LCR 2018/D1 – Purchaser’s obligation to pay a GST ‘withholding’ amount on a taxable supply of newly constructed ‘residential premises’ and certain ‘potential residential land’ – draft Ruling on operation of new law

On 26.4.2018, the ATO issued a Draft Law Companion Ruling, on the operation of the newly passed laws, that implemented the ‘GST withholding’ provisions, for certain purchasers of newly constructed residential premises, or new subdivisions, to remit GST directly to the ATO.

Treasury Laws Amendment (2018 Measures No 1) Act 2018 (the Amending Act),which received Royal Assent on 29 March 2018; and amends the Taxation Administration Act 1953, Schedule 1  (TAA1), A New Tax System (Goods & Services Tax) Act 1999 (GST Act) and Income Tax Assessment Act 1997 (ITAA97) to Implement this system.

The substantive content, for this article, is in 4 parts below (Parts A, B, C & D), each with their own study questions.

The ruling also deals with other topics that are beyond the scope of this article, to summarise.

10.5.18

[ATO website: LCR 2018/D1; Tax Technical – Article about the Bill; FJM; LTN 78, 26/4/18; FJM; Tax Month April 2018]

 

A.   The withholding provisions are in new s14-250 of the TAA1 (which appears just after the similar provisions for capital gains tax) [Sch 5, item 1 of the Amending Act].

1. Subsection (1) makes the recipient of a taxable supply (ie. the purchaser) of ‘new residential premises’, liable to pay a GST withholding amount, to the Commissioner, if those premises are not created through substantial renovations and are not ‘commercial residential premises’. [ss(1)&(2)]
2. Subsection (1) also creates a similar a liability for a supply of ‘potential residential land’ (any land that can be used for residential purposes), that is included in a ‘property subdivision plan’ and does not contain a ‘building that is in use for a commercial purpose’). The liability is also on recipients of such supplies (ie. purchasers) if they are not registered or they do not acquire the land for a creditable purpose. [ss(1)&(2)]
3. The liability is for supplies by way of ‘sale or long-term lease’ (within the meaning of the GST Act). [ss(2)]
4. The amount the purchaser must pay is 7% of the ‘purchase price’, if the margin scheme applies and, otherwise, 1/11th of the ‘purchase price’. [ss(6)] This purchase price is the ‘contract price’, before the normal adjustments. [ss(7)]
5. The purchaser must pay this amount on or before settlement (or, more precisely, the time any of the consideration, is paid, disregarding the deposit). [ss(4)]
6. The Commissioner is given power, by legislative instrument, to: exclude certain types of supply [ss3)]; vary the date amounts are due, in specified circumstances, including payment by instalments [ss(5)]; or, vary the ‘margin scheme’ withholding amount between 7% and 9% [ss(8)].
7. The general rule is that these provisions apply to withholding payments required to be made on or after 1 July 2018 (that is, when the first ‘non-deposit’ amount of consideration is paid). Subject to a transitional rule, this is the case, irrespective of whether the contract of sale was made before or after that date). [Sch 5, item 26]
8. However, there is a transitional rule, which, in essence, gives a 2 year ‘grace period’ for amounts paid under pre-1 July 2018 contracts. Purchasers (recipients of the supply) will have no obligation to pay ‘withholding’ amounts, to the ATO, on contract price, if the first non-deposit consideration is paid before 1 July 2020. [Sch 5, item 26]

Study questions (answers available)

1. Is withholding required, on a (taxable) supply, of all ‘New Residential Premises’?
2. Is withholding, on supplies of ‘potential residential land’, only required from purchasers who would not get an input tax credit, for the GST payable (because they are not registered or do not acquire for a ‘creditable purpose’)?
3. Is the rate of withholding, for a supply, under the ‘margin scheme’, the same as a normal taxable supply?
4. Subject to a transitional rule, are purchasers required to withhold, from 1 July 2018 (which is to say, when the first non-deposit consideration, is paid, on or after that date), irrespective of whether the contract is made before or after that date?

