Changes to Contract - GST Withholding Legislation from 1/7/18
Changes to GST legislation have resulted in sale contracts needing to be amended for the new “GST withholding” regime. The reason behind the legislation is that some developers were avoiding their GST obligations on conclusion of developments and it was costing the government significant tax dollars each year (in the billions apparently).
So if the contract is one to which the regime applies, the buyer will need to withhold part of the purchase price and pay it to the ATO.
Existing residential property (which has always been input taxed and no GST payable in the past) will be exempt from this regime. So the vast majority of transactions you deal with won’t be affected.
What it will apply to
The GST withholding applies to taxable supplies of:
1. "new residential premises" (other than those created through "substantial renovation" and "commercial residential premises"); and
2. certain subdivisions of "potential residential land", where the subdivision does not contain any buildings used for a commercial purpose.
As it is not always clear if a sale will fall into these categories advice should be obtained from the seller’s accountant and/or lawyer.
What does the seller have to do?
In every contract (whether the regime applies or not) the seller must notify the purchaser in writing as to whether GST withholding is required before the supply is made.
Where the sale is subject to GST withholding, the notice must also provide certain specified details ‒ including the GST withholding amount and time for payment.
A failure by the seller to notify the purchaser regarding GST withholding is a strict liability offence, with a maximum fine that can be imposed by a court of 100 penalty units (currently, $21,000) for individuals or 500 penalty units (currently, $105,000) for companies. Alternatively, the ATO may impose an administrative penalty of 100 penalty units ($21,000).
What must the buyer do?
The purchaser must withhold and pay to the ATO:
1. 1/11th of the "contract price"; or
2. 7% of the "contract price" where the margin scheme applies.
This is based on the contract price, i.e. settlement adjustments are not taken into account.
When is it paid?
In most cases it has to be paid on the settlement date so a bank cheque will need to be organised as part of the settlement process.
What happens if the buyer doesn’t withhold and make payment?
Failure by the purchaser to withhold the GST withholding and remit it to the ATO gives rise to an administrative penalty under existing provisions (equal to 100% of the amount to be withheld i.e. double payment is required). The penalty will not apply if the purchaser has relied on a notification from the seller
(provided reliance is reasonable), or if the purchaser has provided the seller with a bank cheque for the GST withholding that is payable to the ATO.
The REIQ contract has been updated to have a section where the seller can tick a box to advise if it is subject to GST withholding or not. If there is withholding additional information must be provided by the seller.
If it does apply, the purchaser is then obligated to take a number of steps under the contract including prior notification to the ATO of the impending sale and lodgement of a form to obtain payment details for the GST amount at settlement. A cheque is authorised to be drawn from settlement proceeds for the relevant amount.
Please contact our property team if you require further information.