GST Withholding Obligations – written by Tammy Wills, Associate.
The GST Withholding obligations on new residential and potentially residential sales and purchases of real property have been in place from 1 July 2018. All contracts for the sale of new residential or potential residential land entered into after 1 July 2018 have been affected by the new GST Withholding obligations and it is important that both purchasers and sellers understand their obligations.
What is New Residential and Potentially Residential Land?
Property will be considered ‘New Residential Premises’ if:
a) it is a residential premises that has not been previously sold as a residential premises; and
b) the original residential premises was demolished and replaced by a new residential premises on the same land
Property will be ‘Potentially Residential Land’ if it is land permitted to be used for residential premises, but does not contain any buildings that are residential or used for commercial purposes.
How does the GST Withholding Regime apply
The purchaser will be required to withhold from the balance purchase price and pay to the ATO 1/11th of the contract price or 7% of the contract price where the margin scheme applies. This obligation arises where:
a) the sale is a taxable supply from the seller to the purchaser; and
b) the sale is of New Residential Premises or Potentially Residential Land.
Sellers of new residential property or vacant land in residential subdivisions will be required to issue a notice prior to the supply (generally settlement) advising of whether GST must be withheld and the amount. This requirement applies regardless of whether seller’s have a good GST compliance history. The seller will remain liable for the GST on a taxable supply that is subject to GST Withholding, but will be entitled to a credit equal to the GST withholding amount paid by the purchaser. It is likely that where GST is overpaid, any variation between the GST withholding amount and the seller’s actual GST liability would be corrected in the seller’s Business Activity Statement.
What happens if the parties do not comply?
A purchaser has an obligation to ‘pay’ the withholding amount, not to withhold it. This means that the purchaser has the obligation to pay the amount to the ATO from the settlement balance regardless of whether the correct notice is given to them by a seller. Failure to pay by the purchaser may result in a penalty equal to the amount that was meant to be paid. The purchaser may defend the penalty where:
a) the purchaser is given a notice stating that the sale is not subject to GST (for example, because the seller is not carrying on an enterprise) and the buyer has no reason to question this; or
b) the purchaser provided the bank cheque at settlement to the seller and the seller has not forwarded that to the ATO,
Note that the defences for the purchaser are for the penalty and not the GST to be withheld. That amount remains payable by the purchaser to the ATO.
A seller has an obligation to notify the purchaser that there is a requirement to withhold before making the supply i.e. completing the settlement. Failure to notify the purchaser of the requirement to withhold may result in a penalty of up to $21,000.00 for individuals and $105,000.00 for companies. There will always be a penalty payable by a seller, but the amount will depend on the severity of the wrong notice.
It may be difficult to determine whether the property being sold is considered ‘Potentially Residential Land’, whether the seller has a requirement to notify, what constitutes ‘carrying on of an enterprise’ and what a purchaser should do if they suspect the sale is taxable. It is important for seller’s to clarify their GST position with their accountant prior to completing a sale. Miller Sockhill Lawyers can provide additional information to both purchasers and sellers of real property.
For further information, please contact Tammy Wills, Associate on 07 5444 4750 or [email protected]