Changes to GST Withholding for Residential Properties from 1 July 2018
On 1 July 2018, changes to the Withholding Law under the Tax Administration Act came into effect. These amendments change the process under which GST is paid to the ATO on the sale of:
- newly built residential properties;
- vacant land in residential subdivisions; and
- long-term leases for newly built residences.
These changes were introduced as part of a wider crackdown on phoenix activity amongst corporate property developers who wind up their companies after all of their sales are finalised, but before their BAS is lodged or paid to the ATO. What do these changes mean for residential conveyancing?
The first thing to remember is that these changes only apply to a limited number of conveyances that were always taxable supplies. For residential conveyancing, what has changed is:
- the ATO is now to receive notice of the taxable supply before settlement;
- there is an obligation to notify the ATO of when settlement is occurring; and
- the Commissioner of Taxation is to receive payment of the GST component directly from the settlement funds.
The above process is to be achieved by the Buyers (or their lawyer following the receipt of authorisation to this effect) lodging two electronic forms with the ATO at different stages. The first form is a Form 1 - GST Property Settlement Withholding Notification. The second form is a Form 2 – GST property settlement date confirmation. The forms are to be lodged by the Buyer or their lawyer electronically at any time before settlement. Once the Form 1 is submitted, the ATO will issue a payment notification with a payment reference number and lodgement reference number. The settlement notification is designed to notify the ATO of when payment can be expected.
Secondly, the amendments only apply to certain new residential disposals. For example, it only applies to the sale of:
- new residential properties;
- vacant land in new residential subdivisions; and
- long term leases over new residential properties (an instrument that is commonly used in retirement villages).
There are a number of exclusions to which the new regime does not apply. These include:
- new residential properties created through substantial renovations;
- potential residential land that is currently used for commercial purposes;
- commercial residential premises like hotels and motels; and
- taxable supplies of potential residential land between GST registered businesses where the buyer is acquiring the property for a creditable purpose.
Another is that the regime does not apply to the sale of existing residential properties. These were always input taxed. Similarly, the new rules are not applicable to transactions entered into before 1 July 2018, but which settle during the two-year transitional period.
Further mention needs to be made of the transitional provisions and how these apply to new residential disposals entered into before 1 July 2018, but which will settle after 1 July 2020. These transactions will be caught under the new rules. Many off-the-plan sales will no doubt be affected by this - particularly those entered into before 1 July 2018, but which have a 3 – 5 ½ year sunset date for establishment of the community title scheme.
The GST component currently is 1/11th of the purchase price if it includes GST, or 7% of the purchase price if the margin scheme applies. If you would like advice about the recent changes to GST in the context of residential property transactions, feel free to make an appointment with one of our lawyers.