New GST Withholding rules came into effect from the 1st of July 2018 and bring with them new reporting obligations for anyone selling residential or potential residential property. They will also result in a cash flow hit for developers.
What are the Vendor's obligations?
In all sales of residential property, vendor's are now required to notify the purchaser in writing whether the purchaser will be required to make a GST withholding payment to the ATO and if so, provide the purchaser with details enabling the amount to be paid, including the amount payable. If notification is not provided, the vendor may be liable to pay a penalty of $21,000 for individuals or $105,000 if the vendor is a Company.
When will withholding apply?
Withholding will apply if either the vendor hasn't given a declaration to the purchaser about GST withholding or if the vendor is selling "new residential premises" or "potential residential land". The withholding amount is 1/11th of the GST inclusive price unless the margin scheme applies in which case the withholding amount will be 7%.
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. However if there is any period within that five years where the property was advertised for sale, the property may still be new residential premises.
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.
How do I claim back the Withheld amount?
When you lodge your BAS for the quarter in which the sale occurred, you will be entitled to a credit equal to the amount of GST withheld that has actually been received by the ATO. Therefore care needs to be taken to ensure that the purchaser pays the required withheld amount on settlement.
What do I do if an amount has been withheld by the purchaser incorrectly?
There may be circumstances where a purchaser withholds an amount in error or withholds too much, eg withholding 1/11th when the margin scheme applies. Rather than having to wait until lodging your BAS, a form can be lodged no later than 14 days before the end of the tax period in which the sale occurred to apply for a refund.
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.
What are the impacts of these new rules on Property sales?
The first impact of the new rules is that instead of receiving 100% of the proceeds for the sale for a development, property developers may only receive 10/11ths of the proceeds. Up until now developers have been able to use the funds collected from the GST to invest in other projects or reduce their interest burden until the time that their next BAS was due for payment.
It may also mean that in some cases GST is withheld where GST does not apply eg where the property was not supplied as part of an enterprise that the vendor carries on. While the vendor will be entitled to a refund of the GST withheld in these cases, it will delay the receipt of up to 1/11th of the sales proceeds and also increase the chances that the transaction will be subject to an ATO audit.
To find out more about GST Withholding for purchasers read our article "What are the new GST Withholding obligations for Property purchasers?"