Fully taxable supplies
Where a fully taxable (non-margin scheme) supply is made by the supplier/developer:
- The purchaser will withhold 1/11th of the contract price excluding settlement adjustments, or the GST-inclusive price for payment to the Commissioner with the balance payable 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 thus have to make another 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.
- The following example illustrates how we understand the measure might apply:
Example 1 – fully taxed supply
ABC Pty Ltd sells a new studio apartment to Alan on 1 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 before making the supply
- At settlement, Alan must withhold $50,000 for payment to the Commissioner and pay the remaining $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 (from Alan)
The Bill 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 withhold 7% of the contract price (excluding settlement adjustments) or the GST-inclusive price for payment to the Commissioner and the balance will be payable to the supplier/developer.
- This is the case even though the actual GST amount may be less (or more) than the 7% required to be withheld by application of the margin scheme.
- 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 thus have to make another 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.
Example 2 – margin scheme supply
ABC Pty Ltd sells a new studio apartment to Alan on 1 July 2018 for $550,000 inclusive of GST. The margin scheme is applied and the GST payable under the margin scheme is $35,000 (based on the developer’s margin of $385,000). 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 before making the supply
- At settlement, Alan must withhold $38,500 (i.e. 7% of $550,000) which is payable to the Commissioner and pay $511,500 to ABC Pty Ltd
- ABC Pty Ltd will receive a credit (i.e. not an input tax credit) from the ATO of $38,500 in its’ BAS for the GST already paid by the purchaser and will claim a GST refund of $3,500 via its July 2018 BAS lodgement process (to recognise that only $35,000 of GST was actually payable under the margin scheme)
- ABC Pty Ltd has received overall net payments of $515,000 ($511,500 from Alan and a $3,500 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) by way of sale or long term lease.
However, there is no requirement to provide notice where the purchaser is registered for GST and acquires the land for a creditable or for supplies of commercial residential premises.
This notice is required to be given 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 (e.g. at settlement)
- 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 first 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 arrangements may not have contemplated the new withholding rules where they were entered into prior to 1 July 2018 and the special provisions ensure that the parties to the arrangement are not advantaged or disadvantaged as a result. These transitional rules apply if the following four conditions are met:
- 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); or
the arrangement provides for the adjustment of the distribution of the consideration to take into account the supplier/developer’s GST liability;
- where, if the distribution occurred, the parties would not be in the same position as they would if the withholding amount was not paid; and
- a withholding payment has been made in relation to the taxable supply.
Our Observations
There is a lot of information to digest in the changes outlined above, but one thing is very clear - this new law will have a huge impact on the cash-flow of suppliers/developers once implemented. Further, the additional administrative requirements of this new regime - for both the supplier/developer and the purchaser will be significant.
The practicalities of the implementation and how exactly the ATO’s systems will handle this regime change is not yet clear, particularly in respect of:
- Reconciling credits given to suppliers/developers where the purchaser has already remitted the GST
- Whether 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 GST refunds often are)
It is hoped that the ATO provides further guidance on these practical matters in due course.
In the meantime, we encourage our clients to consider the potential implications of the new GST withholding rules and understand the changes that may be required internally to comply as of 1 July 2018.
