With the end of the financial year in sight, there is one more thing your clients will need to be aware of regarding changes to the tax landscape — especially those thinking of purchasing a residential property.
From 1 July this year, buyers of new residential premises (or “potential residential land”) will be required to withhold an amount from the contract price for GST and remit this directly to the ATO on or before settlement.
The sorts of property transactions involved are those where a taxable supply is made (for example by sale, or supply by way of a long-term lease) of new residential premises or potential residential land where the contract is entered into on or after 1 July.
Generally the amounts to be withheld will be one-eleventh of the unadjusted GST-inclusive contract price, however this amount can be 7% if a margin scheme applies.
NOTE: A flowchart PDF guide on taxable supplies under a margin scheme
can be downloaded here.
This is sourced from the Tax Summary 2017-18.
Why the change?
The incumbent GST law requires a buyer to pay GST to the seller (or developer) as part of the purchase price on property transactions where there is a taxable supply. The seller is subsequently required to remit that GST amount to the ATO with their next business activity statement.
The problem that the change is attempting to fix has to do with tax evasion and an erosion of GST revenue from some property transactions. It was found that some developers/sellers, having collected GST on the sale of a property, were not forwarding this GST revenue on to the ATO — either dissolving the business and in some cases creating a new one (a “phoenix” entity) or through insolvency.
These GST law changes were originally announced in the May 2017 Federal Budget. The law companion ruling LCR 2018/D1 describes the application of the new law, and the bill itself, which received royal assent on 29 March 2018, can be found here.
The new rules are prospective and only apply on or after 1 July 2018. They do not apply to contracts entered into before then, as long as the transaction settles before 1 July 2020.
It is important to remind clients as well that the new law does not mean that an additional payment, on top of the contract price, is required. The GST withholding amount is taken from the purchase contract price (the price of supply).
Some property transactions are excluded from the new measure, such as:
- 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 the ATO considers these to not be 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