New legislation relating to GST withholding for property developers is set to come into force on 1 July 2018. This has left many developers worrying about the legislation’s effects – and how they can mitigate them.
The new legislation amends GST laws so that purchasers of “new residential properties” must withhold an amount from the contract price and remit that amount to the ATO at or before settlement.
The changes have been made in an effort to prevent property developers who are selling these types of properties from failing to remit the net GST collected on the sale to the ATO. In this regard certain property developers in financial difficulty have used the net GST they receive on sales as working capital to meet other liabilities. In cases where the developer’s business is subsequently placed in liquidation, the ATO will then not received some or all of the amount of the GST that has been withheld and should have been remitted in respect of sales.
So how will the legislation apply and how may it affect you.
GST withholding for property developers: summary of the legislation
In summary, the new legislation for GST withholding for property developers provides that:
- From 1 July 2018, a purchaser will be required to withhold and remit an amount to the ATO when purchasing a new residential property or certain land which has been subdivided (subject to the transitional provisions below);
- Where a contract of sale has been entered into prior to 1 July 2018 and consideration is paid prior to 1July 2020, the new rules do not apply;
- The purchaser is required to withhold 1/11th of the purchase price or, if the supplier uses the margin scheme, 7 percent of the purchase price;
- There are no settlement adjustments used for determining the amount of GST to be withheld;
- Prior to settlement, the vendor must provide a statement to the purchaser setting out the amount to be withheld and paid to the ATO and there are penalties associated with a vendor failing to do this;
- If no statement is provided by the vendor to the purchaser, the purchaser should pay 1/11th of the purchase price to the ATO and there are no penalties imposed on the purchaser if they do this and the amount paid is subsequently incorrect;
- The vendor is entitled to GST input tax credits for the withheld amount that the purchaser pays, meaning that the vendor may be entitled to a GST refund as a result of the transaction.
Key questions about GST withholding for property developers
What happens to GST credits if a property developer has an outstanding tax debt?
The legislation and explanatory memorandum sets out that GST credits available to a developer as a result of GST being remitted by purchasers directly to the ATO will be dealt with in accordance with Part IIB of the Taxation Administration Act 1953 (Cth).
In very brief summary, this means that GST credits will be applied against other outstanding tax debts that a developer may owe prior to a refund being issued to the developer
What’s the financial impact on property developers
For developers who have outstanding tax debts, this may cause significant problems, including that there may be little or no net GST payable on a property sale transaction yet the ATO may still retain 1/11th of the purchase price from the sale.
Property developers may be in a position to pay their debts upon realising further “stock” that they own (including outstanding tax debts owed). However, the ATO withholding the net GST and offsetting this amount against other tax debts may even result in a business ultimately failing.
Where can you get advice and assistance?
If you’re the director of a property development company, or an advisor to such a company, and the new GST withholding legislation looks like having a significant adverse impact on you, please don’t hesitate to get in touch with us.
We may be able to assist you in resolving problems that arise and in mitigating future problems or losses.