 

B.   There is also a ‘notice’ requirement in new s14-255 into the TAA1. This prohibits a vendor making a supply (by sale or long-term lease) of ‘residential premises’ or ‘potential residential land’ unless the vendor, has given the purchaser a notice (before making the supply), advising the purchaser whether they have a GST withholding obligation, and if so, the amount, the date it’s due and the name and ABN of the supplier. [ss(1)]

1. A notice is required, for relevant supplies of all ‘residential premises’, unless they are ‘commercial residential premises’ (ss(2)(a)). This is so, even if there will be no withholding obligation (for instance, because the residential premises are not ‘new’).
2. It similarly applies to supplies of all ‘potential residential land’, unless (not just that on which there would be a withholding obligation – namely: when that land is in a ‘property subdivision plan’ and does not have a ‘building that is used for a commercial purpose’). [ss(1)]. This is likely to be for the same purpose (and the factors, for determine liability, are more readily in the supplier’s control or knowledge).
3. These notice provisions don’t apply to a supply of ‘commercial residential premises’. Neither do they apply to a supply of ‘potential residential land’ if the recipient (purchaser) is registered for GST and acquires the land ‘for a creditable purpose’. [ss(2)]
4. Failure to comply with the notice requirement, does not affect the purchaser’s obligation to withhold. [ss(3)]
5. Failure to give this notice will result in the supplier being liable to a penalty of up to 100 Penalty Units (currently, $21,000). [ss(4)&(6)]

Study questions (answers available)

1. Is a notice required for a sale of all residential premises, even if not subject to the withholding regime, because they are not ‘new residential premises’?
2. Is a notice required, for the sale of ‘potential residential land’, even if there will be no withholding obligation, because the land is not in a ‘property plan of subdivision’ or does have a building on it that is used for a commercial purpose?
3. Is a purchaser excused from having to withhold, if the vendor’s notice erroneously says there is no withholding obligation?

 

