If you’ve been around in the tax and accounting game for a while, like I have, you might have noticed that ATO activity in the property arena has been steadily increasing over time. Whether it’s targeting big developers or property ‘flippers’, a quick search on the ATO website shows it is active in making sure taxpayers are correctly recording their income tax and GST liabilities relating to property.
In recent times, the ATO’s activity has been focused on taxpayers correctly remitting their GST liability on new residential premises. If you’re new to the property development game you might be thinking, “There is no GST on residential premises?” Well, that’s not entirely true. If the premises in question are ‘new residential premises’ then the developer must remit GST to the ATO if they are carrying on an enterprise. In my experience, this comes as a surprise to many first time developers.
On the other end of the spectrum, there’s regular developers who register for GST. They claim GST credits along the way, sell the property, but then wind up their structures before remitting the GST on the sales to the ATO. This failure to remit GST has become so common that they’ve made a term for it – phoenixing.
Enter the May 2017 budget, the government announces that they’re introducing legislation that will strengthen compliance with GST law in the property development sector. On 7 February 2018, that legislation was introduced in parliament and it received assent on 29 March 2018. This means from 1 July 2018 purchasers will be required to withhold the GST on the purchase price of new residential premises and remit the GST directly to the ATO as part of the settlement.
What will the new rules apply to?
The new rules will apply to supplies of new residential premises and supplies of potential residential land. New residential premises that have been created as a result of substantial renovations will not be subject to the withholding requirement.
When will they apply?
They will apply to all contracts of sale entered into on or after 1 July 2018. Contracts signed before 1 July 2018 will not be subject to the withholding requirement, provided the consideration for the supply (other than a deposit) is first provided before 1 July 2020.
Accordingly, the new rules will apply to existing contracts and those entered into before 1 July 2018 where the consideration for the supply (other than a deposit) is first provided on or after 1 July 2020.
How will the rules work?
Where a vendor makes a taxable supply of new residential premises or potential residential land, the purchaser will be required to withhold 1/11th of the price and pay that amount to the ATO on or before the day on which any part of the consideration for the supply (other than a deposit) is first provided. This will usually be at settlement and will be done during the settlement process by the conveyancers or property lawyers.
Where the purchaser pays the withheld amount to the ATO, the vendor will be entitled to a credit in its BAS equal to the amount paid by the purchaser. This credit will then be offset against the GST liability on the sale of the property, which the vendor is still required to report in its BAS.
The purchaser must pay the withheld amount directly to the ATO. Alternatively, they can provide the vendor with a bank cheque made out to the ATO. Provided they retain a record of the payment, no penalties will apply to the purchaser for a delay in the ATO receiving payment from the vendor.
Note, where the margin scheme is to be applied to the sale, the GST payable on the supply will be less than 1/11th of the sale price. Instead the purchaser will withhold 7% of the price.
Notification Obligations of the Vendor
To assist purchasers with their obligation to withhold, a vendor is required to give to the purchaser a written notice before the date the supply is made.
The notice must state whether the purchaser is required to withhold and make a payment to the ATO. If so, it must state the vendor’s legal name and ABN, the amount required to be paid, and when the amount is required to be paid.
Importantly, the notification must be provided in respect of all sales of residential premises not just sales of new residential premises.
Failure to provide the notice gives rise to a strict liability offence with a maximum liability of 100 penalty units, which is equal to $21,000 per infringement for an individual. If a company is the vendor, it will be liable for a penalty 5 times that amount.
With the threat of these penalties hanging over them, developers will need to be confident about their GST obligations at the time of sale and not a moment later. For big time developers, this won’t be an issue. My concern is for the mums and dads who are sub-dividing off the backyard and building a property on it, or buying an old knock down and building a couple of townhouses on it. Both scenarios are likely to attract a GST obligation.
Next Steps
If you are thinking about doing any sort of property development, it is important to consider the income tax and GST obligations of doing so from the outset. The team at The Hopkins Group are here to help you understand these obligations and assist you in achieving your financial goals.
General advice warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.
