Changes to GST at settlement

Since 1 July 2018, buyers of new residential premises or potential residential land may now be required to withhold an amount from the purchase price and pay that amount to the Australia Taxation Office (ATO) on or before property settlement.

The conveyancer, solicitor or real estate agent should be able to assist with the property conveyancing process and gathering the information required to make a valid notification to a purchaser.

The property transactions impacted include:

  • Taxable supplies of new residential premises (eg, sales and supplies by the way of long term lease)
  • Taxable supplies of potential residential land where the contact was entered into before 1 July 2018 as long as the property transaction settles before 1 July 2020.

If you are a property developer, you need to let the buyer know if they need to withhold an amount when you sell residential premises or potential residential land. This information can be included in the sale contract or in a separate document.

To provide certainty to purchasers, a supplier (vendor, seller, etc) of residential premises or potential residential land must notify in writing whether a purchaser is required to withhold an amount. If the purchaser is required to withhold, the supplier must also notify the purchaser what that amount is and when it needs to be paid.

The general rule is that if the property sale contract specifies an amount that is the price of the supply (for example, the contract price) then the withholding amount is calculated on the contract price. However, there are some situations where the amount to be withheld must be calculated differently.

 

Table 1: When the amount to be withheld must be calculated differently

Situations where the amount to be withheld must be calculated differently Amount to be paid by the purchaser
The margin scheme applies to the supply 7% of the contract price or price
The supply is between associates and is without consideration, or is for consideration that is less than the GST inclusive market value of the supply 10% of the GST exclusive market value of the supply
There is a mixed supply, for example only partly a supply of new residential premises or potential residential land A reduced amount using a reasonable apportionment of the contract price or price multiplied by the applicable rate.
There are multiple purchasers (not joint tenants) 7% (margin scheme) or 1/11th of the contract price or price for their % interest in the property purchased

Note: When none of the circumstances in table 1 apply (that is, the general rule) then 1/11th of the contract price or price is the amount to be paid by the purchaser.

 

This law change does not affect the supplier’s obligation to lodge their Business Activity Statement (BAS) and report their GST liabilities or entitlements on taxable supplies of these types of properties.

Once the supplier lodges their BAS and it is processed, the supplier will receive a credit of the amount the purchaser withheld and paid to the ATO.

The transfer of the legal title of the property following settlement of a sale is a matter for the parties to the sale contract. The changes do not require the withholding amount to be paid to the ATO before a title transfer can be registered with the relevant State or Territory agency.

Purchasers do not need to register for GST just because they have a withholding requirement.

Exclusions

Some property transactions are excluded from the new measure:

  • commercial residential premises (for example hotels and motels)
  • new residential premises created by substantial renovations
  • potential residential land included in a property subdivision plan that contains a building that is currently in use for a commercial purpose – for example, a factory or shop being operated in an area where local zoning permits mixed use
  • taxable supplies of potential residential land between GST registered businesses where the purchaser acquires the property for a creditable purpose.

Other types of property transactions are not included in the new measure as they are not new residential premises or potential residential land, for example:

  • sales of commercial premises, for example office units, factories and retail shops where land is zoned commercial use only
  • industrial land or farm land where zoning prevents residential development
  • hospitals.

Transitional arrangements for property contracts entered into before 1 July 2018

The new laws are prospective and only apply on or after 1 July 2018.

That means if your property sale contract was entered into (for example, exchanged) before 1 July 2018 and consideration (other than a deposit) for the sale is made before 1 July 2020, the new notification and withholding rules do not apply.

The normal GST rules will apply for sale contracts for a taxable sale of new residential premises or potential residential land:

  • entered into before 1 July 2018
  • where any consideration for the supply (other than a deposit) is provided before 1 July 2020.

Note: The supplier will report and pay the GST on the sale when they lodge their next BAS.

