The Act requires that subject to transitional rules for certain contracts entered into before 1 July 2018, purchasers on or after 1 July 2018 of taxable supplies of new residential premises (not created through substantial renovations or being commercial residential premises) or new subdivisions of potential residential land must pay either 1/11, or 7% if the margin scheme applies, of the purchase price to the Australian Taxation Office (ATO) at settlement.
On 26 April 2018 the ATO published Draft Law Companion Ruling LCR 2018/D1 (Draft Ruling), that explains the ATO’s view about how to administer the new laws. Submissions on the Draft Ruling must be made by 25 May 2018. The ATO proposes that the Draft Ruling will be finalised as a public ruling with effect from 1 July 2018.
The Draft Ruling includes both explanation and examples although, subject to the discussion below, provides little that was not already contained in the Act or accompanying Explanatory Memorandum.
Potential residential land
A liability to pay an amount to the ATO may arise under the Act if the property is ‘potential residential land’ that is included in a property subdivision plan, that does not contain any building that is in use for commercial purposes and where the purchaser is either not registered for GST or does not purchase the property for a creditable purpose.
Some commentary has taken the exclusion for potential residential land to mean that a GST registered purchaser of ‘potential residential land’ is not required to pay an amount to the ATO on settlement. Example 4 of the Draft Ruling (below) illustrates that the exclusion for GST registered purchasers will only apply where a GST registered purchaser acquires the land for a creditable purpose (a point also made in the Explanatory Memorandum).
Hillside Co enters into a contract with Farm Co to buy vacant land. Both entities are registered for GST and the land is potential residential land. Hillside Co plans to construct residential premises on the land and make them available for rent (not for a creditable purpose).
The contract price is $33 million, which is inclusive of GST, and is payable as follows: a deposit of $3 million is payable on entry into the contract with the balance to be paid in quarterly instalments of $6 million. Hillside Co has been notified by Farm Co that they will be required to make a payment of 1/11th of $33 million, which is $3 million, to the ATO.
In the above example, if the intention of the purchaser were to lease the residential premises for (say) one year and then sell, would there be an obligation on the purchaser to pay an amount to the ATO as the premises would be ‘new residential premises’ at the time of sale? The Commissioner states in the Draft Ruling that “[a] purchaser will be acquiring the property for a creditable purpose if they have a creditable purpose to any extent”. Presumably in this circumstance there would not be an obligation on the purchaser to pay an amount to the ATO (whereas there would be if the intention were to lease the residential premises for more than five years such that they were not “new residential premises”).
Amounts incorrectly paid to the ATO
We consider that the main concern for taxpayers and advisors in the Draft Ruling is the ATO view on where amounts are incorrectly paid to the ATO by the purchaser.
Section 18-60 of the Act provides, in effect, that the vendor is entitled to a credit if the vendor makes a taxable supply and the purchaser paid an amount to the ATO as required under section 14-250. On a strict reading of section 18-60, a credit can only arise for the vendor in circumstances where the vendor has a made a taxable supply. Therefore, where the purchaser pays an amount to the ATO on a non-taxable supply, a credit may not be available to the vendor. Similar issues arise on an interpretation of section 18-85 which deals with refunds on amounts remitted by the purchaser to the ATO mistakenly.
The Explanatory Memorandum dealt with these issues by stating (emphasis added):
Refunds for amounts where the payment is made in error
5.58 Where a purchaser withholds in error, but in purported compliance with the obligation to withhold, (for example, where residential premises are not new residential premises and therefore withholding does not apply), then the supplier may apply for a refund separate to the usual BAS process of the amount of the payment to the extent it was made in error. The amount that may be refunded is the amount that is withheld in error.
Notwithstanding the above, in the Draft Ruling the Commissioner states (emphasis added):
Amounts incorrectly paid to the ATO by the purchaser
61. Generally, if a purchaser incorrectly pays an amount to the ATO in purported compliance with section 14-250, the vendor may apply to the Commissioner for a refund under section 18-85 in the approved form. This must be done no later than 14 days before GST must be paid on the supply. If a refund is made, no credit is available under section 18-60 to the vendor.
62. The Commissioner is only required to refund an amount to a vendor under section 18-85 if satisfied that it would be fair and reasonable to do so. The Commissioner is unlikely to be satisfied that it is fair and reasonable to refund an amount to the vendor if a purchaser incorrectly made a payment in respect of a non-taxable supply. The vendor will not be entitled to a credit but the purchaser may be entitled to a refund. The Commissioner will consider repayment requests by purchasers on a case by case basis.
The Explanatory Memorandum and the Draft Ruling appear to be at odds with one another. The Explanatory Memorandum provides that the vendor (supplier) can apply for a refund where the purchaser pays an amount to the ATO in error. Such an error could be where the purchaser pays an amount the ATO on a supply to the purchaser of “not new residential premises”. That is, on a non-taxable supply.
The Commissioner in the Draft Ruling however seems to take the position that the vendor is not entitled to a refund if the purchaser paid an amount to the ATO on a non-taxable supply – perhaps the purchaser mistakenly thought the supply was taxable and/or the vendor provided an incorrect notice.
The Draft Ruling goes further by stating that the Commissioner will consider repayment requests by the purchaser (raising the possibility that the purchaser would need make a repayment request and the vendor claim the amount under the contract). The Draft Ruling does not contain any guidance on how a purchaser, particularly a non-registered purchaser, makes a repayment request.
Further clarification on amounts incorrectly paid to the ATO is needed.
The Act, the Explanatory Memorandum, and the Draft Ruling illustrate some of the practical issues that may arise under the new rules once they take effect from 1 July 2018. Sladen Legal's leading Property and Development and Taxation practices are able to advise you in relation to all tax and contractual issues arising from the new rules.
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Victor Di Felice
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Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia