The new regime requiring purchasers to withhold GST for supplies of new residential property has been passed by Federal Parliament and will come into effect on 1 July 2018.
What is the change?
Under the current legislation, vendors remit the GST on their sales to the Australian Taxation Office (ATO) in their business activity statements. The ATO is concerned that some vendors may fail to remit the GST on their sales and in some cases, engage in phoenix activities to deliberately avoid their tax obligations.
The new regime will apply to the sale of new residential properties, potential residential land or a long-term lease that has a lease period of more than 50 years. Potential residential land refers to land included in property subdivision that does not contain any buildings, i.e. vacant residential land acquired prior to commencement of construction.
How much does the purchaser withhold?
The purchaser must withhold 1/11th of the contract price or 7% of the contract price where the margin scheme applies, and must pay this amount to the ATO at settlement. The ATO may determine a higher rate can apply to sales made under the margin scheme, but that rate cannot exceed 9%.
The vendor must notify the purchaser in writing as to whether GST withholding is required and failure to do so is a strict liability offence, with a maximum fine that can be imposed by a Court of 100 penalty units, which is currently $21,000.
The new regime will apply to contracts entered into post 1 July 2018, or contracts entered into before 1 July 2018 but where settlement occurs after 1 July 2020.
We strongly recommend that vendors review their current contracts to determine if their contracts are required to be updated, and check if their sunset date is later than 1 July 2020, to address the potential application of the GST withholding regime. Contracts entered into post 1 July 2018 must also be updated to include the new GST withholding regime as a special condition.
Vendors, financiers and accountants will also need to understand the commercial impact of the GST withholding on their business, as it will affect the vendor’s cash flow by not having access to the GST component on the contract price.
Our property team is ready to assist you with the transition process. Contact the DE team for further information.
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