Under Federal Government legislation which came into effect on 1 July 2018, purchasers of “new residential properties” are now required to withhold and remit GST to the ATO, at or before settlement.
The legislation was enacted to avoid circumstances where property developers were failing to pay GST collected to the ATO. Instead, some developers in financial difficulties were using the GST to pay other debts owed. The ATO was then unlikely to be paid the GST it was owed if the property developers’ business was placed in liquidation, as the funds were used to pay other creditors.
A summary of the legislation:
- Since 1 July 2018, when purchasing a new residential property or certain land (which has been subdivided) a purchaser is now required to withhold and remit an amount to the ATO.
- Generally, 1/11th (or 7% if the supplier uses the margin scheme) of the purchase price is required to be withheld by the purchaser.
- Settlement adjustments are not used to determine the GST to be withheld.
- A statement must be provided, by the vendor to the purchaser, prior to settlement. This must set out the amount to be withheld and paid to the ATO, if the vendor fails to do this there are penalties .
- 1/11th of the purchase price must be paid to the ATO, if the vendor doesn’t provide a statement. No penalties will be imposed on the purchaser if they do this.
- The vendor may be entitled to a GST refund as a result of the transaction, as the vendor is entitled to GST input tax credits for the withheld amount the purchaser pays.
If the developer has an outstanding tax debt, what happens to GST credits?
GST credits available to a developer due to GST being remitted by the purchaser directly to the ATO will be dealt with in accordance with Part IIB of the Taxation Administration Act 1953 (Cth). In summary, this means that GST credits will only be refunded to the developer once they have been applied against other outstanding tax debts, which may be owed.
What is the financial impact on property developers?
The ATO may still retain 1/11th of the purchase price of the sale, if the developer has outstanding tax debts. This may occur even when there may be little of no net GST payable on the property sale transaction.
The ATO withholding the net GST and offsetting this amount against other tax debts may result in businesses failing. This may occur even when property developers are able to pay their debts upon realising further ‘stock’ they own.
If you are the director of a property development company and the above measures are having an adverse impact on you, the professionals at TAX DEBT SOLVED may be able to assist you in formulating a solution to your problems.
Contact us for a free, no-obligation consultation, here.