New GST Withholding rules came into effect from the 1st of July 2018 and bring with them new reporting obligations for all residential property purchasers along with significant potential penalties.
How does it affect me?
If you purchase either "new residential premises" or "potential residential land" you will need to withhold an amount for GST as part of the property settlement. The withheld amount is forwarded to the ATO rather than the vendor. The amount will be 1/11th of the GST inclusive price unless you have agreed with the vendor to use the margin scheme in which case the withholding amount would be 7% of the GST inclusive price.
How do I know if I need to withhold?
The vendor (seller) is required to provide you with a written notice notifying you of whether you need to make a GST withholding payment to the ATO and if so, how much is required.
What happens if I don't withhold?
Significant penalties can apply if you are required to withhold and you don't. You may be liable to pay the entire GST amount to the ATO (Effectively increasing your purchase price for the property to 110% of the contract price). You wont be liable for a penalty if you have received a declaration that the property is not "new residential premises" if it is reasonable for you to believe that the declaration is correct based upon the contract and other circumstances present at the time when payment is provided. Therefore if you know that the house was built three years ago, and you don't withhold, you would likely be liable for a penalty equal to the GST payable. You also wont be liable for a penalty if either the property was not "new residential premises" or "potential residential land".
What are new residential premises and potential residential land?
Residential premises are new residential premises for the purposes of withholding if they have not previously been sold as residential premises or contain a building that has been built to replace demolished premises on the same land. The premises must also be being supplied as part of an enterprise that the vendor carries on. Residential premises in most cases will no longer be new residential premises if they have been rented continuously for more than five years since completion. Determining whether a property is new residential premises can be quite complex so caution needs to be taken to avoid potential penalties.
Potential residential land is land that is included in a property subdivision plan and does not include any building that is in use for a commercial purpose. If the purchaser is both registered for GST and acquiring the land for a creditable purpose, GST withholding is not required.
What other obligations are there?
You need to notify the ATO of the withholding amount by lodging the approved form on or before the day that a payment is made towards the purchase of the property (other than a deposit). If notification is not made on time, late lodgement penalties may apply.
How do I withhold?
Withholding will either be completed electronically through a conveyancing portal or by the exchange of bank cheques. As mentioned above it is important to also lodge the approved form with the ATO on or before making payment.
When do the new rules apply?
The GST withholding rules apply to contracts signed after 1 July 2018. They will also apply to contracts signed before this date if first consideration (other than a deposit) is not received before 1 July 2020.
It is best for purchasers to exercise caution in determining their GST Withholding obligations and avoid being pressured by the vendor into not withholding. The liability for the GST can fall on the purchaser if the proper procedure is not followed. Some examples of where purchasers should withhold even if they have been given a declaration would be if the contract contradicts the vendors declaration (eg the contract states that GST applies in error) or if the purchaser knows the building was completed less than five years ago. Even though GST may not apply for the vendor in these cases, it is too risky for the purchaser to not withhold.
If you want to find out about how these rules impact on sellers you can read our article "Cashflow hit for property developers under new GST withholding rules".