The new proposed measures
In terms of some of the specifics included in the Exposure Draft, please note the following:
Basics
Subject to the transitional rules, where a purchaser receives a taxable supply of new residential premises or new potential residential land (i.e. a new subdivided residential lot) a GST withholding obligation will apply. Regardless of whether the taxable supply is fully taxed or under the margin scheme 1/11th of the (GST-inclusive) price paid for the supply will payable by the purchaser as GST direct to the Commissioner.
The purchaser is required to pay to the Commissioner this GST amount on or before the day that consideration for the supply (other than consideration provided as a deposit) is first provided to the supplier.
In the majority of cases consideration will be provided on the settlement of a property and the GST will be payable to the Commissioner by the purchaser on the settlement date. However, where consideration is paid in instalments the purchaser must pay the Commissioner the GST on or before the day they make the first instalment payment. Money that is held as a deposit is generally not held to be consideration.
The Commissioner is able, by legislative instrument, to vary the day of the purchaser’s payment to the Commissioner for types of supplies where unintended consequences might arise. This power to vary the payment day is expected to be limited to where payments are required over a number of years (e.g. Land Rent Scheme in the ACT).
Fully taxable supplies
Where a fully taxable (non-margin scheme) supply is made by the supplier/developer:
- The purchaser will pay 1/11th of the GST-inclusive price direct to the Commissioner and the balance direct to the supplier/developer.
- The supplier/developer will receive a credit for this GST amount (i.e. not an input tax credit) in its relevant BAS and will not then have to make a payment of this amount when paying their net amount for this tax period.
- The entitlement to a credit arises on the assessment of the supplier/developer’s net amount for the tax period to which the supply has been attributed but is contingent on the purchaser having paid the GST amount to the Commissioner.
- To clarify, we have created an example below to illustrate how we understand the measure might apply.
Illustrative Example 1 – fully taxed supply
ABC Pty Ltd sells a new studio apartment to Alan on 31 July 2018 for $550,000 inclusive of GST. The margin scheme is not applied. The sale will settle on 31 July 2018 and full payment of consideration is required at settlement.
- ABC Pty Ltd must notify Alan, of certain matters and in the required form, by 17 July 2018 (14 days before the supply occurs)
- At settlement, Alan must make a payment of $50,000 direct to the Commissioner and $500,000 to ABC Pty Ltd
- ABC Pty Ltd will receive a credit for $50,000 from the ATO for the GST already paid by the purchaser (so that it need not pay the GST again when paying the net amount for the period)
- ABC Pty has received overall net payments of $500,000 ($500,000 payment received from Alan)
The draft Explanatory Memorandum provides two specific examples of fully taxed sales under the new arrangements – one handled by a traditional settlement scenario and another handled by an online conveyancing portal (e.g. PEXA).
Margin scheme supplies
Where a margin scheme supply is made by the supplier/developer
- The purchaser will pay 1/11th of the GST-inclusive price direct to the Commissioner and the balance direct to the supplier/developer. This is the case even though the actual GST amount may be less than the 1/11th required to be withheld by application of the margin scheme.
- The supplier/developer is able to apply for a refund of the amount of GST that is anticipated would ultimately be refunded after their BAS for the relevant tax period has been assessed. This would generally be the difference between the amount of the payment made and the GST payable on the supply.
- Where a supplier/developer is subject to monthly tax periods (as opposed to quarterly tax periods), the entity is not able to claim a refund other than via its normal BAS process. The Commissioner considers that the supplier/developer will not suffer a large cash-flow disadvantage because they will receive a credit that may result in a refund at the end of the tax period which is a short period thereafter.
- To clarify, we have created an example below to illustrate how we understand the measure might apply.
