GST on property transactions – New GST withholding measure took effect from 1st July 2018.

Commercial, Property

Are you a Vendor or Developer selling a brand new residence or potential residential land subdivision?

Are you a potential Purchaser of a brand new residence or vacant land in a new subdivision ?

If you answered “Yes” to either of these questions, this article will be of importance to you.

This measure was brought about to stop Developers from dissolving their entities before remitting GST with their next BAS lodgment, where they may have already claimed input tax credits on their construction costs.  This is known as the “Phoenix activity” and is a deliberate avoidance of taxes, creditors payments and employees entitlements.

A Vendor of new dwellings or vacant land subdivisions is a “Supplier” of a “Taxable Supply”.

Even if the Vendor is not a business or Company, if the turnover from the property transactions and other transactions in the same enterprise exceed the GST threshold, the Vendor will be required to pay GST at the time of the settlement of the sale of the taxable supply.

“Contracts for the Sale and Purchase of Land 2018 edition” entered into from 1st July 2018 includes provision for information on whether the GST component of the sale price must be remitted directly to the ATO on settlement.  The Vendor/Supplier’s name, ABN, business address, contact details, together with the GST amount to be remitted to ATO are required to be inserted into the Contract or provided by written notice within 14 days of exchange of Contracts.

Vendors’ Accountants will assist in providing the appropriate information for this area referred to as “Residential Withholding payment” or RW payment.

Contracts that have been entered into before 1st July 2018 (for brand new residences or vacant land in new subdivisions) have until 1st July 2020 before the GST on settlement becomes applicable.  This provides a two-year transitional period for existing Contracts.

For Contracts in place that are not yet exchanged, these must be reviewed. The Contract pages must be updated to reflect the GST at settlement measure. Keystone Lawyers can answer any queries you may have to ensure you’re up-to-date.

Calculating the RW payment – If the Contract price includes GST, the amount is usually calculated at 1/11th of the sale price.  If the sale is subject to a margin scheme, the amount to be withheld is 7%.

If you are transacting properties for private purposes, for example building and selling your family home, this is not regarded as an enterprise requiring the withholding of GST.

The Purchaser’s Solicitor or Conveyancer must submit two notifications to the ATO following the exchange of Contracts.  At settlement, the Purchaser must withhold the RW amount from the sale proceeds for direct submission to the ATO.  The balance of the proceeds may be disbursed to the Vendor or mortgagee as normal.

To ensure a high level of compliance, ATO may penalise purchasers who fail to collect and remit the GST amount required.  The Vendor may also incur a penalty if they fail to supply the required notice in writing to the purchaser.

Further information is available on the ATO website.