C.   Draft Law Companion Ruling: LCR 2018/D1 covers most of the above topics, including the following.

1. The Commissioner discusses the ‘pre-July 2018 contract’ transitional rule, which is for ‘contracts for a supply … entered into before 1 July 2018’. In para 8, he rules that this includes contracts that are exchanged by 30 June 2018. It also includes, where the parties execute 2 copies of the contract, contracts where the vendor communicates, to the purchaser, that it has executed the contract by 30 June 2018. [para 8]
2. The Commissioner guides taxpayers to his rulings on the important concepts of ‘residential premises’ (GSTR 2012/5) and ‘new residential premises’ (GSTR 2003/3). [para 10]
3. For the purposes of liability for the supply of ‘potential residential premises’, the Commissioner addresses the key requirement that it is ‘permissible’ to use the land for ‘residential purposes’ (neither of these terms, being defined).  He rules that the test is what ‘planning laws’ say is permissible. It will be sufficient if even one permitted purpose, is residential (for instance industrial or rural zoning that doesn’t prohibit residential use). [para 16] He also says that it is not relevant what private documents might permit (such as a lease or covenant). [para 19] Neither will it be relevant that there are some local government requirements to use it for residential purposes (such as requiring a permit to build the residence). [para 20] He says that ‘residential purposes’ can include residing without that necessarily having any degree of permanence. [para 21] By way of contrast, the ‘buildings that are residential premises (in the negative limb of the definition of ‘potential residential land’) must have some some permanence and offer some shelter from the elements. He says that prefabricated buildings may qualify and a mere shed would not. [para 22] Another requirement for this type of withholding, is that there is no ‘building’ that is ‘in use for a commercial purpose’. He rules that the purpose must be ‘current, actual and ongoing’ this use is ‘objectively demonstrated’. [para 23] I hope this is not an extension of his view that premises are ‘residential’ by looking at the form of the building. This has proved difficult for houses used as a doctor’s surgery, warehouses used to live in and strata appartments leased to a hotel.
4. The Commissioner rules on the requirement that the potential residential land be ‘included in a *property subdivision plan’, which is defined in the GST Act as a plan for the division of real property that is registered under an Australian law. He rules that this includes ‘strata plans’ and ‘community plans’ as they, too subdivide land (with new titles). [para 25]
5. The Commissioner looks forward to the time where he might exercise his power to exempt certain kinds of supplies, from the withholding obligation. He says that this is likely to emerge from practical experience. He excludes transactions that are prone to ‘phoenixing’ but foresees that it could be appropriate on government affordable housing schemes. [para 28]
6. The Commissioner confirms that, generally, the obligation to pay the withholding amount, on the payment of the first non-deposit amount, will be on settlement. [para 29]
7. The Commissioner considers the meaning of the word ‘deposit’ for the purpose of establishing the time the withholding payment must be made (at the time any of the consideration is paid, other than the deposit). He says that this must be a ‘genuine’ deposit. [para 31]. For these purposes, he refers readers to Div 99 of the GST Act (about ‘security deposits’) and the contents of his Goods and Services Tax Ruling: GSTR 2006/2. This has some relevance to this law (because it is about ‘security deposits’ not just ‘deposits’). In any event, paragraphs 31 to 34 of GSTR 2006/2 give some guidance about the difference between a deposit, and instalments under a contract, and on the more vexed question of whether deposits might be paid in instalments.
8. The Commissioner mentions ‘instalment contracts’ and notes that the withholding amount, for the whole of the ‘purchase price’ will become payable on the first instalment (of only part of that price). [para 35] It would be unwise to set the first instalment amount at a figure less than the withholding amount (eg. less than 1/11th of the full price). Then the purchaser would have a liability, that it could not fund, by withholding from the instalment payment.
9. The Commissioner mentions that the amount to be withheld is set as the ‘contract price’, which, is the ‘*price’ specified in the contract. The Commissioner notes that ‘price’ is defined as the GST inclusive price, but rules that a contract that specifies that GST is to be added, then it will be that contractual amount, plus the GST. [para 38]
10. The Commissioner also says that the exclusion of ‘normal adjustments’ from the price stated in the contract, is a reference to adjustments for rates, taxes and water adjustments calculated to the date of settlement. He contrasts this with the opposite approach for calculating GST on the ‘price’ of land, where these types of settlement adjustments are taken into account by the supplier, as set out in his Goods and Services Tax Determination: GSTD 2006/3.  [para 39]
11. He rules that a purchaser of land, which is only partly covered by these withholding provisions, should take reasonable steps to apportion the contract price. [para 42]
12. He rules that an option fee is NOT part of the contract price (for the purchase). [para 43]
13. He rules that multiple purchasers will be treated as having made separate acquisitions, proportional to the share they acquire (eg. proportional to their interests as ‘tenants in common’ or treating ‘joint tenants’ as acquiring equal portions). [para 44]
14. He rules that a purchaser must still make a ‘withholding’ payment, even though part of the consideration is non-monetary (and there might be insufficient funds, from which to withhold). [para 45]. This is a troublesome application of the law, as the purchaser may have to make the GST withholding payment, without having any statutory right of indemnity, from the vendor (as s16-20 only exonerated from liability, for withholding what was otherwise payable).

Study questions (answers available)

1. Does he rule that the transitional rule applies to contracts exchanged by 30 June 2018?
2. Does he rule that it is ‘zoning law’ that determines, whether it is permissible, to use land, for residential purposes (for the purposes of determining whether it is ‘potential residential land’)?
3. Does he rule that until a local government requirement, to get a permit, before building a residence, is also relevant to determining that it is ‘permissible’ to use the land for residential purposes?
4. Does he rule that a ‘strata plan’ is relevantly a ‘property subdivision plan’?
5. A Div 99 ‘security deposit’ and the word ‘deposit’ (used, in s14-250(4)(a)(i), to define the time when the withholding amount must be paid) are similar, but are they the same thing?
6. The withholding amount is payable on the payment of the first (non-deposit) instalment of the purchase price, but does the purchaser have to pay the full withholding amount (1/11th of the Contract Price), if that is more than the instalment, from which it could be withheld?
7. Does the Commissioner rule that the ‘contract price’ is the price in the contract, even if it’s a pre-GST price (to which GST must be added)?
8. Does he rule that an ‘option fee’ is part of the ‘Contract Price’ (for the purposes of determining the amount of the GST withholding obligation)?

