The ATO will soon be outsourcing the collection of GST on new residential property sales and home site sales to innocent purchasers in an attempt to thwart cowboy developers who do not meet their GST obligations.
Parliament has recently passed legislation that changes the way GST is paid and accounted for in transactions involving new residential property. In effect, the purchaser will be required to withhold the GST portion from the sale price prior to settlement, then pay that amount directly to the ATO on behalf of the property developer.
When will it apply?
The new rules will apply on all contracts entered into from 1 July 2018. Additionally, contracts entered prior to 1 July 2018 will also be caught if settlement is to occur on or after 1 July 2020.
The new rules apply to the sale of new non-commercial residential property, or potential residential land. Potential residential land means land permissible for use as residential premises which does not contain any buildings.
The new rules do not apply to the construction of commercial property (factories, shops etc.), commercial residential property (hotels, motels etc.), new residential property created through substantial renovations or the sale of taxable land where both parties are registered for GST.
Amount paid & timing
The amount that must be withheld by the purchaser and paid to the ATO at or before settlement will generally be one-eleventh of the total purchase price.
If the vendor has a GST margin scheme in place, the withholding amount will be 7%. The vendor can then recover the excess amount of GST by claiming a refund as part of their BAS for the period.
Obligations and liability
Vendors must give written notice to purchasers instructing whether they are required to withhold at least 14 days prior to settlement. Importantly, though the withholding requirement only applies to certain residential property, notice must be given to the purchaser of all residential property and potential residential land (commercial, renovated etc.).
If a vendor fails to give notice to the purchaser, or if a purchaser fails to make the withholding payment to the ATO after receiving notice, they may face a fine or administrative penalty.