Relatively new rules require buyers of new residential premises or potential new residential land to pay the GST owing on the purchase directly to the ATO (rather than to the seller) as part of the settlement process.
The seller can then claim a GST credit in their Activity Statement for the amount of GST paid to the ATO by the buyer.
The reason for this change was an allegedly high level of non-compliance by property developers with their GST obligations. This was in the form of ‘phoenixing’ whereby developers, after selling properties and collecting the GST from the buyer, would dissolve their business without remitting the GST received from the sale to the ATO.
In this article
- Which transactions?
- How much to withhold?
- When to withhold and remit?
- Seller reporting obligations
- Buyer obligations
- Seller credit
- Seller checklist
- Buyer checklist
This change to the law matters because:
SELLERS may require assistance in:
- determining which sales are subject to the GST withholding rules
- calculating the amount (representing the GST) to be withheld
- notifying the buyer of certain matters including whether and how much withholding is required
- calculating and remitting any GST payable for the tax period to the ATO after taking into account any credit for the amount remitted by the buyer to the ATO.
BUYERS may require assistance in:
- submitting certain forms to the ATO to firstly obtain information from the ATO and secondly confirm settlement has taken place
- making the payment of GST withheld to the ATO.
From 1 July 2018, the law requires the buyer to withhold an amount representing the GST in relation to taxable supplies of:
- new residential premises (other than commercial residential premises or new residential premises created through substantial renovations), and
- potential residential land – that is, land that is permissible to be used for residential purposes but does not contain any buildings that are residential premises – for example, houses and units.
Residential premises are ‘new’ for the purposes of this regime where they have not been previously sold as residential premises, or a new building has replaced a demolished building on the same land. The exclusion of ‘new’ residential premises created by substantial renovation (see earlier) means that a buyer is not required to make a subjective judgement as to the extent of the renovations – which may be difficult to assess at the time of purchase.
Whether the property is ‘residential’ in nature (as distinct from commercial) is determined by its physical characteristics – not how the incoming purchaser intends to use the premises. Do the premises provide potential occupants with shelter and basic living facilities such as bedrooms, kitchens, and bathrooms containing showers and toilets? If so, they will generally be residential in nature. However, where it is clear these types of physical facilities are merely ancillary to the function of another type of premises, those properties are not residential premises.
Julian purchases a brand-new building. It consists of a display area, a storage area, an office, a kitchenette and a toilet (as such, the building provides shelter and basic living facilities). The premises were designed as a shop which is evidenced by the architectural plans held by the lessor. Julian intends on furnishing the premises in order to use it as his residence, but makes no structural changes to it.
Although the physical characteristics of the building may be considered similar to characteristics found in a house or apartment, the physical characteristics of the building together with the design plans objectively show that the premises are not residential premises to be used predominantly for residential accommodation. Rather, the characteristics and design plans show that the building is a shop designed to facilitate a retail business.
Therefore, although GST may apply (as the sale is of commercial premises) the new GST withholding regime does not apply as the premises are not residential premises and therefore no GST withholding is required by Julian. GST will therefore be paid direct to the seller, and not the ATO.
Turning to the other style of property captured by the regime, ‘potential residential land’, this includes land that has been zoned for residential use under a State or Territory law but does not currently contain any residential premises (i.e. vacant land). According to the Explanatory Memorandum, for a taxable supply of potential residential land to be captured by the regime, the land must be land that:
- is included in a property subdivision plan, and
- does not contain any building that is used for a commercial purpose…
- …and either the buyer is not registered for GST, or is registered for GST but is not acquiring the land for a creditable purpose.
The GST registration requirement effectively ensures that the regime does not apply to business-to business transactions of potential residential land.
Note that the withholding requirement applies each time land is sold that meets the above criteria. Therefore, if a developer was selling 50 separate parcels, then each parcel must be assessed against this criteria, with potentially all attracting a separate withholding obligation.
Furthermore, a long-term lease (i.e. more than 50 years) is treated as a sale and subject to the regime.
