Since the GST came into being in 2000, the GST liability of the vendor on land transactions has been “contracted out” to the purchaser. Under contracts for the sale and purchase of land, the purchaser has paid the vendor’s GST component on the transaction directly to the vendor at settlement as a part of the amount due by the purchaser.
A significant number of land transactions arise from developments, which are typically “new residential premises”, being vacant land, dwellings or multi-story apartment developments. With large-scale developments, the GST component on the sales can involve huge amounts of money, which the developer has historically collected at settlement.
The majority of developers have carried out the intent of the GST Law, and they have reported and paid the GST that they have collected from the settlements of their developments. A few, however, have sought to flout the GST Law and some particularly unscrupulous developers have employed devious means to avoid remitting the GST they have collected.
One course that some have taken is to undertake a development project in the name of a GST registered incorporated entity. Once the project has been constructed, and the settlements have been completed (and the GST has been collected by the vendor from the various purchasers), the incorporated entity has been liquidated, and it has appeared that the developer has gone out of business. The GST collected has not been remitted to the ATO as the developer’s company has gone into liquidation without remitting the GST.
That developer has then incorporated another entity and continued to operate. This is known as phoenixing and the ATO, having lost substantial GST revenue to this type of scheme, has decided to change the GST payment regime for new residential premises to mitigate the loss of GST revenue from developers engaging in illegal phoenixing activities.
The changes to the GST withholding rules apply to new residential premises (newly constructed dwellings including apartments) and also to new residential land, which is vacant land that has been newly subdivided for residential purposes.
The change “flips” the responsibility to remit the GST on the sale from the developer (vendor) to the purchaser. The ATO’s thinking is that by making it the purchaser’s responsibility to remit the GST there will be a “spread” of parties remitting GST, rather than one party (the vendor) holding and then remitting what can sometimes be many hundreds of thousands of dollars in GST. The new rules do not in any way change the amount of GST that is payable, just the manner in which the GST is collected and remitted to the ATO.
This change comes in from 1 July 2018 and applies to contracts entered into from 1 July 2018. Contracts entered into before 1 July 2018 are exempt from the change provided that the developer completes construction of the development before 1 July 2020.
The effect of this change is significant because it affects all parties to a sale and purchase of new residential land and potential new residential land, including not only the vendor and purchaser and their respective conveyancers but also the real estate agent and the developer’s accountant.
The changes will place significant responsibility on the vendor as there is additional information that must be provided to the purchaser. This will largely be undertaken by the vendor’s conveyancer as a part of the settlement process.
The changes require that the vendor notifies the purchaser before the settlement of the need for the purchaser to remit the vendor’s GST component of a sale directly to the ATO upon settlement. This must be done by way of a written notice which must include the vendor’s name, ABN, GST amount, and the payment date. Once this is done, and settlement has taken place the vendor will be entitled to receive a credit in their next BAS for the GST that was withheld at settlement.
Purchasers, however, should not be directly affected by the changes. The ATO has designed the withholding changes so that the conveyancer for the purchaser will be charged with the responsibility to ensure that the GST component of the transaction is collected at settlement and remitted directly to the ATO. The purchaser’s conveyancer must report the information provided by the vendor to the ATO so the ATO can provide payment details to the purchaser.
Penalties will apply for non-compliance with the new withholding rules, so it is important that developers and vendors of new residential land and potential new residential land are aware of the changes and that their conveyancer or solicitor is also aware of the changes to ensure that compliance with the new rules is achieved. The conveyancer will also request the required information from the vendor so that this information can be given to the purchaser’s conveyancer as required by the new rules.
A developer should also raise these changes with any real estate agent that they may retain for a project to ensure that the agent uses a form of contract that makes provision for the new rules. The developer’s accountant will also potentially be more involved in the sale process, as accounting advice may be required to determine the GST liability and to ensure that the vendor complies with the requirements to advise the purchaser so that the correct amount of GST can be remitted at settlement by the purchaser.
If you require any help with the new GST withholding rules for sales of new residential land and potential new residential land, please contact Rod Hammond.