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    GST withholding laws passed for property transactions

    Author //

    • Paul O'Dea Partner
      Phone: 61 7 3001 9243
      Email: p.odea@clarkekann.com.au

    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.

    Purpose

    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.

    Affected Transactions

    The changes will apply to the sale or long-term lease of:

    • New residential premises; and
    • Subdivisions of ‘potential residential land’

    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.

    Process

    For transactions mentioned above, both developers/sellers and purchasers have new responsibilities under the new laws.

    Developers/Sellers:

    • Sellers must give notice to residential purchasers in writing whether the transaction is of a type subject to GST withholding;
    • Should GST withholding apply the seller must provide to the purchaser details regarding the amount of GST payable and when it is to be paid to the ATO;
    • The requirement to issue notice is not limited to transactions where the GST withholding applies and must be done for all transactions of residential property;
    • Failure to issue notice, or the issuing of a false notice, will constitute an offence and the seller will be liable. A maximum penalty of $21,000 applies for individuals and $105,000 for corporations. 

    Purchasers:

    • Purchasers are required to withhold and pay (on or before settlement) to the ATO either:
      • one-eleventh of the contract price; or;
      • 7% of the contract price if the GST margin scheme applies
    • Where multiple buyers acquire land as tenants in common, the GST withholding liability is apportioned according to their interest in the property. This does not apply to joint tenancies however. 

    Impact and Effects

    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.

    ClarkeKann is a commercial law firm with offices in Brisbane and Sydney. Our expertise covers commercial & corporate transactions, employment & IR, financial services, litigation, risk management and insolvency, property transactions and resources projects, across a range of industries. For a full list of our legal services, please visit our website at www.clarkekann.com.au. To update your contact details or unsubscribe to any of our publications, email us at ck@clarkekann.com.au

    This bulletin is produced as general information in summary for clients and subscribers and should not be relied upon as a substitute for detailed legal advice or as a basis for formulating business or other decisions. ClarkeKann asserts copyright over the contents of this document. This bulletin is produced by ClarkeKann. It is intended to provide general information in summary form on legal topics, current at the time of publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters. Liability limited by a scheme approved under professional standards legislation. Privacy Policy
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