The following table lists various supplies of property and whether withholding is required under this regime.
|Type of supply||Withholding required?||Type of supply||Withholding required?|
|House and land packages||x||Extensively renovated residential property||x|
|Strata title plans||x||Vacant land not part of a subdivision plan||x|
|New residential houses/units/townhouses not previously sold||x||Land included in a subdivision plan containing factories/shops (or other commercial premises) that permits mixed use||x|
|New residential premises has replaced a demolished building on the same land||x||Office blocks/shops or other commercial premises||x|
|Business-to-business sales of potential residential land where buyer is GST registered and purchase is for a creditable purpose||x||Boarding house, hotels, motels or other commercial residential premises||x|
HOW MUCH TO WITHHOLD?
Once it is determined that withholding is required on the sale, the GST withholding amount (to be withheld by the Buyer) will generally be based on the contract price.
The ‘contract price’ is typically the GST-inclusive price contained in the sale contract. Adjustments to the contract price such as for Council rates, taxes and water adjustments are not relevant in terms of calculating the amount of GST that the buyer is to withhold under this regime. Alternatively, where there is no contract price, the price of the supply is the amount of money paid or, where the price is paid in something other than money, the GST-inclusive market value.
While in most cases the amount to be withheld and remitted by the Buyer will be 1/11th of the contract price, as set out in the following table there are some circumstances where the amount to be withheld will be different:
|If…||…then the amount to be paid by the buyer is…|
|The contract price is specified, and none of the following circumstances apply:||1/11th of the contract price|
|The Margin Scheme applies…||7% of the contract price or price|
|The supply is between associates and is without consideration or is for consideration less than the GST-inclusive market value of the supply…||10% of the GST-inclusive market value of the supply|
The supply is only partly a supply of new residential premises or potential residential land to which the regime applies,
It is practicable to ascertain the portion of the consideration that relates to the residential premises or potential residential land when consideration is first provided…
|A reduced amount which is the proportion to which the regime applies and calculated as per the relevant circumstances of this table|
|There are multiple recipients (not joint tenants), for example tenants in common or two or more separate buyers…||For each Buyer, the proportion of the supply that is made to them and then calculated as per the circumstances of this table|
- Contract price is $700,000 including GST and no other circumstances in the table apply…the amount to be withheld is $63,636 (1/11th of $700 000)
- Two tenants in common make a $650,000 contract price purchase for which the Margin Scheme applies…amount to be withheld by each separate buyer is $22,750 (7% of the $325,000 contract price that is attributable to each buyer)
- Transaction between associates where the GST-inclusive consideration provided is $300,000 but the market value is $475,000 excluding GST…amount to be withheld is based on $522 500 ($475 000 + $47 500 GST), and is therefore $52,250 (10% of $522,500)
- A mixed purpose premises (commercial premises downstairs and new residential premises upstairs) where the contract has a total price of $950,000, but actually breaks the components down; with the residential portion $600,000, and the Margin Scheme does not apply…amount to be withheld $54,545 (11th of the $600,000 portion that relates to the new residential premises).
In the last example (relating to a mixed supply) there is actually an incentive for the seller to break down the price in the sale contract (between the component of the supply that withholding applies to and that to which it does not). By doing so, a lower amount is withheld, and therefore the seller suffers less of a cash-flow disadvantage (by a smaller amount going direct to the ATO and a larger amount direct to the seller). There is no incentive for the buyer as they have to pay the same GST amount anyway (it’s just a question of the portion they pay to the seller, and the portion paid to the ATO).
A contract for the supply of new residential premises contains a contract price of $1.9 million and the Margin Scheme does not apply. Therefore, the withholding amount would be $172,727 (1/11th). However, the seller has valued the chattels at $205,000 and included that breakdown in the contract.
The withholding amount is therefore reduced to $154,090 ($1.9 million – $205 000) / 11). Therefore, the withholding amount is $18,637 less, monies which are instead paid direct to the seller instead of the ATO, thereby providing the seller with significant cash-flow relief rather than having to wait to lodge its Activity Statement to receive a credit for this amount.
