In brief - Considerations for buyers and sellers of affected property
The Federal Government has recently introduced the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (Bill)
which will implement the proposal announced in the 2017-18 Federal Budget: that buyers of new residential premises or new residential subdivisions will be required to remit GST on the purchase price as part of the settlement process from 1 July 2018. The proposal is intended to combat phoenix activities in the property industry.
If enacted, the Bill will create adverse cash flow issues for sellers of affected property and compliance issues for both sellers and buyers. Administration of the new regime will also pose challenges for the Commissioner. However, it is fair to say that the Bill is an improvement on the original exposure draft as a result of industry and stakeholder consultation.
Which property transactions will be affected?
The withholding obligation applies to a buyer or lessee under a long-term lease (recipient) (a long-term lease is broadly a lease for a period of at least 50 years) of:
- new residential premises, other than those created through a substantial renovation of a building and commercial residential premises, or
- potential residential land (which is land that can be used for residential purposes but does not contain any buildings that are residential premises) that is included in a property subdivision plan and does not contain any building that is in use for a commercial purpose, but only if the recipient is not registered or does not acquire the property for a creditable purpose. The withholding obligation therefore does not apply to business-to-business transactions involving potential residential land
The transaction must be a taxable supply so withholding is not required if the transaction is GST free, input taxed or not treated as a taxable supply (for example, a supply between members of a GST group).
When does the withholding obligation apply and what factors affect the amount to be paid?
Payment must be made by the recipient on or before the day any of the consideration for the transaction (other than the deposit) is first provided or on the day of the transaction if the transaction is between associates and no consideration is provided. Given that there will be practical difficulties in meeting this timeframe, we query whether the Commissioner will introduce a grace period for payment as an administrative arrangement, as applies to capital gains tax withholding.
The Bill requires different amounts to be paid depending on whether or not the margin scheme applies and whether or not the transaction is between associates for less than market value:
- if the margin scheme applies, the amount is 7% of the GST inclusive contract price, although the Minister has the power to determine a different percentage between 7% and 9%
- if the margin scheme does not apply, the amount is 1/11 of the GST inclusive contract price
- if the transaction is between associates and is without consideration or is for consideration that is less than the GST inclusive market value, the amount is 10% of the GST exclusive market value
The contract price does not take into account any potential adjustments which simplifies the compliance burden for the parties.
The Bill contains apportionment rules for mixed supplies and multiple buyers or lessees. Joint tenants are jointly liable to make the payment but any of the joint tenants may discharge the obligation.
Transitional provisions include two exceptions for contracts entered into before 1 July 2018
The general rule is that the new rules will apply in relation to a transaction for which any of the consideration (other than a deposit) is provided on or after 1 July 2018, irrespective of the date the contract was entered into.
There are two exceptions for contracts entered into before 1 July 2018:
- where the consideration (other than a deposit) is first provided before 1 July 2020
- where the contract is a development arrangement which includes a payment waterfall which does not take into account any withholding obligation and which may result in a windfall gain to a party if the withholding obligation was applied
To qualify for the second exception, the following conditions must be satisfied:
- the arrangement is between the seller or lessor (supplier) and one or more entities, at least one of whom will supply development services
- the arrangement deals with the distribution of the consideration from the development
- under the arrangement either an amount is to be distributed to the supplier on account of GST or distribution of the consideration is adjusted to take into account GST
- broadly, a windfall gain would arise for a party if an amount was withheld
- an amount has in fact been withheld
Where the conditions are satisfied the amount withheld is deemed to have been received by the supplier. This prevents the supplier seeking to recover the amount withheld from another party to the arrangement.
Credit and refund entitlements
The supplier is entitled to a credit in its business activity statement equal to the amount actually paid by the recipient.
If the supplier believes that a payment or part of the payment was made in error, it may apply to the Commissioner for a refund. The application must be made no later than 14 days before the day on which the GST is payable by the supplier. It is unclear what happens if the application is made outside this period, for example is the entitlement to a refund lost? The Commissioner is obliged to refund the amount if it would be fair and reasonable to do so. This gives the Commissioner some discretion to refuse refunds and will inevitably give rise to delays. If an amount is refunded, the credit available to the supplier is reduced by the same amount.
Suppliers will need to ensure that payment has been made to the Commissioner otherwise credit and refund entitlements will be lost.
Requirements for giving notice
The supplier of residential premises or potential residential land must give the recipient a written notice stating whether or not the recipient will be required to withhold. If so, the notice must also contain the name and ABN of the supplier, the amount that is required to be withheld, when the amount must be withheld, the GST inclusive market value of any non-monetary consideration and any other matters that may be specified in the regulations.
The notice must be given before the supply is made. There is some uncertainty as to the time of supply because there are no time of supply rules in the GST legislation. We expect that the time of supply will be settlement of a contract of sale or entry into a long-term lease. This may be later than the time the withholding obligation arises if part of the purchase price (other than the deposit) is paid before settlement.
The obligation to give a notice does not apply if the transaction relates to commercial residential premises or if the recipient of the potential residential land is registered and acquires the land for a creditable purpose. Despite these exclusions, the obligation applies to a broader range of transactions than those transactions to which withholding applies. For example, it applies to the sale or long-term lease of residential premises which are not new residential premises.
Penalties for non-compliance with notice and payment requirements
Failure to give a notice is a strict liability offence (it is not necessary to establish fault) with a maximum penalty of 100 penalty units (a penalty unit is currently $210) for individuals and up to five times that amount for companies. An administrative penalty of up to 100 penalty units may be applied. There are defences available which broadly require a reasonable belief that there was no obligation to give a notice.
Failure by the supplier to give a notice does not affect the withholding obligation. If the recipient is in doubt about whether a payment should be made, it should make the payment because it will not be subject to any adverse consequences as under the Bill its liability to pay the amount withheld to the supplier is discharged. If the payment has been made incorrectly, the supplier may apply for a refund. The explanatory memorandum indicates that in determining whether a refund is fair and reasonable, a factor that may be relevant is whether the error was caused by the supplier's failure to give the notice.
If the recipient is required to make a payment, it must notify the Commissioner in the approved form of the amount paid on or before the due date for the payment.
Failure to make payment is not a criminal offence but an administrative penalty applies equal to the amount of the payment that should have been made. The general interest charge also applies. There are defences available in relation to the imposition of the administrative penalty if the recipient has relied on a notice provided by the supplier that was incorrect where it was not unreasonable to do so, and where the recipient has provided a bank cheque payable to the Commissioner to the supplier on or before the date that payment must be made.
Powers of the Commissioner
Under the Bill, the Commissioner has the power to determine:
- that certain transactions are not subject to withholding
- a different time for payment to be made (including that amounts be paid in instalments)
- the time that the recipient must notify the Commissioner of the amount paid
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2021.