By Andrew Howe, Chris Colley and Rebecca Lawrence by Greenwoods & Herbert Smith Freehills Pty Ltd
On 7 February 2018, the government introduced legislation (the Treasury Laws Amendment (2018 Measures No 1) Bill 2018) for the GST withholding measure on sales of new residential premises and potential residential land. Due to successful lobbying, there are quite a few beneficial changes in the Bill compared to the Exposure Draft released in November (the ED). However, the measure is still due to take effect from 1 July 2018… not leaving a lot of time to change systems and contracts.
To recap, GST withholding was announced in last year’s Budget, ostensibly to combat phoenix developers who build houses, claim credits, sell new houses and then disappear before paying the GST to the ATO. However, in practice most of the forecast benefit to Treasury comes from taking the GST cash-flow benefit from all developers selling new residential premises.
The key changes from the ED are:
7% margin scheme rate — if the property sale is subject to the margin scheme then purchasers will only need to withhold 7% of the purchase price (with any subsequent true up to the actual margin scheme liability taking place via the developer’s BAS). Non-margin scheme sales will still require 1/11th of the purchase price to be withheld.
Contract price — the contract price can be used to calculate the withholding amount — giving parties certainty about the correct amount to withhold.
No timing requirements for notices — the time limit for vendors to issue a notice has been removed, although we still expect the notifications to be included within the contract for sale.
No rapid refund mechanism — the rapid refund mechanism didn’t make the final cut. Instead, refunds can only be received in very limited circumstances where certain errors have occurred.
Date of effect/limited grandfathering — the new rules take effect for all contracts entered into after 1 July 2018, and contracts entered into before 1 July 2018 aren’t caught unless they settle after 1 July 2020.
Property development agreements — of great concern to industry was how property development agreements would be affected by the new rules; in particular where the proceeds of sale go through a “waterfall” mechanism to determine the split between developer and land owner. The legislation includes “application measures” aimed at putting parties back into the same position they would have been without GST withholding.
Express carve outs — the new legislation expressly excludes from the GST withholding measure, sales of:
- commercial residential premises
- residential premises that are created through substantial renovation, and
- supplies of “potential residential land” if either:
- the purchaser is registered for GST and acquires the land for a creditable purpose, or
- the land contains a building used for commercial purposes.
Bank cheque as withholding — as an option, the purchaser can satisfy the withholding requirement by providing the seller with a bank cheque made out to the Commissioner for the GST withholding amount.