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The new obligations apply for new residential developments, new residential subdivisions and long-term leases, and will have a significant impact on the property sector. Extending beyond property developers and purchasers to include lawyers, conveyancers and financial institutions to name a few.
The current process for property developments is that vendors collect GST on property transactions at settlement and remit it to the ATO as part of their business activity statement process. However, some developers have failed to remit the GST to the ATO despite claiming GST credits on their construction costs.With growing concern from the Federal Government regarding “pheonixing”, which involves developers collecting GST on sales and then dissolving or declaring bankruptcy before remitting GST to the ATO, resulting in unrecoverable receipts. The Government suggests that the ATO has written off $1.8 billion in lost GST revenue in the past five years as a result of this behaviour.The new laws are designed to prevent this loss of GST revenue and to quicken up the payment process.
From 1 July 2018, purchasers of newly constructed properties or new subdivisions are required to pay GST on their purchase directly to the ATO on or before settlement, rather than to the vendor. While this is not a new tax for developers, the passing of the legislation has meant the responsibility for paying GST on new properties has shifted from developers to purchasers.
The amount of GST to be withheld depends on if the sale is a plus GST transaction or a sale on a margin scheme.
Vendors are required to issue a note to the purchaser at least 14 days before settlement for any residential premises (not just new premises) advising:
Penalties apply to vendor's who fail to issue the notice. Vendors could face a fine of $21,000 for failure to comply with notification obligations and a potential further $21,000 administrative penalty.The vendor is then required, at the time of lodging its BAS statement, a report setting out the sale of the property and the amount of GST payable on the sale. Vendors may be entitled to a tax credit from the Commissioner for GST already held and remitted by the purchaser.
The GST component of the purchase price of a property is not generally considered by a purchaser when they make a decision to buy, even when purchasing from developers or entities registered for GST.With the new legislation, this will change. The purchaser is required to remit the GST prior to or at settlement. How this is paid will depend on the type of settlement occurring. If the settlement is to occur on PEXA, the GST will be paid directly to the ATO. If it’s not via PEXA, GST will need to be remitted via bank cheque to the ATO prior to or at settlement.Since most purchasers use a legal or conveyancing service they should experience minimal impact from these changes.However, if the purchaser does not pay the required amount to the ATO, they will be liable to a penalty equal to the amount of witholding obligations. The only time a penalty won't apply to the purchaser is if the vendor fails to provide the notice to the purchaser.
Within the amended legislation there are transitional provisions in place that excludes sale contracts entered into before 1 July 2018 as long as the property transaction settles before 1 July 2020. Providing some certainty for already signed contracts.
As a result of the amended legislation, there are a number of likely impacts across the property development industry. Developers could experience a reduction in cash-flow since they are no longer able to retain and derive a benefit from the GST component of a sale until lodging its BAS up to 3 months later.A decreased demand for off-the-plan purchases, coupled with increasing difficulty to obtain finance for off-the-plan purchases may result in lowered valuations for future new developments.Other considerations such as updates to contracts of sale, as well as changes to the settlement process itself will need to cater for purchasers to directly pay the GST to the ATO. Conveyancers and property lawyers need to have a thorough understanding of the new regime so they can ensure they administer it correctly for both purchasers, who need to pay the GST, and vendors who will need to know that the purchaser has paid the GST before they proceed with settlement.Accounting and GST compliance software might also need to be updated to ensure it has accounted that a vendor has a GST liability that will not be paid until settlement by the purchaser.Want to know more about how you could be impacted? Speak with RJS Wealth Management about how you can be prepared for the upcoming changes to GST on property developments. Give us a call on 1300 27 28 29.
Are you looking to purchase a property off-the-plan in the future? Or are you a developer who is faced with these changes? Add your comments below.This article is published by R J Sanderson and Associates Pty Ltd ABN 71 060 299 783. This article contains general information only and is not intended to represent specific personal advice (Accounting, taxation, financial or credit). No individual personal circumstances have been taken into consideration for the preparation of this material. It is recommended that you obtain your own personal professional advice before making any financial or business decision.