The ATO has outsourced the collection of GST on new residential property sales and home site sales to purchasers in an attempt to stop developers who do not meet their GST obligations.
Parliament passed legislation earlier this year that changes the way GST is paid and accounted for in transactions involving new residential property. Basically, the purchaser is required to withhold the GST portion from the sale price prior to a settlement then pay that amount directly to the ATO on behalf of the property developer.
The new rules came into effect on all contracts entered into from 1 July 2018. Additionally, contracts entered prior to 1 July 2018 will also be caught if a settlement is to occur on or after 1 July 2020.
The new rules apply to the sale of new non-commercial residential property or potential residential land. The term, “Potential residential land” means land permissible for use as residential premises which do not contain any buildings.
The new rules do not apply to the construction of commercial property (factories, shops etc.), commercial residential property (hotels, motels etc.), new residential property created through substantial renovations or the sale of taxable land where both parties are registered for GST.
The purchaser must withhold and pay to the ATO at or before settlement one-eleventh of the total purchase price.
However, if the vendor is applying the GST margin scheme, the withholding amount will be 7%. The vendor can then recover the excess amount of GST by claiming a refund as part of their BAS for the relevant period.
Vendors must give written notice to purchasers instructing whether they are required to withhold at least 14 days prior to settlement. Importantly, notice must be given to the purchaser of all residential property and potential residential land (with some exceptions as noted above).
If a vendor fails to give notice to the purchaser, or if a purchaser fails to make the withholding payment to the ATO after receiving notice, they may face fines and administrative penalties.