WHEN TO WITHHOLD AND REMIT?
Buyers must make the GST withholding payment to the ATO on or before the day on which:
- any consideration for the sale (other than a deposit) is first provided, or
- if the seller is an associate and the sale is without consideration …when the sale is made.
Therefore, in most cases, withholding payments to the ATO will be required on the day of settlement. However, where payment or part payment (except for a deposit) is made prior to settlement, all or part of that payment must be used to make the entire GST withholding payment to the ATO.
As alluded to above, another exception to the general rule (the GST withholding payment is not required until settlement) arises where a supply is between associates for no consideration. In this case the withholding payment to the ATO must be made on, or before, the day on which the supply is made. Where an amount is paid but it is below market value, the withholding payment must be made to the ATO on or before the day any of that money is first payable.
SELLER REPORTING OBLIGATIONS
To assist buyers in complying with their obligations, sellers of residential or potential residential premises must notify the buyer in writing of certain matters before settlement. Unlike the withholding obligation (which only applies to new residential premises or potential residential land), the notification obligation applies to the supply of all residential premises (both new and existing) or potential residential land.
This includes so-called “Mums and Dads” selling existing/old residential property such as the family home. However, the seller does not need to provide a notice in respect of potential residential land where the Buyer is registered for GST and acquires the land for a creditable purpose. Notice is also not required where the sale is of commercial or commercial residential premises.
Where the sale does not require an amount to be withheld and remitted to the ATO (e.g. because it is an input taxed sale of residential premises that are not new) the seller only needs to make a notification to the buyer.
On the other hand, where an amount must be withheld, the seller must identify this in the notice, and also the amount that must be paid to the ATO. This simplifies compliance for the buyer (who is typically less resourced than the seller). Additionally, the following information must be provided by the seller when an amount is required to be withheld:
- The name and ABN of the seller
- When exactly the buyer is required to pay the amount to the ATO (see earlier). This may be expressed as a specific date (if known) or more generally e.g. any time on or before settlement
- Where some or all of the consideration is not expressed as an amount of money…the GST-inclusive market value of the consideration that is not expressed as an amount of money.
The seller may provide this notice as part of the contract of sale or, less likely, as a separate document. The seller’s conveyancer, solicitor or real estate agent should be able to assist with the property conveyancing process and the incorporating of a valid notification to the buyer into the sale contract. Although solicitors or conveyancers will generally be responsible for contractual clauses, they may need input from a Tax Agent or BAS Agent on the application of the regime to the sale, and advice on the GST amount to be withheld. (Indeed, solicitors and conveyancers are not legally permitted to charge a fee for providing GST advice to clients unless they carry a Tax Agent or BAS Agent registration with the Tax Practitioners Board).
Standard property sale contracts have been updated to incorporate notification clauses. These can then be tailored to the circumstances of each sale as appropriate.
Build Co purchases a large block of vacant land that does not contain any buildings and is zoned to allow residential use which it intends to subdivide into three lots. The plan is carried out, and the vacant lots are sold with GST in the price.
One of the sales was made to Carly (for $450,000 including GST) who is not carrying on an enterprise for GST purposes. She pays a 10% deposit with the balance due at settlement. The sale contract includes the required notice advising Carly of the requirement to make a payment to the ATO and informs her of the amount of that payment ($40,909 being 1/11th of $450,000), and to make it on or before the day of settlement.
Following on from the example above, assume Build Co. made another sale to Chemist Co. who is registered for GST and intends to use the land in its business. This time, no notification is required from Build Co. – despite being potential residential land, this is a business-to-business sale and the land will be used for a creditable purpose.
Supplies of new residential premises or potential residential land that require an amount to be paid directly to the ATO on or before settlement may require buyers or their representatives (i.e. conveyancer or solicitor) to use the following online forms to advise the ATO of a purchase (both forms are housed on the ATO website, and are to be completed and sent to the ATO electronically):
- Form 1 – GST property settlement withholding notification
- Form 2 – GST property settlement date confirmation.