 

D.   Amounts withheld, in error, are also covered in this draft ruling.

1. Ordinarily, the vendor (with the GST liability) would get a credit for an amount properly withheld and remitted (s18-60 of the TTA1).
2. But s18-85 deals with amounts withheld (and paid to the ATO) in error. It allows the vendor to apply for a refund of that amount (at least 14 days before the GST is due to be paid). This seems appropriate, as the Vendor will not have received the ‘withheld’ portion of the sale price, this is the most expeditious way getting him the balance of the sale price.
3. However, the Commissioner only has to pay the refund (to the vendor, as opposed to the purchaser, who wrongly paid the amount), where it is ‘fair and reasonable’ to do so, having regard to the nature of the error, the wider circumstances, and any other relevant matters (s18-81(4)).
4. Somewhat surprisingly, however, the Commissioner advises that he is unlikely, to be satisfied that a refund, to the vendor, is ‘fair and reasonable’ where the vendor does not, actually, have any GST to pay (that is, because it is not a ‘taxable supply’). Instead, the Commissioner says, the purchaser, who withheld in error, may be entitled to a refund (by way of restitution for money paid under mistake of law or fact). The Commissioner says he will consider these claims on a ‘case by case’ basis. [para 62]
5. This might seem wrong headed, as it is the Vendor, who has not received all of the sale price (because part of it has been withheld and remitted to the ATO – albeit, now in error. The most expeditious way, to pay the Vendor, the balance of the sale price, is for the ATO (who has the money) is for the ATO to pay it to him (whether he has a GST liability, or not).
6. The alternative is more circuitous. The Commissioner would have to refund the purchaser, who would then have to pay the Vendor, the balance of the sale price, which it wrongly withheld, to pay it to the ATO.
7. This would allow the Commissioner to avoid a restitution claim (as he would have refunded, the Purchaser, the amount paid in error).
8. This, in turn, would leave it up to the purchaser to on-pay the balance, of the sale price, to the underpaid vendor. This means the Vendor has to get the Purchaser to co-operate, in on-paying the refunded amount (which he may or may not do). It also leaves the purchaser exposed, as s16-20 only exonerates him, from any liability, for withholding what was otherwise payable, if the withholding is actually required (and here, we are assuming, it was not). Therefore, the purchaser could be liable for damages.
9. And, to complicate things, the Explanatory Memorandum, to the Amending Bill, assumed that the refund would go to the vendor (even though the withholding, was done in error). Para 5.44 of the EM seems to assume that, when a Purchaser is in doubt, about whether he must withhold, the safest thing is to withhold, as he will be exonerated, under s16-20 (which seems wrong to me, if there was, in fact, no obligation to withhold).
10. To remedy this, I would recommend amending s18-85 to say that where there has been a payment by mistake, the Commissioner can treat the withholding as justified and refund the amount to the vendor, as long as the amount has been withheld from the price otherwise payable.

Study Questions (answers available)

1. If it turns out that the vendor did not have a GST liability (and the purchaser paid a GST withholding amount in error), does s18-85 of the TAA1, require the Commissioner to refund the amount to the vendor (given that he can’t use it as a GST credit on that supply)?
2. Would the s16-20 right of exoneration, from liability, for withholding an amount otherwise payable, protect a withholding made erroneously?
3. Did para 5.44 of the EM effectively assume that: ‘when in doubt, withhold, to be on the safe side’?