Until recently, the collecting and remitting of GST on the sale of development properties (including subdivided land, residential property, apartments, townhouses etc) has always been a very tricky area for the Tax Office.
History and practice would dictate the proceeds from sale of a property would commonly go directly to the bank and then to the developing entity, with GST to be settled later down the track on the lodgement of the BAS. The problem being, there have been many instances where development sales are inadequate, settlement goes to the secured lender, project cash flow ends up short, and the Tax Office is left as an unsecured creditor for the GST – in many circumstances, to the tune of millions of dollars.
From 1 July 2018
Change in obligations
Effective 1 July 2018, certain purchasers of ‘new residential premises’ are required to withhold an amount from the purchase price and remit this to the Tax Office.
The purchaser is required to withhold and pay to the Tax Office:
1. 1/11th of the contract price (where the supply is fully taxable), or
2. 7% of the contract price (where the supply is under the margin scheme), or
3. 10% of the GST exclusive market value of the supply (for supplies between associates were consideration is less than the GST inclusive market value).
As it stands, the developer will be required to assist the purchaser to comply by notifying the purchaser whether or not they have withholding obligation on the supply of the property.
Where there is a withholding obligation, the developer must notify the purchaser of the amount they must withhold, when the purchaser needs to paid to the Tax Office and other particulars required.
The withholding amount is due to be withheld on the day consideration for the supplier is first provided (ie settlement day) and we would suggest this would normally be managed by the conveyancer for the developer.
This now brings GST obligations within the realm of the purchaser, even though the purchaser is not required to register for GST (they are simply withholding an amount, they are not liable for a supply and the associated GST).
What property is affected?
These new provisions relate to a supply of ‘new residential premises’ or ‘potential residential land’ (land included on a property subdivision plan).
The new withholding provisions do not relate to:
- New commercial residential premises (ie hotels and motels).
- Substantially renovated premises.
- ‘Potential residential land’ that contains a building currently used for commercial purposes (ie land permitted to be used for residential purpose but currently does not contain residential premises).
- Potential residential land supplied to a GST registered entity for creditable purpose.
Practically, what happens now?
From 1 July 2018, the process for settlement on affected residential premises will be as follows:
1. Supplier notification
- Unless the purchaser has been notified in writing by the developer as to whether or not there is a requirement to withhold proceeds at settlement, the developer must not supply residential premises or potential residential land.
- If the purchaser does have a withholding obligation, the developer must notify the purchaser of;
- the amount they must withhold,
- when they must pay the amount to the Tax Office, and
- certain particulars such as the developers name and ABN.
2. Lodge form one
- There are two forms to be lodged by the purchaser under these new rules
- GST Property Settlement Withholding Notification – https://www.ato.gov.au/gstpropertysettlementform1/
- This form can be lodged at any time after the contract has been entered into but must be lodged before the due date of payment for the withholding amount
- This form is completed online and once submitted, the applicant/purchaser will receive a confirmation email with a unique payment reference number (PRN) and lodgement reference Number (LRN)
- Both the PRN and LRN are used to lodge the second form.
3. Lodge form two
- GST Property Settlement Date Confirmation – https://www.ato.gov.au/gstpropertysettlementform2/
- This form is to be lodged on or before the date of settlement
- The purchaser must notify the Tax Office (using the PRN and LRN) confirming the property settlement date
- This form effectively confirms that settlement has occurred
- The purchaser will then pay the amount withheld to the Tax Office using the PRN and they will receive email confirmation once the payment is processed
- Once the Tax Office has processed the purchasers withholding payment, they will notify the developer by email of the GST property credit amount and the property settlement (subject to supplier having recorded an email address for their activity statement account).
4. BAS lodgement
- keeping in mind that GST is a supplier based liability, the developer is still obligated to lodge their BAS and report the GST liability
- most importantly, this GST liability must be reported in full – not the net GST liability after withholding amounts
- once the BAS has been lodged, the developer will receive a credit for the amount of withholding that was paid to the Tax Office.
Funds at settlement
Obviously the net effect for developers of the residential premises is a lower amount at settlement of the property.
When settlement occurs, the developer is likely to receive the contract price less deposit paid less the withholding amount (less any other settlement fees and costs).
If for some reason the contract does not settle, there is no obligation on the purchaser to withhold any amount or to lodge the second form (because the supply has not been made).
In the event the form one has already been lodged by the purchaser, this form does not need to be cancelled.
The Tax Office has also specifically stated in their literature the purchaser’s obligation to withhold an amount at settlement is exactly that – it is an obligation to withhold. The amount withheld is not to be added on to the value of settlement to top up the agreed purchase price.
While the concept of withholding seems to add another layer of complexity to a property settlement, the added obligation on the developer to notify the purchaser is simply another consideration in the transaction.
But with the amount of lost revenue from property development being lost to liquidations, it is not difficult to understand why the Tax Office has taken this approach.
That being said, the most important consideration for developers at the moment is understanding their BAS lodgement process and notification of their GST liabilities, such that the transaction can occur efficiently within the tax system and the credit used to offset BAS liabilities.
Please contact us to discuss these changing GST requirements in more detail.