A new GST withholding regime was recently introduced requiring purchasers of new residential premises or potential residential land by subdivisions to withhold the GST on the contract price (excluding adjustments) and remit it directly to the ATO.
When Do the New Laws Come Into Effect?
The new laws took effect from 1 July 2018 and exclude sale contracts entered into before that date, provided the matter settles before 1 July 2020.
Why Have the New Laws Been Introduced?
The new laws aim to target what is known as illegal ‘pheonixing’ where developers collect GST on new properties and then dissolve their business and fail to remit the GST collected.
What Do the New Laws Mean for Purchasers?
1. The withholding regime only applies to purchasers who are not registered for GST and who are not purchasing for creditable purposes (ie. the regime will apply to most residential sales and only business to business transactions are excluded).
2. Purchasers must remit the GST withholding amount to the ATO on or before settlement.
3. Failure to withhold imposes a significant penalty– this will not apply if at settlement the purchaser hands to the vendor a bank cheque in favour of the Commissioner for the withholding amount.
What Do the New Laws Mean for Sellers?
1. The seller must notify the purchaser prior to settlement whether GST withholding is required (failure to do so is an offence and significant penalties will apply) – this can be done by way of a special condition in the sale contract.
2. The seller must confirm with the purchaser prior to settlement whether they are purchasing for a creditable purpose – if so the regime will not apply.
3. Sellers may be entitled to a tax credit for any amount withheld and paid to the ATO when calculating their net amount of GST payable in the seller’s business activity statement.
The new GST withholding regime presents a significant and fundamental change in the way that GST is collected. It is important that both purchasers and sellers are aware of their obligations and are prepared for the change.