residential premises;
- have not been created through substantial renovations of an existing building; or
- have been built to replace demolished premises on the same piece of land.
Potential residential land includes land on which no buildings are constructed but on which buildings are permitted to be constructed.
Contracts subject to the new laws
Except for the obligation of the vendor to provide written notice to the purchaser (see below), which applies to the sale of any residential premises or potential residential land, the proposed laws will apply to all property transactions of relevant land where the payment of consideration (other than the payment of a deposit) is first provided on or after 1 July 2018. The date that consideration is paid would, generally, be the settlement date.
However, the new laws will not apply to contracts entered into before 1 July 2018, provided settlement takes place before 1 July 2020.
Withholding of GST
Before making any supply of relevant land the vendor must provide the purchaser with a written notice that includes the following information:
- whether the purchaser is required to remit GST directly to the ATO; and
- if so:
2.1 the amount of GST required to be paid to the ATO;
2.2 the time at which it is required to be paid; and
2.3 if some or all of the consideration is not an amount of money, the GST-inclusive market value of the property.
- The vendor's failure to comply with its notification obligations may face a fine of $21,000.00 and a potential further $21,000.00 administrative penalty.
The purchaser must then pay to the ATO 1/11th of the property's purchase price on or before the settlement date, if the margin scheme does not apply to the transaction.
If the margin scheme applies to the transaction, then the amount to be withheld is 7% of the purchase price and any necessary adjustments are dealt with as part of the vendor's BAS obligations.
This obligation to pay the ATO can be satisfied by the purchaser drawing a bank cheque in favour of the ATO for the applicable GST amount as part of the usual settlement process.
This part of the regime applies to GST-taxable property transactions of residential land or potential residential land, even if the land is not "new".
Refunds to vendor
A vendor may apply for a refund if a payment made to the ATO contains an error.
An application for a refund must be lodged with the ATO in writing no later than 14 days before the lodgment date of the vendor's business activity statement for the period in which the property transaction took place.
Implications for purchasers
Even when purchasing from developers or entities registered for GST, the purchase of property is not often thought of as a taxable supply, and the GST component of the purchase price is not generally considered when a purchaser is making a decision to purchase a property.
This new scheme will essentially require a vendor to disclose the GST component up front. Possible implications from this process are:
- Decreased appetite for "off-the-plan" purchases as opposed to existing homes which do not attract a liability for GST; or
- Increased difficulty in obtaining finance for "off-the-plan" purchases with an increased focus on GST components lowering valuations;
- Implications for Vendors
- The proposed scheme is a mechanism geared at cracking down on tax avoidance through unscrupulous business practices (in particular 'phoenixing'), however poses a number of potential issues for developers operating legitimately, including:
- Reducing cash-flow for vendors who were previously able to retain, and derive a benefit from, the GST component of a sale until lodging its BAS; or
- Require an overpayment of GST where the margin scheme is applied, further impacting cash flow.