GST withholding: finalised ATO guidance does not even out the bumps

GST withholding on taxable supplies of certain new residential premises or potential residential land is now in effect and applies to contracts entered into on or after 1 July 2018 (or contracts before that date where the first consideration other than the deposit is paid on or after 1 July 2020).

On 27 June 2018, the Australian Taxation Office (ATO) released Law Companion Ruling LCR 2018/4 (LCR 2018/4) on the GST withholding laws but some issues and problems that arose from Draft Law Companion Ruling LCR 2018/D1 (Draft Ruling) have not been smoothed out.

As background, on 26 April 2018, the ATO published Draft Ruling and we commented that it was ‘at odds’ with the explanatory memorandum to the Treasury Laws Amendment (2018 Measures No. 1) Act (the EM). The issues included:

  • amounts incorrectly paid to the ATO – the EM provided that where a purchaser paid a GST amount to the ATO in error, the vendor may apply for a refund from the Commissioner. The Draft Ruling on the other hand, said that it would not be fair or reasonable to refund the vendor and instead the purchaser should apply.
  • inadequate legislative mechanisms – on a strict reading of the law, there is no legislative mechanism that allows a purchaser to apply for a refund where the purchaser has paid a GST amount to the ATO in error.

The above issues are explained further via a brief example below.

The first problem: amounts incorrectly paid to the ATO

Contracts of sale of real property may either be GST-inclusive or GST-exclusive and each bear with it risk to the vendor and purchaser respectively. The ATO failed to identify this critical distinction in its Draft Ruling.

When a purchaser enters into a contract of sale to buy new residential premises (such as off-the-plan apartments) the contract will typically be a GST-inclusive contract. That is, if the sale of the property is a taxable supply, the vendor will remit 1/11th of the contract price to the ATO (or a lesser amount of the margin scheme applies). If, for any reason, the sale of the property is not a taxable supply, the vendor receives the full benefit as there is no GST to remit to the ATO. GST inclusive pricing is a well-established practice with sales of new residential premises.

Where the contract is GST-exclusive, if the market (contract) price effectively allows for GST, and for some reason the sale was not a taxable supply, the purchaser would usually benefit as they would not have to pay the GST component to the vendor.  

The Draft Ruling essentially stated that, where the supply was a non-taxable supply and the purchaser had incorrectly paid a GST amount to the ATO at settlement, the Commissioner will not make a refund to the vendor, but that the purchaser may apply for a refund.

The second problem: inadequate legislative mechanisms

Continuing the above example, if the sale of the property was not a taxable supply and the purchaser is entitled to a refund, there is no legislative mechanism for the purchaser to apply for the refund. On a strict reading, the current legislation (section 18-85 of the Taxation Administration Act 1953) only effectively allows the vendor to apply for a refund, not the purchaser.

The finalised position

The Draft Ruling was finalised as LCR 2018/4 on 27 June 2018. Whilst the Commissioner has clarified some of the hurdles, a few bumps remain.

LCR 2018/4 does not provide any further clarification to the first problem when contracts of sale are GST-inclusive. It appears the Commissioner is continuing its hard-line approach by disallowing any refunds directly to the vendor.

The relevant paragraph in LCR 2018/4 states:

The Commissioner is only required to refund an amount to a vendor 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 where the amount paid to the vendor under the contract was GST-exclusive (the contract included a GST gross-up clause) and the purchaser has paid an amount additional to the contract price to the Commissioner in purported compliance with section 14-250. 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 purchases on a case-by-case basis. (Emphasis added)

That is, the Commissioner only clarifies the situation where the contract of sale is GST-exclusive. In GST-exclusive contracts, the Commissioner will not provide a credit to the vendor but the purchaser may be entitled to a refund. This is still at odds with the EM.

The basis for this practice is that the Commissioner does not want to allow the vendor a windfall gain. That is, if the supply was not a taxable supply and the Commissioner makes a refund to the vendor, there may be a risk the vendor may never pass the refund back to purchaser. Therefore, the vendor may be keeping an extra amount, the GST, potentially, without the purchaser knowing.

For GST-inclusive contracts, the most common for new residential property, LCR 2018/4 says nothing on this point. Does that mean that the vendor may be eligible for a refund or does the purchaser need to apply?

The GST withholding laws were aimed at property developers engaging in phoenix activities who were keeping GST paid to them from sales of new residential land. It is not surprising that the Commissioner is taking a hard approach.

Regarding the second problem, the ATO are aware that there is no legislative mechanism to allow a purchaser a refund of excess GST paid on a non-taxable supply (however, the ATO is looking to find an administrative solution). This highlights the need for purchasers to thoroughly review sale contracts and associated documentation before settlement to, amongst other things, decide if the transaction is one in which a GST amount must be paid to the ATO (or otherwise).

To discuss this further or 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

Kelvin Yuen
Sladen Legal
T +61 3 9611 0177

Sam Campbell
Associate | Business Law
Sladen Legal
M +61 423 515 454 | T +61 3 9611 0135

Victor Di Felice
Sladen Legal
T +61 3 9611 0162  l M +61 419 515 010

Joshua Hunter
Senior Associate
Sladen Legal
T +61 3 9611 0128