Important things to be aware of

  • A deposit or security paid on exchange of contracts is not consideration as it is usually held in a trust account on behalf of the purchaser until the property purchase settles. A deposit becomes consideration when it is either released to the supplier or forfeited.
  • A contract for the sale of a property is not entered into before 1 July 2018 if there is only an option granted to buy or sell the property. In most cases it will be necessary to look at the date at which that option is exercised to work out whether the transitional arrangements apply or not.
  • A supplier will not be required to notify the purchaser for contracts entered into prior to 1 July 2018 unless the consideration (other than a deposit) for the property sale takes place on or after 1 July 2020.

How the measure will work from 1 July 2018

Step 1: Supplier notification

A supplier must not sell any residential premises (new or otherwise) or potential residential land unless the purchaser has been notified in writing whether there is a requirement to withhold.

If the property being sold is excluded from the withholding obligation (for example, because it has been sold previously), the supplier notification must be clear that ‘no withholding is required’.

The supplier notification may be:

  • included in the sale contract; or
  • in a separate written agreement.

The onus is on the supplier to inform the purchaser correctly or penalties may apply.

There is no requirement for the supplier to notify if the supply is of:

  • commercial residential premises (hotels, motels, etc)
  • potential residential land to a GST registered purchaser who acquires the land for a creditable purpose (for example, to develop new strata units on the land and sell them as new residential premises).

If the purchaser must withhold, the supplier must provide additional information in the notification given to the purchaser including:

  • the name and ABN of the suppliers
  • the amount the purchaser is required to withhold and pay the ATO
  • when that amount needs to be paid
  • if the payment for the property purchase includes non-monetary consideration (for example, land swaps), provide the GST inclusive market value of that part of the payment
  • other information as specified in the regulations.

Step 2: Purchaser forms

There are two online notification forms the purchaser or their representative needs to lodge:

  • Form 1: GST property settlement withholding notification online form – enables a withheld amount to be paid to the ATO. A purchaser or their representative must notify the ATO prior to settlement the details of the parties to the contract and the property. Once the online form is submitted, we will provide a unique payment reference number (PRN) and a lodgment reference number (LRN). This form can be lodged any time after a contract has been entered into and prior to the settlement date.

Once the confirmation form is submitted a lodgement confirmation will be issued automatically to the purchasers (or representative’s) email address, or can be printed from the screen.

Step 3: Payment

Using the payment reference number (PRN), the purchaser will then pay the withheld amount directly to the ATO. The purchaser will receive an email confirmation once the payment is processed, as proof of payment for their records.

The credit will be transferred to the suppliers GST property credit withholding account. Once the payment has been credited, the supplier will then receive email confirmation.

Step 4: Business activity statement (BAS)

The supplier lodges their BAS when it is due and reports the taxable sale along with:

  • any other supplies
  • acquisitions
  • GST liabilities
  • GST input tax credits.

When the BAS is lodged the credits in the GST property credit withholding account will be automatically transferred to the suppliers activity statement account. This will apply the withholding credits against the supplier’s BAS net amount.

Any surplus credits from the activity statement account will be refunded (subject to normal GST refund processes) or if a further amount of GST is payable, the supplier will remit that amount if it hasn’t been paid already.

Note: The credit will not be made available until the supplier has lodged their next BAS and it has been processed.

Information for suppliers and their representatives

Your conveyancer, solicitor or real estate agent should be able to assist the with property conveyancing process and gathering the information required for you to make a valid notifcation to a purchaser.

Information for purchasers and their representatives

If you are purchasing new residential premises or potential residential land (and the exclusions do not apply) you will be required to withhold an amount from the purchase price and pay the amount to the ATO.

Your conveyancer, solicitor or real estate agent should be able to help gather the information you need to:

If you are unsure of the correct GST treatment of the property purchase or supply you are making, it is recommended you seek advice. You can call Damien Palmer, AFS Business Services Partner on 03 5443 0344 or get in touch with the ATO to avoid unintended consequences.