Example 2 – margin scheme supply
ABC Pty Ltd sells a new studio apartment to Alan on 31 July 2018 for $550,000 inclusive of GST. The margin scheme is applied and the GST payable under the margin scheme is $40,000 (based on a margin of $440,000). The sale will settle on 31 July 2018 and full payment of consideration is required at settlement
- ABC Pty Ltd must notify Alan, of certain matters and in the required form, by 17 July 2018 (14 days before the supply occurs)
- At settlement, Alan must make a payment of $50,000 direct to the Commissioner and $500,000 to ABC Pty Ltd
- ABC Pty Ltd will receive a credit from the ATO of $50,000 for the GST already paid by the purchaser and will claim a GST refund of $10,000 via its July 2018 BAS lodgement process (to recognise that only $40,000 of GST was payable under the margin scheme)
- ABC Pty Ltd has received overall net payments of $510,000 ($500,000 from Alan and a $10,000 refund from the ATO)
Notice to purchaser obligation
To help purchasers meet their compliance burden there is a requirement for the supplier/developer of residential premises or a residential subdivided lot to notify the purchaser in writing of whether the purchaser will be required to make a payment under the new amendments.
Unlike the withholding obligation outlined above, this notification is required to be made by a supplier/developer in respect of ALL supplies of residential premises or new subdivided residential lots (even if they are not new).
This notice is required to be given at least 14 days before the supplier/developer makes the supply.
If the purchaser is required to make a payment then the supplier/developer must include the following matters in the notice to the purchaser:
- Name and ABN of the supplier/developer
- The amount of GST that the purchaser will be required to pay to the Commissioner
- When that amount is due to the Commissioner
- Where some or all of the consideration is not expressed as money – the GST-inclusive market value of the consideration not expressed as money (e.g. in kind consideration)
- Such other matters as specified in the regulations
Penalties can apply to the supplier/developer for failure to notify the purchaser as appropriate as well as to the purchaser for failing to withhold or make payment to the ATO.
Transitional Rules
Transitional rules apply whereby any contract for the supply of new residential premises or a new subdivided residential lot was entered into before 1 July 2018 and consideration for the supply is provided before 1 July 2020. These transitional supplies will not fall under the new regime described above.
Under these transitional rules the purchaser need not withhold the GST and will instead, as is currently the case, pay the entire purchase price to the supplier/developer and the supplier/developer will pay the GST directly to the ATO via its BAS.
Specific additional transitional provisions are included for property development agreements under which new residential premises or new subdivided residential lots are sold and there is an agreed distribution of funds by means of “waterfall” payment arrangements. These special provisions ensure that a distribution that results in a windfall gain should not be performed and that the parties to the arrangement are discharged from all liability to pay the GST liability amount to the supplier/developer. These transitional rules apply if:
- the arrangement is entered into before 1 July 2018;
- the arrangement provides for the distribution of the GST liability to the supplier/developer (for the payment of the supplier/developer’s GST liability for the taxable supply); and
- where, if the distribution occurred, the parties would not be in the same position as they would if the withholding amount was not paid
Public Consultation Process
In respect of the public consultation process on the proposed legislation, please note the following:
- Public consultations will take place for a two-week period concluding on Monday 20 November 2017.
- You can make written submissions until 20 November 2017. However, given the tight timeframes, early feedback is requested to provide time to consider and incorporate your comments to the draft legislation iteratively. To assist with this, Treasury has welcomed raising issues directly with them via email or phone throughout the consultation period.
- As these consultations are public, all information (including name and address details) contained in submissions will be made available to the public on the Treasury website unless you indicate that you would like all or part of your submission to remain in confidence. Respondents who want their submission to remain in confidence should provide this information marked as such in a separate attachment.
- Formal submissions should be sent to GSTproperty@treasury.gov.au by close of business on 20 November 2017. You can visit the Treasury website for further details on these consultations.
Grant Thornton comments
There is a lot of information to digest above but one thing is clear, this new law, if implemented, will have an impact on the cash-flow of suppliers/developers. Further, the administrative requirements of this new regime both for the supplier/developer and the purchaser will also not be insignificant.
What we are not yet fully aware of is the practicalities of its implementation and how exactly the ATO’s systems will handle this regime change particularly in respect of:
- Providing a rapid refund mechanism for those who will have a significant cash-flow impact
- Reconciling credits given to suppliers/developers where the purchaser has already remitted the GST
- Whether any refunds of GST payable to suppliers/developers where the margin scheme is applicable will be held up by the ATO for further verification (in the same way that refunds usually are)
It is hoped that the ATO provides further information on these practical matters in due course.
In the meantime, we encourage our clients, to the extent that they are concerned with the potential impact of the new law or have further suggestions as to how the proposed law might be improved, that they make contact directly with Treasury as soon as possible given the very tight timeframe given for responses.
