GST withholding: legislation introduced to Parliament

On 7 February 2018 the Commonwealth Government introduced into Parliament legislation which if enacted will, subject to a transitional rule (discussed further below), require from 1 July 2018 that purchasers of taxable supplies of new residential premises or new subdivisions of potential residential land pay either 1/11, or 7% if the margin scheme applies, of the purchase price to the Australian Taxation Office (ATO) at settlement (the Legislation). 

This follows the announcement in the 2017 Budget (see our article here) of the new GST withholding regime, and the Exposure Draft Legislation previously released on 6 November 2017 (see our article here) (the Exposure Draft).

Designed as a measure to combat phoenix activity by property developers, the Explanatory Memorandum to the Legislation includes an estimate that the new measure will raise $590 million of GST revenue in the period being the 2019 to 2021 budget years, inclusive. Given the consultation prior to, and on, the Exposure Draft, we expect enactment of the Legislation in its current form without further amendment. As with the CGT withholding regime introduced in 2016, it is likely that the ATO will give practical guidance on the application of the new regime prior to the 1 July 2018 start date.

The key changes in the Legislation compared to the Exposure Draft are:

  • removing substantially renovated premises (which are treated as new residential premises for GST purposes) from the withholding requirement to simplify the determination of whether a property is new residential premises or otherwise;
  • the withholding amount is based on the contract price (rather than after settlement adjustments) to give certainty for vendors and purchasers on the amount to withhold;
  • the removal of the 5-day notice requirement on purchasers and the 14-day notice requirement for vendors. Instead there is no time limit on vendors to give the required notice and we expect the contract of sale will include the required notice. (Failure to provide the notice is a strict liability offence with fines (per transaction) of $21,000 for individuals and $105,000 for companies);
  • removing criminal penalties on purchasers that do not comply with the new regime (although administrative penalties are payable);
  • where purchasers give a bank cheque to the vendor at settlement made out to the ATO and their conveyancer keeps a record of this, the requirements of the new regime are satisfied;
  • a transitional rule whereby the new regime will not apply to contracts entered into before 1 July 2018 subject to those contracts settling before 1 July 2020;
  • a 7 % rate of withholding where the margin scheme applies;
  • the removal of the rapid refund mechanism, instead the normal GST refund rules apply; and
  • introducing a deeming provision to address issues arising from existing property development agreements with “waterfall” clauses aiming to put parties back in the same position as if withholding had not applied (although the measure may not apply in all circumstances).

Subject to the deeming provision concerning bank cheques (see point 4 above) payment of the withholding amount must be on or before settlement (like the CGT withholding regime) although it is possible the ATO may allow a few days ‘grace period’ as it does with CGT withholding (on this, we will have to wait and see).

The new measures if enacted will, subject to the transitional rule (see above), apply from 1 July 2018 – this leaves little time for taxpayers and other affected stakeholders to change standard form contracts and systems.

The new measures will affect the cash flow of developers who will not have use of the GST part of the purchase price between settlement and BAS lodgement. Similarly, the ATO will, in practical effect, have priority over secured creditors with respect to the GST component at settlement.  

For more information please contact:

Neil Brydges
Special Counsel | Accredited specialist in Tax Law
Sladen Legal
M +61 407 821 157 | T +61 3 9611 0176
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Sam Campbell
Associate / Business Law
Sladen Legal
M +61 423 515 454 | T +61 3 9611 0135
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Millie Mavrodis
Sladen Legal
T +61 3 9611 0130
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Victor Di Felice

Sladen Legal
T +61 3 9611 0162  l M +61 419 515 010   
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia