On 27 June 2018, the ATO issued Law Companion Ruling LCR 2018/4 on the recently enacted measure requiring purchasers of newly constructed residential premises (or new subdivisions) to remit GST directly to the ATO as part of the transaction (finalising LCR 2018/D1). For a fuller discussion about the operation of these provisions, and the draft ruling, see this related TT Article.
The main withholding obligation is found in s14-250 of the TAA1. This applies to supplies, under which any of the consideration (other than the deposit), is payable on or after 1 July 2018 (by virtue of the commencement provisions in the relevant amending Act). But same commencement provisions also implement transitional rules, which exempt amounts payable, under contracts entered into before 1 July 2018, where relevant consideration is first due by 30 June 2020 (which is to say, within 2 years of the start of the withholding measures).
The ruling discusses:
- the operation of the general transitional rule. The ATO will accept that a contract is entered into before 1 July 2018 if an exchange of contracts occurs by 30 June 2018. Where a contract is entered into by each party executing two copies of the contract, the contract will be treated as having been entered into before 1 July 2018 if the acceptance of the offer is communicated to the other party by 30 June 2018;
- the types of supply covered by the measure, namely the sale or long-term lease of new residential premises and potential residential land. The Commissioner has the power, however, to exclude other supplies from these withholding requirements and that he may well, where there is little or no risk of “phoenixing”;
- when the buyer is required to pay an amount to the ATO (generally by the settlement date). The ATO confirms that payment is not required at the time a genuine deposit is paid;
- the amount that needs to be paid to the ATO (generally 1/11th of the contract price or, where the margin scheme applies, 7% of the contract price);
- the vendor’s obligation to give written notice to the purchaser before making the supply; and
- the penalties for breaching the new rules.
DATE OF EFFECT: the ruling will commence on 1 July 2018, along with the legislation it relates to.
Para 60 of the draft ruling created some problems, the nub of which was that the Commissioner seemed to be saying that he would rarely be able to refund the vendor, a wrongly withheld amount. This seemed to be because he said (strangely) that s18-85(4) would not allow a refund to the vendor, as it would rarely be ‘fair and reasonable’ to do so [see Heading D, para 4, of the Related TT Article].
However, the Commissioner cures this in para 80 of the finalised Ruling (the equivalent of the draft para 60), leaving a much wider range of circumstances where the refund could go to the vendor. The changes to the draft can be seen below.
80. The Commissioner is only required to refund an amount to a vendor if satisfied that it would be fair and reasonable to do so [s18-85(4), having regard to the 3 matters set out in that subsection]. The Commissioner is unlikely to be satisfied that it is fair and reasonable to refund an amount, to the vendor, if a purchaser incorrectly made a payment in respect of a non-taxable supply where the amount paid to the vendor under the contract was GST-exclusive (the contract included a GST gross-up clause) and the purchaser has paid an amount additional to the contract price to the Commissioner in purported compliance with section 14-250. The vendor will not be entitled to a credit but the purchaser may be entitled to a refund. The Commissioner will consider repayment requests by purchasers on a case-by-case basis.
The Commissioner now seems to be saying that it is only where the purchaser pays an amount, to the Commissioner, under a GST ‘gross-up’ clause, mistakenly thinking the supply was taxable and it did have a contractual obligation, to pay this extra amount, to the vendor. In these circumstances, the Vendor has no GST liability and was never had a contractual entitlement, to an extra amount, for GST.
An example of this might be the supply of residential premises (ordinarily not taxable, because it is ‘input taxed’). But, to be on the safe side, the contract provides for an extra amount to be paid, to the vendor, for GST, if any (which there might be, if premises supplied were relevantly ‘new’). The parties might have erroneously proceeded on the basis that the premises were ‘new’, when, in fact, they were not. In those circumstances, the purchaser should get the overpaid amount back (not the vendor).
It seems the result would be different, if the vendor had been deprived of part of his purchase price, through a mistaken understanding about whether the supply was taxable or not (for instance, a fixed price, and the purchaser withholds for a non-existent GST liability). Then, the most expeditious way, of getting the underpaid sale proceeds, back to the vendor, would be for the Commissioner to refund the wrongly withheld amount, to the sort paid vendor. This would save the problems associated with the vendor having to extract it’s short paid amount from the refunded purchaser (perhaps by court proceedings, with associated cost and creditworthiness risk).
I am not sure, what the Commissioner would do, if the vendor did have an ultimate GST liability and it was only suffering a cash flow disadvantage, from a mistake about the scope of the withholding provisions. Presumably the Commissioner would refund the pre-paid amount, to the vendor, and trust him to pay the GST, at the subsequent due date. An example of this might be the supply of residential premises that are ‘new’ (and thus ‘taxable’) but are only new by virtue of ‘substantial renovations’ (and thus beyond the scope of the withholding obligations, under s14-250(2)(a)(i)).
FJM 30.6.18
[LTN 121, 27/6/18; Tax Month – June 2018]
Study questions (answers available)
- Is the finalised ruling about the operation of the new laws requiring purchasers, of residential premises and new subdivisions, to pay a GST amount to the Commissioner (withholding it from the purchase price)?
- Is there a ‘transitional’ exclusion for pre-1 July 2018 contracts, where the consideration is due within 2 years of contract?
- Is the range of ‘supplies’ subject to these requirements is fixed (so they can’t be changed)?
- Is the amount the prima-facie amount the purchaser has to pay to the Commissioner 1/11th of the total price or 7% if the ‘margin scheme’ applies to the sale?
- Is the effect of the ‘clarified’ para 80, that a Vendor that was never entitled to withheld GST, will not get a refund, under the ‘fair and reasonable’ requirement?
