GST WITHHOLDING RULES ON RESIDENTIAL PROPERTIES – GST AT SETTLEMENT
Updated: Oct 30, 2019
Written by Nagisa Takaki
From 1 July 2018 purchasers of new residential premises or potential residential land will be required to withhold GST from the contract price at the date of settlement. The withholding amount is paid directly to the ATO.
The legislative changes are aimed at property developers who failed in the past to remit the GST liability. Paying GST at settlement will help prevent non-compliance by property suppliers who sell properties for a price that includes the GST and avoid remitting the GST to the ATO. They may avoid tax by liquidating their businesses and restarting their business again under a different entity before their next BAS lodgement.
New Residential Premises
New residential premises are residential premises where any of the following apply to the premises:
They have not previously been sold (or subject to a long term lease) as residential premises
They have been created through substantial renovations (but note new residential premises of this kind are excluded from the withholding obligation)
They are new buildings which have been built to replace demolished buildings on the same land.
Note: residential premises cease to be new residential premises if they have been used solely for renting for a period of at least five years since they were constructed.
Potential Residential Land
Potential residential land is land that it is permissible to be used for residential purposes but does not contain any buildings that are residential premises (for example, houses and units).
The amount of GST required to be withheld
The amount a purchaser must withhold and pay to us is generally either:
1/11th of the contract price (for taxable supplies)
7% of the contract price (for margin scheme supplies)
10% of the GST exclusive market value of the supply for supplies between associates (for consideration less than GST-inclusive market value).
Impact on Vendors
Suppliers of residential premises (not only ‘new’ residential premises) or potential residential land must provide the purchaser with a vendor/supplier GST withholding notice stating whether or not the purchaser is required to withhold a payment to the ATO.
The notice needs to set out as follows:
The vendor’s name and ABN
The amount that the purchaser has to withhold
When the purchaser has to pay the withheld amount i.e. usually at settlement
A vendor is not required to provide a GST withholding notice for any contracts entered into before 1 July 2018.
A purchaser/representative is required to do the following if they receive a vendor/supplier GST withholding notice:
Lodge a GST Form 1 with the ATO which outlines the expected settlement date, property details and GST withholding amount. Upon lodgement the purchaser will be provided with a Payment Reference Number (PRN) and a Lodgement Reference Number (LRN).
On settlement, a purchaser is required to withhold the GST amount and use the PRN to pay the GST to the ATO together with a GST Form 2 which contains the details of the actual settlement date and makes the payment.
There are penalties for both the vendor and purchaser in failing to comply with their obligation.
If a vendor fails to provide the required Notice to a purchaser, they can face a strict liability penalty of 100 penalty units and an administrative penalty of 100 penalty units.
It is important to note however that a vendor’s failure to provide Notice does not eliminate the purchaser’s obligation to withhold.
If a purchaser fails to withhold or pay an amount required, the administrative penalty is equal to the amount the purchaser was required to pay.
This is general information only. This article is intended to provide general information only and is not a substitute for legal advice. To prepare a contract and/or obtain legal advice to your situation, please contact Ferraro and Company Pty Ltd on (03) 9311 8911.