Construction 2

New Residential Property Sales – GST Withholding Regime

Wai-Hwoon Low, Kathryn Elleman, Mark McKinley

A New Regime

  • As we have previously highlighted, in the 2017 budget, the Federal government introduced a new regime to require home buyers of new properties to withhold 1/11th of the sale price and to remit it to the ATO as the developer’s GST.  
  • An exposure draft (“Exposure Draft”) of the Treasury Laws Amendment (2018 Measures No. 1) Bill (“Bill”) was released last November.
  • The release of the Exposure Draft was followed by extensive consultation with the industry.  As a result, the Federal government introduced the Bill into Parliament on 7 February 2018.

Main Features of the Bill

Transactions affected

  • Contracts entered into from 1 July 2018 will have to comply with the new regime.
  • Contracts entered into before this date will not have to comply, so long as the purchase price is paid by 1 July 2020. If not, the new regime will apply to these contracts.
  • There has been no change to these timeframes from those set out in the Exposure Draft, despite lobbying for a delayed start date.
  • The new regime does not apply to sales of new residential premises created by substantial renovation and commercial residential premises.

Purchaser’s obligations

  • Purchasers must withhold and remit to the ATO either before or immediately following settlement:
    • 1/11th of the purchase price (if the margin scheme is not applied); or
    • 7% of the purchase price where the margin scheme applies. This is a substantial shift from the original position in the Exposure Draft, which is that a purchaser must withhold 1/11th of the purchase price regardless of whether the margin scheme applies or not.
  • The actual contract price and not the adjusted purchase price must be used for the purpose of calculating the amount to be withheld and remitted. This is another shift from the position set out in the Exposure Draft (which required the purchaser to calculate the amount to be remitted based on the purchase price after taking into account the usual adjustments).
  • The payment of a deposit does not trigger a payment obligation on the purchaser.

Vendor’s obligations 

Before settlement occurs, vendors must issue purchasers with a notice setting out the prescribed information, including the amount of GST that should be withheld and remitted by the purchaser.  Failure on the part of the vendor to comply may result in significant penalties being imposed.

Development or Joint Venture Agreements

  • Development or joint venture agreements ("Development Agreements") between developers and land owners often provide for sale proceeds to be shared between the developer and the land owner, and for the party supplying the property, to be paid the GST. Depending on the agreed arrangements, it is possible that the new GST withholding regime may adversely impact one of the parties to the Development Agreement.
  • Provided a Development Agreement is entered into before 1 July 2018, and it also meets certain specified criteria, the Bill contains provisions which would modify the agreed payments arrangements if the agreed arrangements would otherwise disadvantage or benefit one party because of the new GST withholding regime. In other words, the Bill seeks to prevent an unexpected windfall to one party in a Development Agreement, to the detriment of the other.
  • Developers who are considering entering into Development Agreements after 1 July 2018 should have regard to the new GST withholding regime when negotiating payment arrangements under the proposed Development Agreements.

In preparation for the changes, we recommend that developers consider amending their residential sale contracts and systems to ensure compliance with the new regime.  

If you have any questions about how the new GST withholding regime will affect you, please contact Kathryn Elleman, Principal on (03) 9609 1633 or Mark McKinley, Principal on (03) 8640 2357. 

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