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By Lauren O’Neill and Caitlin Riethmuller – March 7, 2018
The Government announced in the 2017-18 Budget that from 1 July 2018 purchasers of new residential premises or land in new subdivisions will need to remit the GST on the purchase price directly to the Australian Taxation Office (ATO) as part of the settlement process. The Bill was introduced to the House of Representatives on 7 February 2018 and will become the law if enacted.
Reason for the proposed changes
The Government has determined some developers are selling property inclusive of GST and dissolving their business before remitting the GST to the ATO. The developer is pocketing the GST on the sale even though they have previously claimed GST on all development costs.
The ATO is also finding a significant increase in the use of illegal Phoenixing Arrangements. This is where a business is deliberately liquidated to avoid paying their debts, including all outstanding liabilities to the ATO. A new entity is created to continue the business of the liquidated entity. When a developer goes into liquidation, any outstanding GST liabilities are normally unrecoverable as the ATO becomes an unsecured creditor.
Currently, the developer of new residential premises or sub-divided potential residential land is required to remit GST on the sale to the ATO in their next business activity statement. This provides a potential short-term cash flow benefit for a developer.
Proposed new law
To combat the propensity of these Phoenixing Arrangements and the non-payment of GST, the Government is proposing to shift the payment obligation in relation to GST on new residential premises to the purchaser.
This law will apply to new residential premises and the subdivision of potential residential land.
The obligation to make the payment of GST falls on the purchaser. The developer (vendor) must provide a notice to the purchaser that states whether or not the purchaser is required to make the payment.
To satisfy the obligation to make payment, the purchaser may provide a bank cheque for the GST amount made payable to the ATO to the seller on or before the day the payment is required to be made or pay the ATO direct.. The seller is obligated to provide this bank cheque to the ATO immediately.
The GST must be paid on or before the day that any of the consideration is first provided. Normally the deposit is not treated as consideration as it is held in trust. The expected date would be the settlement date for the property.
What to consider if you are a Property Developer
The new legislation will apply differently, depending on whether the property is sold using the margin scheme or not.
Notification to Purchasers
As a supplier of new residential property or land, the developer will be required to notify the purchaser in writing of the amount to be paid to the ATO before making the sale, together with the name and ABN of the entity that makes the supply.
These provisions will apply to the sale of all new residential premises or potential residential sub-divided land from 1 July 2018.
Any contracts entered into after 1 July 2018 will be subject to the withholding obligations.
Cash Flow Implications
Developers will need to manage their cash flow as the cash consideration they receive at settlement will be the GST exclusive sales price. Currently, developers have the benefit of the GST component of the sales price being available to them in cash between the settlement date and the due date of their next Business Activity Statement, which allows for greater flexibility in cash flow management. This will need to be reviewed as these changes will impact this significantly.
Borrowers may need to consider the impact these rules will have on their loan arrangements with their Lenders. Lenders will likely be assessing the adequacy of their security or might be reluctant to fund the GST component of progress claims on the seller’s works going forward.
If you wish to discuss further, or would like to know how this could potentially affect you and your business, please contact our office.
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