GST Withholding on Residential Property Development

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In the 2017 budget, the Federal government announced a new GST withholding regime to be applied to all residential developments. Draft legislation was released late 2017 providing a glimpse into some significant changes for developers (in particular) and buyers alike.

GST on residential property sales – the current situation

Sales of new residential properties (i.e. new units and land) are considered a taxable supply, and where a developer is registered for GST then they are required to account for GST on the sale.
Usually GST is included within the purchase price on a contract, and often the ‘margin scheme’ is applied which reduces the GST payable by a developer. Unless a buyer is registered for GST often this is of little concern to them.
Currently, sellers receive the full purchase price at settlement, and then only remit the GST to the ATO when they submit their next BAS return. The proposed regime looks to ensure the ATO receives monies to cover GST directly from settlement, minimising the risk of non-payment by a developer (for example where it becomes insolvent).

How does the new regime work?

Under the new regime, at settlement of a new residential property sale, buyers will be required to withhold from the seller

  1. 1/11th of the purchase price, if the property is not sold under the Margin Scheme; or
  2. 7% of the purchase price, if the property is sold under the Margin Scheme,

(the Withholding Amount) and then pay it to the ATO immediately after settlement.
This obligation will override any contractual obligation requiring buyers to pay the full purchase price to the seller.
The ATO will hold money paid by a buyer until the developer submits their next BAS return, at which point which will be credited to the developer’s GST liability. This means the developer may be entitled to a refund if they have applied the margin scheme, or their BAS indicates that they would otherwise be in credit.
Importantly, developers will need to provide buyers with a notice stating the amount to withhold at least 14 days before settlement.
There are penalties for non-compliance by the developer in providing the notice, as well as for the buyer failing to withhold/pay the monies to the ATO.

What is the effect for developers?

The primary impact on developers is that they will not have the benefit of the Withholding Amount for a lot as they normally would between settlement and lodgement of their next BAS.  Developers will need to factor this into their cashflow forecasts to ensure sufficient liquidity during this period.
Unfortunately, it also means developers may need to factor increased interest costs on any finance facilities, where the loan might otherwise have been reduced during these periods.

What is the effect for buyers?

The primary impact on buyers is that they must comply with the requirement to remit the Withholding Amount to the ATO from their purchase of new residential property. Provided buyers comply with this requirement, there should be no increased cost or direct commercial impact on their purchase.

When does this take effect?

The proposed legislation has not yet been enacted by parliament, however it is likely that the regime will apply to all contracts for new residential land from 1 July 2018, or settlements that occur after 1 July 202 (even if the contract was dated prior to 1 July 2018).

Can developers still apply the margin scheme?

Yes, application of the margin scheme is unaffected. The withholding regime only means monies are withheld from settlement and directly paid to the ATO (to be credited towards the developers next BAS return). The regime does not otherwise affect a developers methods of calculating GST or their reporting obligations.

What needs to be done?

Developers should look to ensure that:

  1. sale contracts contain suitable provisions to protect both parties.
  2. cash flow forecasts for affected developments take into account the monies that will be remitted to the ATO from settlement.
  3. feasibility forecasts for affected developments with finance facilities take into account additional interest charges payable (if the developer was otherwise intending on paying the Withholding Amount to the loan account).
  4. joint ventures or structures involving multiple parties (land owner/developer) take into account the revised requirements for dealing with proceeds from settlement.

If you have any questions regarding GST Withholding on Residential Property Development, please contact our team today on 1800 640 509 or via email here.