On 9 May 2017 the Government announced that it will strengthen compliance with the GST law by requiring purchasers of newly constructed residential properties or new subdivisions to withhold the GST from vendors/developers and to pay the amount directly to the ATO at or before settlement. This new law will take effect from 1 July 2018
Under the current law, GST is included in the purchase price of new constructed residential properties or new subdivided residential land and the vendor/developer pays that GST to the ATO in their Business Activity Statement (BAS) for the tax period in which the supply occurs. In some cases, the GST on the supply is not paid until three months after settlement.
Why the new GST law
Some developers are failing to pay the GST to the ATO despite having claimed GST credits on their construction costs. The new GST law will prevent developers who build dwellings, claims GST credits, sell dwellings and then disappear before paying GST to the ATO.
Practically, the new GST law is an upfront GST revenue-flow benefit for Government.
Summary of the new GST law
The purchaser must withhold from the vendor an amount equal to 1/11th of the purchase price, but where the margin scheme applies 7% of the purchase price must be withheld – although the Minister may determine a higher percentage but not exceeding 9%. Where the contract of sale specifies an amount as the “contract price”, that is the price to be used. The purchaser must pay the GST amount to the ATO on or before settlement.
The GST amount must be paid on or before the day on which any of the purchase price (other than the deposit) is first provided. This will usually be at settlement, but for a contract payable by instalments, the obligation will be triggered at the time of payment of the first instalment (not being the deposit).
The new GST Law applies to all contracts entered into on or after 1 July 2018.
Contracts entered into before 1 July 2018 if settlement is on or after 1 July 2020.
If the purchaser does not pay the GST amount to the ATO the purchaser will be liable to a penalty equal to the GST amount payable.
Implications on vendors/developers
Developers should consider the potential to create cash flow issues, particularly as they will no longer have the cash flow benefit of having temporary access to GST collected at settlements. Developers should also consider the other financial impacts of the changes on their current and future residential developments. Financiers of developers will need to factor in the effect of the withholding provisions when assessing funding requests, particularly in relation to presale requirements and the number of settlements required for repayment.
Developers must obtain legal advice and ensure that their contracts for sale comply with the new GST law and that they legally represented by the right lawyer who can settle their contracts without failure to comply with the new GST law.
Implications on purchaser
Purchasers will have an obligation to withhold the GST amount from the Vendor at settlement, whether or not those are described in the contract.
Failure to comply with the new GST law means that the purchaser will have to pay the GST to the ATO directly after settlement. Therefore, purchasers must ensure that they are legally represented by the right lawyer who can protect their interest.
Purchasing a property can be one of the most important financial decisions you make in your lifetime, so it’s vital that you understand exactly what you’re signing up for. As a purchaser, it is critical that you consult a legal professional and review the provision in detail to ensure that you have adequate protection.
Optimum Lawyers can provide you with services and expertise that go above and beyond the services provided by many operators in the market, while still remaining within your budget. We aim to provide professional and friendly legal advice and effective representation to both individual and business clients and pride ourselves on our ability to provide clear and understandable solutions to your legal issues. When making decisions that could affect your legal rights, please contact us for professional advice.