How the New GST Remittance Rules will Affect Property Transactions
By Erlinda Nunn
In a bid to combat illegal ‘phoenixing’ activities, the Government has introduced new GST remittance rules which affect property transactions that relate to sales of vacant land and new residential premises. These rules which came into effect on 1 July 2018 require purchasers to withhold and remit the GST payable on the sale directly to the Australian Taxation Office (“ATO”) on or before the date of settlement.
What is 'phoenixing'?
During the Federal Budget, the Government announced that $1.8 billion of GST revenue was written off due to illegal phoenixing activity. Phoenixing typically occurs when a company has been created to complete a residential project and does not remit GST on completed sales. The company is then placed into liquidation, avoiding its obligations to pays its debts, including taxes, creditors and employee entitlements.
The new GST remittance rules aim to address this type of phoenixing activity by passing the obligation to remit GST from the developer to the purchaser.
What is the withholding rate?
The GST withholding rate is dependent on whether the margin scheme is applied to the property transaction.
If the margin scheme does not apply to the transaction, the withholding rate is 1/11th of the GST inclusive purchase price noted in the Contract. However, if the margin scheme does apply to the sale, the withholding rate is 7% of the GST inclusive price.
Who is obliged to remit GST?
Purchasers of vacant land or new residential premises will be required to pay the GST withholding amount directly to the ATO at settlement or by providing a cheque payable to the ATO to the developer at settlement. For most property transactions, the withholding amount will be remitted on the date of settlement. However, under an instalment contract, the withholding amount will be due on or before the date for payment of the first instalment of the balance of the purchase price.
Developers must provide the purchaser with written notification at least 14 days prior to settlement advising whether or not the property is new residential property and providing their ABN. If the purchaser receives a notice that the property is not a new residential premises and this has been incorrectly disclosed by the developer, the purchaser can rely on the developers notice to avoid a penalty from the ATO for not withholding GST. If a developer fails to provide notice of an amount to be withheld they may be liable for a fine of $21,000.00, or $105,000.00 for companies.
When do these rules take effect?
The GST remittance rules were made effective on 1 July 2018 and will apply to contracts entered into for vacant land or new residential premises. Any contracts entered into prior this date are exempt, provided the transaction settles before 1 July 2020.
If you are considering entering into a contract and would like more information on how the remittance rules will affect you, please contact our Conveyancing Team on 4771 5664.