On 6 November 2017 Treasury published an Exposure Draft of legislation that will require purchasers of new residential premises and lots in new residential subdivisions to pay an amount equal 1/11th of the purchase price directly to the ATO at or before settlement. The legislation was announced in the 2017-18 Budget and views on the draft are sought by 20 November 2017.
The documents can be accessed here:
The amendments are intended to address non-compliance by property developers who collect GST at settlement but dissolve the business before lodging the BAS to avoid remitting GST. By making purchasers pay GST directly to the ATO, the main enabler of the evasion activity is removed.
Summary of the proposed amendments
The withholding regime
The amendments will apply to the supply of “new residential premises” (as currently defined in the GST) act and to “potential residential land”, which are essentially lots in a subdivision where the land is zoned residential and that have not previously been sold. This is intended to cover house and land packages where the purchaser may receive a taxable supply of a vacant block of land.
The purchaser must pay to the Commissioner an amount equal to 1/11th of the “price” for the supply and that amount must be paid on or before the day on which any of the consideration for the supply (other than as a deposit) is first provided. This will usually be at settlement, but for a contract payable by instalments, the obligation will be triggered at the time of payment of the first instalment (not being the deposit). The amendments are to be introduced into Schedule 1 of the Taxation Administration Act 1953 as an extension of the withholding provisions in Division 14. These provisions require a payer to withhold part of monies payable to another person in certain circumstances and to pay those amounts to the ATO – for example PAYG withholding.
If the purchaser does not pay the amount to the Commissioner the purchaser will be liable to a penalty equal to the amount payable. However, no penalty will be applied if the amount related to the taxable supply of new residential premises and the purchaser reasonably believed the premises not to be new residential premises.
Where the purchaser pays the amount to the Commissioner, the supplier will be entitled to a credit equal to that amount.
Disclosure obligations on the vendor
Under the amendments a supplier will be prohibited from making a taxable supply of “residential premises” or “potential residential land” to another entity unless, at last 14 days before making the supply, the supplier gives to the other entity a written notice including:
- Whether the other entity will be required to make a payment under the amendments in relation to the supply.
- If so, the amount required to be paid and when the amount is required to be paid.
If the supplier does not give the notice, it is liable to an administrative penalty of 100 penalty units (a penalty unit is currently $210).
Importantly, a notice will need to be given each time residential premises are supplied as a taxable supply – not just where the supply falls within the amendments. This is to assist purchasers to comply with the legislation.
Sales made under the margin scheme and where the purchaser withholds in error
Where the margin scheme is applied to the sale, the GST payable by the supplier will be less than 1/11th of the price but the purchaser will still be required to withhold 1/11th of the price at settlement and pay that amount to the Commissioner.
To address the cash flow difficulties that may be imposed on suppliers in these circumstances, the amendments provide for a refund mechanism whereby a supplier who accounts on quarterly tax periods and is making sales under the margin scheme can apply for a refund of the difference between the payment made by the purchase and the anticipated GST payable on the supply.
A supplier may also apply for a refund where the purchaser withholds 1/11th of the price in error.
In both cases, the application for refund must be made at least 14 days before the end of the tax period to which the taxable supply is attributed. The Commissioner must refund the amount if would be fair and reasonable to do so, having regard to the matters set out in the statute.
Proposed commencement of the amendments
The amendments are to apply to supplies on which any of the consideration (other than the deposit) is first provided on or after 1 July 2018, regardless of the date of the contract of the sale. However, if the contract was entered into before 1 July 2018, the amendments do not apply if consideration (other than the deposit) is first provided before 1 July 2020.