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Here’s how to prepare when your fixed interest rate is expiring.

Blog Image | GST (Goods and Services Tax) Withholding Obligations in a Contract of Sale. A legal perspective. | Bridge Legal
Blog Image | What is a Rate Lock and why should you consider it | Nectar Mortgages

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.

Is your fixed rate expiring soon? Here is how to prepare...

In July 2022 Michele Bullock, Deputy Governor of the Reserve Bank, remarked on the high number of borrowers who took out fixed rate home loans in 2020 and 2021. At the time, these were some of the lowest interest rates ever seen in Australia. Now over halfway through 2022, many of these same borrower’s may have to ready themselves for a significant increase in their rates and repayments once their fixed term comes to a close.

About 40% of outstanding mortgages late last year were fixed rates. Of those, 75% are set to expire by the end of 2023. By that time, the cash rate is expected to be between 2.5% and 3.5%.

Unchecked, this could cause serious financial stress and strain on the budget, but there are steps you can take to prepare and potentially lessen the blow.

In order to prepare, the first thing you should do is look at your loan and:

Check when it will expire

Normally, once your current fixed-loan term comes to an end, the lender simply reverts the loan to their standard variable rate available at the time, which may be higher or lower than the fixed rate you’ve been on. Unfortunately, many borrowers don’t act fast enough and get caught out by an uncompetitive revert rate.

That’s why it’s important that you know when your current term ends, so you have time to negotiate for better rates, or switch loans or lenders if required.

Look for flexibility

Depending on your lender and the terms of your loan, there may be room for some flexibility. For example, you may be able to increase the amount of your regular repayments until the end of your fixed term or change from monthly to fortnightly repayments. This would enable you to take advantage of the lower rate and pay off as much of your loan principal as you can before reverting to a higher rate.

Furthermore, paying off more of the principal now can help lower your loan-to-value ratio (LVR). This will put you in a more favorable position to qualify for lower rates if you decide to change loans/lenders.

A Nectar mortgage broker can explain to you all the features of your loan and show you ways to pay off your loan faster.

Get saving:

If you’re expecting a big increase in repayments, you could focus on saving as much as possible from now until your expiry date and then use those savings to pay off a lump sum on your mortgage before you feel the pinch of higher repayments. Doing this will also lower your loan-to-value-ratio (LVR), which can be helpful come negotiation time with your lender.

Make a budget:

Consider your current financial situation and try to figure out how your expenses could change when you come off your fixed rate.

Start noting down your expenses. Subscriptions, grocery costs, repayments, other debts you might have, your income, your sources of income and so on. Once you’re done, take a look at what you can do without. Also, try shopping around and looking for deals for utilities like your phone, internet, etc. This will help you save more money, which can go into paying off your debts more easily in the future.

Seek out recommendations from the pros:

There’s nothing wrong with seeking a little help and getting some recommendations. If you’re worried about your financial situation and how you might pay your mortgage in the future, Chat to Grant Howe our Corporate Partner from Nectar Mortgages.

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.

HLB Mann Judd - Advisory And Accounting | Property Related Article for Equity Rise
Equity Rise (pty) Ltd | Property Investments and Wealth Creation

Equity Rise,

Level 3, 31 Alfred Street,

Sydney, NSW 2000, Australia


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