In November 2017 we released an update regarding draft legislation released by the Federal Government proposing to shift responsibility for paying GST on new residential premises from developers to purchasers. These amendments were passed through parliament in March when the Treasury Laws Amendment (2018 Measures No. 1) Bill was approved by parliament with the changes to come into effect from 1 July 2018 onwards.
These new laws have been passed with the intent of preventing the loss of GST revenue occurring due to the ‘phoenix’ activities of some property developers. These scenarios arise where developers will claim a GST amount within the payment price of the property from the purchaser only to then liquidate the company prior to the payment of this GST to the Australian Taxation Office (“ATO”). Often these companies will then go on to continue business via another corporate entity.
The effect of the new GST laws will be to require the purchaser to pay the required GST amount directly to the ATO on or before the date the purchase price is paid to prevent these amounts from reaching the property developer in the first place.
The changes will apply to the sale or long-term lease of:
New residential premises include any residential premises that have been created through significant renovation, construction or replacement of demolished premises, and have not previously been sold.
‘Potential residential land’ is drafted broadly to include any land which is legally possible to be used for residential purposes and on which no residential premises currently exist (i.e. newly subdivided residential zoned land). This GST payment only arises in relation to the purchase only of potential residential land which is included in a subdivision plan and has not previously been sold as potential residential land within a subdivision.
For transactions mentioned above, both developers/sellers and purchasers have new responsibilities under the new laws.
It seems as though this new legislation has been introduced as a ‘blanket rule’ applying to all property developers due to the phoenix activities carried out by a small percentage of developers. Unfortunately the legislation does not include any exemptions for those developers who can demonstrate a history of compliance with GST contributions and compliance with tax obligations.
While it is estimated that GST revenue will increase by $590M within the first three financial years following commencement of the new laws, from a buyer’s viewpoint these new obligations will greatly increase the complexity and risk associated with what should be a simple residential property purchase. While most of the responsibility lies upon the developer or seller to provide notice of the GST payment requirement to the purchaser, buyers certainly have been given an additional administrative step in the process of purchasing a new property.
The new withholding regime will apply to transactions where the purchase price (excluding deposits) is paid on or after the 1 July 2018 with a two year transitional period for contracts entered into prior to 2018.
For further information regarding these proposed changes, please contact Paul O’Dea of ClarkeKann’s Property and Projects team.