Desperate times call for desperate measures. Following an ATO submission to the 2015 Senate Inquiry on ‘Insolvency in the Australian construction industry’, which reported that $1.8 billion in GST debt had been written off as a result of phoenix activity by property developers, the Australian Government announced drastic changes in the 2017-18 Budget which would attempt to stem the bleed.
The challenge: preventing developer entities (which will have claimed input tax credits throughout the life of a project) from being placed into liquidation, whether by design or legitimate misfortune, prior to the remission of GST on sales. The Government’s solution: collecting GST on supplies of new residential premises directly from purchasers at settlement, before the money falls into the (potentially) slippery hands of developers.
The proposed law is set out in the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018, which was tabled in Parliament on 7 February 2018, and will apply to specific residential property transactions where consideration (other than the deposit) is received by the supplier on or after 1 July 2018. The new laws will not apply in relation to any existing contracts, provided consideration for the supply is provided before 1 July 2020. Specific transitional rules also apply to existing property development arrangements.
An overview of the proposed law
The liability to pay an amount at or before settlement will arise for purchasers of:
- new residential premises (as defined), excluding commercial residential premises and premises that are new because they have been created through substantial renovations of a building; and
- potential residential land (as defined): that
- is included in a property subdivision plan (as defined); and
- does not contain any building that is in use for a commercial purpose; and
- the purchaser is not a registered entity or an entity that acquires the thing supplied for a creditable purpose.
The application of the law to potential residential land is intended to capture GST on house and land packages.
The amount to be remitted by the purchaser will be calculated with reference to the “contract price”, which is the price of the supply specified in the contract, or, if the contract doesn’t specify a price, the price for the supply as defined in the GST Act (generally, the sum of any monetary and non-monetary consideration) (the Amount).
In cases where the parties agree to calculate the GST under the margin scheme and are eligible to do so, the GST to be remitted is 7% of the Amount (the Commissioner can alter this percentage by way of determination, but it must be between 7% and 9%). In most other cases, the GST to be remitted will be 1/11th of the Amount.
An exception arises where supplies are made between associates for no consideration or consideration at less than the GST inclusive market value, in which case the GST to be remitted by the purchaser will be 10% of the GST exclusive market value of the supply.
Further, the GST to be remitted by the purchaser may be less in the case of a supply that is only partly covered by the relevant provisions. In those circumstances, if it is “practicable to ascertain” how much of the consideration relates to the part of the supply that is covered by the provisions, the purchaser must remit that lesser amount. Where it is not practicable to ascertain the less amount (for example, because the consideration isn’t apportioned in the contract), the purchaser will need to withhold and remit GST that is calculated by reference to the entire amount.
The GST can be paid by the purchaser to the ATO directly, or a bank cheque made out to the ATO can be provided to the vendor on or before settlement. Strictly speaking, the provision of a bank cheque doesn’t discharge the purchaser’s liability, but it is a defence against the imposition of a penalty for failing to remit. This option is helpful if a vendor wants the comfort of knowing the GST has actually been remitted and not merely withheld.
What the changes will mean for vendors
No doubt, this is a significant change for property developers. They will lose the time value of the GST between settlement and the due date for payment of the business activity statement. There will be difficult conversations to be had with lenders about who will now get first bite of the cherry from proceeds at settlement. There will also be an added compliance burden. Vendors will still be required to report the amount of GST payable in relation to their taxable supplies in the relevant business activity statement, but a credit (under the withholding regime) will be made available for any GST that has been paid by the purchaser, which may give rise to a refund or an additional amount payable (for example, where the actual calculation under the margin scheme is more or less than 7% of the contract price).
Vendors will also be required to issue a written notice to all unregistered purchasers of (non-commercial) residential premises or potential residential land, prior to settlement, that indicates whether the purchaser is required to remit an amount at settlement and, if so, how much must be remitted. Failure to issue the notice will result in a penalty for the vendor – but will not relieve the purchaser of its obligation to withhold and remit in the specified circumstances.
What the changes will mean for purchasers
Purchasers will bear the brunt of the administrative burden imposed by the provisions. Protections have been built into the legislation for purchasers that make a genuine attempt to discharge their obligations at settlement – but only to an extent. For example, purchasers will be protected if they rely on a notice from the vendor to the effect that no GST is required to be withheld – unless it was “unreasonable to believe that the statement or indication was correct”. Purchasers will not be protected if they rely on the vendor’s calculation of the GST amount as stated in the notice, and the amount is incorrect.
Further, there is limited relief for a purchaser where the vendor fails to provide a notice altogether. The purchaser will not be penalised by the Commissioner for withholding and remitting an amount where no notice was issued, and the vendor has the option (in some limited circumstances) of obtaining a refund of amounts remitted by the purchaser in error. However, the purchaser still risks being in breach of its obligations under the contract if it withholds an amount in circumstances where the law did not require it to do so. The alternative risk, if it fails to remit in the absence of a notice, is that it may be in breach of its obligations under the law and will be exposed to considerable interest and penalties.
Another area of uncertainty will be in relation to supplies that are only partly covered by the new laws, specifically as to when it is “practicable to ascertain” how much of the consideration relates to the relevant component of the supply. In practice, will purchasers simply rely on representations made by the vendor as to the correct apportionment, notwithstanding that there is no protection for the purchaser if the amount is incorrect? If it takes the more cautious approach and refuses to accept the vendor’s apportionment on the basis that it is unreliable, it may find itself drawn into a contractual dispute.
These issues are exacerbated in light of the fact that purchasers of these kinds of premises will often be individuals with little or no business acumen, and little or no experience with the GST regime.
If the bill is passed, affected parties should watch very closely for any consequential changes that are made to the standard form contracts for the sale of land. One would expect to see some of the challenges for vendors and purchasers addressed in the standard clauses.
Robyn Thomas is a Senior Associate at BLW, specialising in goods and services tax, tax litigation and tax administration. She advises clients on a wide range of domestic and international indirect tax issues, including in respect of global supplies, property, anti-avoidance and the resolution of disputes with the Australian Tax Office. Robyn is also a contributor to Australian GST Journal, edited by Michael Evans.