These online forms provide details of:
- The contact person
- The property
- The GST withholding amount, and
- The buyer and the seller.
The two online forms must be submitted to the ATO after the buyer enters into the contract of sale and has received the written notification requirements from the Seller (e.g. where the property transaction is a taxable supply of new residential premises, and the seller has provided written notification to the Buyer that they need to withhold from the contract price and remit that amount to the ATO).
Form 1 is used to advise the ATO that a contract has been entered into for new residential premises or potential residential land that requires a withholding amount. This form can be submitted to the ATO any time after a contract has been entered into and prior to the settlement date. The ATO has published instructions on how to complete each section of the form, and how to lodge with the ATO.
Form 2 is used to confirm the settlement date and can be submitted at the time of settlement and when the payment has been made to the ATO. There are instructions on the ATO website on how to complete the form. Each property transaction covered by the regime requires just the one set of forms.
Note that where withholding is required, there is no requirement for the Buyer to register for withholding with the ATO (unlike withholding from salary and wages or Foreign Resident Capital Gains Tax Withholding). In terms of physically paying the amount, although it relates to GST, it is not paid via an Activity Statement. Rather, it is a standalone payment direct to the ATO via:
- e-conveyancing (electronic conveyancing which is a national online hub through which documents needed for property conveyancing can be digitally prepared, signed, settled and lodged, replacing manual processes) or other online conveyancing facilities
- mail or
- credit card.
The buyer (or their representative) needs to ensure that they provide the correct unique payment reference number (PRN) in the reference field every time they make a payment, in order to guarantee that the money goes into the correct account without delay. Detailed information regarding how to pay can be found on the ATO website. These amounts cannot at present be paid at an ATO shopfront or at Australia Post.
Where a taxable supply is made to which the regime applies, the seller is entitled to a GST credit limited to the amount paid to the ATO by the buyer. Once the buyer has paid the GST withholding amount to the ATO, the ATO will make a credit available to the seller in a GST Property Credit Account and send an email (either to the Seller or their Tax/BAS Agent) to confirm this. The ATO will then apply this credit against the Seller’s Activity Statement account once the Seller lodges their Activity Statement for the tax period in which the payment is made to the ATO. The credit is only available if the amount is actually remitted to the ATO by the buyer. Therefore, if the amount is paid to the Seller in full or is not paid to anybody at all, then no credit is available to the seller.
Where an amount of withholding is refunded (see earlier) the amount of the credit that the Seller is entitled to receive is reduced by the amount of the refund.
Example – applying the credit
Following on from the earlier example of Build Co. selling to Carly, assume that the contract was entered into in January 2023 and that settlement takes place in April 2023 at which time the GST withholding amount is paid to the ATO.
If Build Co. accounts for GST on a quarterly basis, as the GST withholding payment was made to the ATO in April 2023 at settlement, the $40,909 credit cannot be claimed until Build Co. lodges its June 2023 quarterly Activity Statement. Build Co. would take this amount into account at lodgment and – all other things being equal – simply pay whatever its GST liability was for the quarter, minus $40,909.
- Determine whether the sale is subject to withholding (new residential premises or potential residential land sold where the buyer is not making the acquisition for a GST creditable purpose)
- Notify the buyer in the sale contract (or other separate document) of any residential premises sold (new or existing) or potential residential land whether there is a withholding obligation, and, if so, how much to withhold. Also, supply other details such as ABN etc.
- Receive an email from ATO acknowledging the availability of a GST credit if and when it is paid
- Lodge Activity Statement taking into account any GST credit for the withheld amount in the tax period in which it is paid to the ATO (typically at settlement).
- Read the sale contract (or other separately provided document from the seller) to determine whether withholding applies and, if so, how much
- If the regime applies, lodge Form 1 with the ATO any time after a contract has been entered into and prior to the settlement date
- Withhold and remit generally at settlement, along with Form 2 which can be submitted to the ATO at the time of settlement and when the payment has been made to the ATO
- If no notification, you can still withhold and pay the withholding to the ATO if you reasonably believe an amount is due.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.