GST Withholding – new residential premises or potential residential land

Changes have been made to the GST Laws which will require purchasers of new residential premises or subdivisions of potential residential land to withhold at settlement an amount for GST and remit it to the tax office on or before settlement.

The legislation has been promoted as assisting the tax office to deal with those developers who are failing to remit the GST collected from their purchasers to the tax office (for example by “phoenixing” behaviour). It will however place additional administrative burdens on purchasers and their lawyers to obtain the required notices from the vendor, complete the ATO forms and remit the GST to the ATO at or prior to settlement. Vendors and developers also will need to take into account the cash flow consequences and will be obliged to serve the required notifications on purchasers prior to settlement. The new laws will also expose both purchasers and vendors to penalties for non-compliance. How it will affect electronic settlements we don’t yet know, but either way there will be additional steps involved in the conveyancing and settlement processes for all parties.

The new laws apply to all contracts entered into on or after 1 July 2018 and those entered into prior to that date where settlement is expected to occur on or after 1 July 2020. Further details will be provided at a later date, however the general obligations are:

1. The purchaser will be required to withhold at settlement and pay to the tax office one eleventh of the contract price or 7% of the contract price if the margin scheme applies (or market value if the contract price is less than the market value).
2. The purchaser will be required to remit the GST to the tax office on or before the day of settlement.
3. The vendor must serve written notice on the purchaser before settlement notifying whether the GST withholding is required and the amount to be withheld.
4. If the purchaser fails to withhold that GST and remit it to the tax office then the purchaser will be subject to an administrative penalty equal to the amount which was required to be withheld unless the purchaser has reasonably relied on a notification from the vendor.

These new provisions will not apply to contracts entered into prior to 1 July 2018 provided settlement is effected prior to 1 July 2020.