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May 03, 2018

Changes to GST on property developments

Back in May 2017 when the 2017-2018 Budget was announced, the government made a decision to introduce new GST withholding legislation on property developments to strengthen compliance with GST law. On 29 March 2018, the amendment to the GST laws received Royal Assent with the legislation due to take effect from 1 July 2018.

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.

Why the need to amend the legislation?

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.

How will the process work from 1 July 2018?

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.

  • If the property is sold plus GST then the amount of GST to be withheld and paid to the ATO is 1/11th of the contract price.
  • If the property is sold applying the margin scheme, then the purchaser must pay 7% of the contract price to the ATO.
  • If the purchaser is registered for GST the new legislation will not apply

What are the vendor’s obligations?

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:

  • how much GST is required to be withheld (if applicable)
  • when it is to be paid
  • the vendor’s ABN
  • if some or all of the consideration is not an amount of money, the GST-inclusive market value of the property.

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.

What are the purchaser’s obligations?

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 willbe 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.

Transitional arrangement

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.

Impact of the changes

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 a Modoras Professional about how you can be prepared for the upcoming changes to GST on property developments. Give us a call on 1300 888 803 or email advantage@modoras.com.

Over to you

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.

 

IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (QLD) Pty. Ltd. ABN 81 601 145 215. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (QLD) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (QLD) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (QLD) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (QLD) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.