Withholding GST for Residential Property Transactions

For contracts entered into after 1 July 2018, purchasers of new residential premises or potential residential land are required to withhold an amount of the contract price and pay this directly to the ATO as part of the settlement process on sale.

This was introduced as an integrity measure, to target developers who in some cases were failing to remit the GST collected on their property sales to the ATO. It is not intended to apply in the case of a sale of existing (not new) residential property, which is not generally a taxable supply for GST purposes.

There are also exclusions from the requirement to withhold in respect to supplies of new commercial residential premises (e.g. hotels), existing premises that are deemed to be new by way of substantial renovation, land currently in use for commercial purposes, or where the land is being acquired by a GST registered entity for a creditable purpose (e.g. by another developer).

It is important to note that the rules that determine whether the sale of a property is a taxable supply have not changed, nor has the fact that GST on the sale is ultimately the supplier’s liability. It is still up to the supplier to determine the appropriate GST treatment of a property sale – it is only the mechanism & timing for payment to the ATO that has changed.

So, how does it work in practice?

Supplier Notification

The supplier of the property is required to notify the purchaser in writing of their obligation to withhold and provide information including the ABN & details of the supplier, the amount that must be paid to the ATO and the date this must be paid.

In practice in NSW, the standard Law Society / REINSW ‘Contract for the Sale and Purchase of Land’ has been updated to include a tick box to indicate if an RW payment is required, and if so, capture the necessary information that is required to be notified to the purchaser by the supplier.

The withholding amount will generally either be

• 1/11^th of the contract price (for fully taxable supplies); or
• 7% of the contract price (where the supplier is using the margin scheme).

Note: Penalties apply if a purchaser fails to withhold, however there are protections for purchasers where they rely on the information in the notice provided by the vendor (and it was reasonable to do so in the circumstances).

Purchaser Online Forms & Payment of GST Withholding at Settlement

There are two online ATO forms that need to be completed by the purchaser over the course of the transaction.

The first form (‘GST property settlement withholding notification’) needs to be lodged after the contract has been exchanged, but before the due date for payment of the withholding amount, and is used to notify the ATO of the details of the property, the purchaser and the supplier. This will generate a Payment Reference Number & Lodgement Reference Number which will need to be used with the second form (details below).

The second form (‘GST property settlement date confirmation’) needs to be lodged on or before the date of settlement to confirm that settlement has occurred. It is at this point that the purchaser needs to pay the withheld amount directly to the ATO, or give the supplier a bank cheque made out to the ATO. The purchaser & supplier will both receive confirmation once the payment has been processed by the ATO.

Supplier Business Activity Statement

The supplier is still required to lodge their Business Activity Statement (BAS) and report their GST liability on the sale as before.

When the supplier lodges their BAS for the relevant quarter in which the sale occurred, they will be able to claim a credit for the amount remitted to the ATO by the purchaser against the GST liability on the sale.

In the case of sales using the margin scheme, this may give rise to an additional amount payable, or a refund, depending on whether the actual GST liability was greater than or less than the 7% withheld.

What does this mean for developers?

Property developers will need to ensure they revise their project cash-flow forecasts and planning to account for the fact they will not receive the GST component of the sale price at settlement.

As an example, let’s say a developer makes a $1.1M fully taxable property sale for a new home in a residential subdivision which settles on 1 October.

Previously, if the developer was registered on a quarterly basis they may not have had to remit the resulting GST liability on the sale until 28^th February when the relevant BAS fell due, so they would have had the benefit of retaining the $100k GST component received on settlement for use in their general working capital for up to 5 months.

This money could have been used by the developer to assist in completing their project, in paying suppliers and employees etc, before the business needed to meet the GST liability by the required due date (which could have been done out of the proceeds of later sales for instance).

Under the new rules, the developer would only receive $1M at settlement with the remaining $100k being paid directly to the ATO – meaning this money is not available to the business in the meantime. The developer would need to ensure they have funding available from other sources to assist in completing the project if required.

The above is of course only a general overview as every situation is different. If you are a property developer or purchaser our team at BLG Business Advisers can provide you with clarity on your situation.  Take this opportunity to get in touch online or by calling (02) 4229 2211 to discuss your circumstances today.

*This information is relevant at the time of publishing and is subject to change*