Legal Update - Off the Plan Changes

Author: TML Admin

New laws affecting the sale of new residential premises and new residential subdivisions in Australia

The Federal Parliament has recently passed the Treasury Laws (2018 Measures No.1) Bill which proposes significant changes to the GST system particularly in relation to real property transactions. 

Once enacted into legislation the proposed changes scheduled to come into effect from 1 July 2018 will require purchasers of new residential premises or new residential subdivisions to withhold one eleventh of the purchase price from the vendor (or 7% if the Margin Scheme applies) and remit this amount directly to the Australian Taxation Office (ATO) on or before settlement.

At present, the GST payable on the sale of new residential premises and new residential subdivisions is typically included in the contract price and is collected by the vendor at settlement.  The vendor is then responsible for remitting the GST to the ATO when lodging their Business Activity Statement (BAS).

The proposed changes will thus see the liability to remit GST to the ATO shifting from vendor to purchaser. The vendor will subsequently be entitled to a GST credit for the amount paid by the purchaser to the ATO. 

Additional requirements under the proposed legislative changes, will require vendors to provide purchasers with written notice of their withholding obligations prior to entry into the contract.  Failure to provide notice will be a strict liability offence and result in fines.

The new measures have been introduced in an effort to prevent phoenix activities, where property developers sell all lots in a development then wind up their business before lodging their next BAS in an effort to avoid remitting GST to the ATO.

Implications for Developers

The proposed changes are likely to have significant impact on the sale and settlement process and likely to have significant cash flow implications for developers.

If you are a developer who utilises instalment contracts, you may wish to consider how you plan to structure future transactions, as the total withholding amount will become payable on the day the first instalment payment is made and this may adversely affect your cash-flow for projects.

Accordingly, developers will need to update their contracts, systems and practices to take account of the withholding obligation required under the new legislation.

Property development agreements with agreed distribution or ‘waterfall’ payment arrangements will also be affected by the withholding obligations, however transitional relief arrangements may apply in the interim.  

Implications for Purchasers

The obligation to make payment of GST will shift from vendor to purchaser. If multiple purchasers purchase the property as tenants in common (i.e in respective shares), each purchaser will be treated as receiving a separate taxable supply proportionate to their interest in the property. Accordingly, each purchaser will be responsible for making a separate payment to the ATO of a proportional withholding amount based on their share of the property.

Purchasers who are purchasing as joint tenants will be treated as having received a single taxable supply from the vendor, and accordingly will only be required to make a single payment to the ATO.

Purchasers of home and land packages will only be required to remit GST to the ATO in relation to the purchase of the land and will not be required remit GST in relation to the build contract.

Exemptions

The withholding obligation will not apply in the following circumstances:

- where the premises is a commercial residential premises and was created through substantial renovation;

- where a new residential subdivision lot contains a building used for a commercial purpose;

- where the purchaser is registered for GST and acquires the residential land for a creditable purpose.

When will the proposed changes come into effect?

Generally, the withholding obligation will come into effect from 1 July 2018, and apply to all relevant transactions where the consideration is payable from this date onwards regardless of whether the contract was entered into before this time.

However, a two year transitional arrangement will apply where the contract was entered into prior to 1 July 2018 and the consideration (other than deposit monies) is first provided prior to 1 July 2020. In these circumstances the withholding obligation will not apply.

If a contract is entered into prior to 1 July 2018 and consideration is provided after 1 July 2020, then the withholding obligation will apply.

If you have any questions, feel free to contact us.

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