Australians awoke on 1 July to many of the Federal Budget measures coming into effect. Amongst these were two significant changes to GST – both relating to popular Aussie past-times of online shopping and property acquisition.
The Treasury Laws Amendment (GST Low Value Goods) Act 2017 and Treasury Laws Amendment (2018 Measures No.1) Act 2018, reveal the extent to which our indirect tax system has been “extended” beyond its original design, since it was introduced some 18 years ago, and this has lead practitioners and tax authorities alike, to ask – is it time to rethink how we tax consumption?
Heydon Miller, CTA at Orange Chambers, asked exactly this question of participants at the NSW 11th Tax Institute Forum in his review of the system: “GST Turns 18: Is it old enough to go out on its own.” And Michael Evans, one of the original designers of the regime and General Editor of Thomson Reuters Australian GST Journal, has been exploring the intent of the recent amendments to the regime, also asking “are these measures designed to address a loss of revenue through fraud and evasion or is it an expansion of the base?”
The low value goods amendment will have little impact on the majority of Australian tax payers, but it is significant in a global tax context. Australia is the first to adopt a vendor-collection model and our regime is going “extra-territorial” by requiring previously un-registered entities, with no physical presence in Australia to become part of our tax system.
But it is the GST and property changes that will have the biggest impact on Australian taxpayers. So now that they are in force, what do these mean for developers, buyers and vendors? And where to next for Australia’s indirect tax system?
Changes to GST and Property
Now buyers of new residential properties, or subdivisions of potential residential land will be responsible for making sure the GST on purchase is paid to the ATO, on or before settlement. The payment is dependent on the contract price for the property and differs based on whether or not the margin scheme applies (note: the Vendor remains responsible for notifying the purchaser if the scheme does apply.)
Previously, withholding and payment of GST was the responsibility of the developer – who will still be liable for the GST, however, the shift of the obligation to the buyer means that previously GST un-registered parties have been brought into the GST compliance net as “tax collectors” and as such, are exposed to penalties if they fail to comply.
Consequences of non-compliance
- Vendor may be subject to penalties including ATO imposed of up to 100 penalty units
- Purchaser liable to withhold even if vendor fails to notify
- Purchaser liable for interest rates (GIC) if paying late
- Purchaser may be liable for the amount not withheld (s 16-30, Sch 1, TAA 1953)
Why the shift?
The new law was introduced as part of the government’s black economy crackdown, specifically the construction industry to stop the practice of “Phoenixing” by some developers who sell properties at a price that reflects their GST obligations but then dissolve their businesses before BAS lodgement to avoid passing the GST to the ATO. (Click here for more background)
The new measures weren’t exactly met with enthusiasm when first proposed, with the property, legal and accounting sectors all voicing concern. The remedy was seen as an over-reaction to a problem involving only a small percentage of developers.
However, the scale of the problems has grown significantly in the last decade and within the last 5 years these insolvent entities were responsible for around $1.8bn in debt written off, and at the same time claimed around $1.2bn in input tax credits. Hence, the new law was introduced as a protective mechanism against tax revenue leakage for the government.
What will be the impact?
In theory, this measure is said to have little or no impact on developers or sellers. However, the long-term implications for purchasers, developers and property prices are uncertain, and there are still grey areas which could trip up unsuspecting purchasers and vendors.
One of these areas is the interpretation of legal definitions. Thomson Reuters GST specialist, Ian Murray-Jones, notes that although the new laws apply to the sale of new residential properties, the legislation (s 14-255, Sch 1 TAA 1953) states “residential” so strictly speaking, “written notification by the vendor to the purchaser regarding GST withholding requirements is required for the sale of all residential property.”
Also, definitions of what constitutes “new” could be open to interpretation. For example, when does a “substantial renovation” become a “demolition” and therefore to be treated as “new” – many vendors and purchasers won’t be aware of the nuances of these. In such circumstances, Ian Murray-Jones recommends conveyancers and solicitors “act with caution by instructing the purchaser to remit the GST if in doubt”.
Another consequence is the impact on cash flow for developers. Many businesses, including developers, rely on their payment terms with the Commissioner as a source of cash flow. These new measures will deprive all property developers of a cash flow advantage that is available to taxpayers in other industries. As a result, some developers may increase the costs of these new properties to cover the immediate cash shortfall they may experience.
Heydon Miller also made the point that from a moral perspective, the changes have not been enacted “to punish wrongdoers”, but rather put an “additional burden” on other taxpayers, who by and large do the right thing.
These changes are also coming at a time of digital transformation for the conveyancing industry – with the move to electronic lodgement of documents and online financial settlement of property. Unfortunately (and unrelated to the GST laws) the PEXA system has been susceptible to cyber-crime, resulting in high-profile hacking cases, where data has been altered and huge amounts of money stolen.
Where to next for GST?
The revenue base being collected through GST has been declining, and the recent measures could stem some of that bleed, but it is time to rethink the whole thing?
The surge in the growth of the online economy has prompted the governments, globally to re-evaluate the integrity of its tax revenue streams and taxation systems as a whole need to keep pace with changing consumer and supply trends.
As Heydon Miller noted, “in the age of pervasive cross-border electronic commerce and big data technology, it may be time to consider whether a GST system is the right “fit” for Australia’s indirect tax system as it moves into the third decade of the 2000s.”
Find out more on the impact of new measures for your clients –and keep up-to-date on the GST debate with our Weekly Tax Bulletin. For our analysis of the future of GST, read issue 29 of WTB 2017 [para 996] on our Checkpoint Platform.