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Changes to remission of GST on new residential premises

Changes to remission of GST on new residential premises

Michelle Bennett and Matt Evans discuss the proposed new rules for GST on new residential premises.

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Blue house against a blue sky

The Government has this week released an exposure draft of legislation requiring purchasers of new residential premises and home sites to remit the goods and services tax (GST) on the purchase price directly to the Australian Taxation Office (ATO).

Under the current law developers collect GST from buyers as part of the purchase price and remit it to the ATO in the same way as any other business.

However, from 1 July 2018, the purchaser will instead be required to hold back the GST component of the purchase price and pay it directly to the ATO.

The stated aim is to “strengthen compliance” with the GST law pursuant to the previous announcement in the 2017-18 Budget as the Government is concerned some developers are failing to remit GST on the sale of new residential premises. In particular, the measure target “phoenix” operators who establish development vehicles that go bankrupt before paying GST collected from buyers, despite claiming input tax credits in relation to the construction costs of building.

Operation of the new law

The withholding applies to new residential premises and “potential residential land”. Generally, new residential premises are those which have not previously been sold as residential premises, created through substantial renovation or built to replace demolished premises. Potential residential land is land on which no residential premises exist but which can legally be used for residential purposes, (e.g. newly subdivided land zoned for residential use).

From 1 July 2018:

  • Developers must issue a notice to withhold 14 days prior to settlement. Penalties will apply for failure to issue a notice.
  • Purchasers will be required to pay the GST amount to the Commissioner on or before the day the purchase price is paid. Withholding will be 1/11th of the price, even if the actual GST is lower (e.g. where the margin scheme applies).
  • The developer will report the actual GST amount through their business activity statement (BAS) and will be entitled to a credit for the amount paid to the Commissioner by the buyer, and a refund if it exceeds the actual GST liability.
  • If the developer remits quarterly or annually and makes a supply under the margin scheme, refunds for any excess withholding can be made before the BAS is lodged.

Impact of the changes

The new rules remove developers’ ability to hold GST from sales proceeds for up to three months before their BAS is due, although a corresponding delay in claiming credits during the development process will continue to apply. In addition, where the margin scheme applies the developers will have to wait up to three months or make a separate application to recover amounts withheld which exceed their actual GST liability. It is easy to imagine these incursions on developer’s margins will feed into higher prices.

The government has stated that buyers should experience only “minimal impact” from the change in law, however this new obligation imposed on purchasers will increase the complexity and risk of buying and financing new property so unfortunately it is likely that the buyers’ costs will also increase.

Transitional relief will apply until 1 July 2020 for contracts signed before 1 July 2018.

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