Let's unpack this from a legal perspective...
Before a purchaser enters into a contract of sale, the seller needs to disclose to the purchaser whether the purchaser is required to make a GST payment to the ATO on behalf of the seller from settlement monies.
Specifically, in the GST withholding obligation section of a contract of sale, the seller gives notice to the purchaser in accordance with section 14-255(1)(a) of the Taxation Administration Act 1953 (Cth), that the purchaser is or is not required to make a payment under section 14-250 of the Act in relation to the supply of the property. If the buyer is required to make a payment, the seller is required to give further GST details to the purchaser prior to settlement, including the amount to be withheld, when it must be paid to the ATO and certain other particulars.
The GST withholding obligation was announced in May 2017 in the federal budget and was introduced to prevent non-compliance by property suppliers who sell property but avoid remitting their GST payable to the ATO. As per the current withholding laws, the responsibility of making payment of the GST to the ATO has shifted to the purchaser. In the past, purchasers would pay the full purchase price directly to the seller at settlement and the seller would remit the GST amount to the ATO with their post-settlement Business Activity Statement (BAS).
After 1 July 2018, where a seller is registered for GST and required to make a GST payment to the ATO, the purchaser is required to withhold an amount from the purchase price of the property and pay that amount directly to the ATO in accordance with the settlement process. The GST amount is deducted from the purchase price on settlement and paid directly to the ATO after settlement is affected. Therefore, this amount is not being paid out of the purchaser’s pocket, but rather, by the seller, out of settlement monies received from the purchaser.
Why the change?
The GST withholding laws were primarily introduced to try to prevent what the government identified as a significant loss of GST revenue due to the practice of ‘phoenixing’. Phoenixing is an illegal practice that involves company directors transferring assets of a company to a new company, leaving the old company with debt. Once the assets have been transferred, the previous company is then deserted or placed into liquidation. However, since the company itself no longer has any assets, there is nothing available to cover debts. These changes essentially shift the compliance burden for the collection and remittance of the GST on relevant property transactions from a seller to a purchaser. Now the ATO receives the payment of the GST directly from the purchaser instead.
Purchaser Obligations
As mentioned, as a purchaser of residential land or a new property, you may be required to withhold a GST amount at settlement and pay this directly to the ATO. The contract will confirm if this is the case and your lawyer or conveyancer will ensure the obligations are met on your behalf at settlement.
Seller Obligations
As a seller registered for GST and selling residential land or new property, you are required to provide the purchaser of the property with a GST withholding notice, which includes the seller’s full name, ABN, the exact amount that is to be withheld and when the purchaser is required to make the payment. If, as a seller you fail to give the notice, you may be liable for significant penalties.
Failure to Withhold
Penalties apply to both the seller and purchaser if they fail to meet the GST withholding obligations. If a purchaser fails to withhold the required GST amount and remit this to the ATO, they may be liable for a penalty that is equal to the GST amount that was meant to be paid. If the purchaser has failed to notify the ATO and their lawyer or conveyancer has not lodged the two online GST forms required prior to settlement, then they may be liable to one penalty unit for each 28-day period. If the seller fails to notify the purchaser of GST payable to the ATO, they may be liable for significant penalties also.
We highly recommend that both sellers and purchasers of property make themselves aware of the laws pertaining to GST withholding. It is important to know when they are appliable, what obligations you may have to comply with in your given circumstances and the requirements of the GST withholding regime for your role in a property transaction.
If you would like to further discuss any of the information contained in this article with a legal professional, please contact the office of Bridge Legal on 07-3062 2802.
If you have any questions regarding property law, legal property contracts or are
ready to purchase your next investment,
Please don't hesitate to contact your Property Strategist.
Equity Rise,
Level 3, 31 Alfred Street,
Sydney, NSW 2000, Australia