Until now, contracts for the sale of certain types of real property which were entered into before 1 July 2018 have not been subject to the GST withholding rules. However, the transitional period is coming to an end.
From 1 July 2020, contracts that were entered into before 1 July 2018 and which have not settled on or before 30 June 2020 will be subject to the GST withholding rules.
What do I need to know?
The GST withholding regime requires that payment of the GST liability on the sale or long-term lease of new residential premises or potential residential land be made directly to the Australian Taxation Office (ATO) by the purchaser of the property at the time of settlement. Transitional provisions provided that contracts which were entered into before 1 July 2018 were not subject to the GST withholding regime, provided that payment (other than a deposit) was made on or before 30 June 2020.
What contracts are now subject to GST withholding?
The changes apply to any contract of sale in respect of residential property or potential residential land which was entered into before 1 July 2018 and will not settle on or before 30 June 2020.
Developers that have entered into long-term or off-the-plan contracts for residential developments or subdivisions of land where settlements are now expected to occur post 30 June 2020 should be particularly careful. Contracts that were expected to settle prior to 1 July 2020 may have been subject to delays, which could mean that those contracts will now be captured by the GST withholding rules.
What does this mean for me?
We recommend that you undertake a review of all contracts currently on foot to determine whether any of these contracts were entered into prior to 1 July 2018.
Any contracts that were entered into prior to 1 July 2018 but are not due to settle until on or after 1 July 2020 will now be subject to the GST withholding rules. This means that the GST withholding notification requirements must be satisfied by the vendor prior to settlement and that the ATO online lodgement obligations must be completed by the purchaser or their representative in order to successfully complete settlement.
Importantly, more recently drafted contracts of sale for real property may already include clauses specifically dedicated to the GST withholding obligations of both parties. However, contracts of sale that were entered into prior to 1 July 2018 are unlikely to include such clauses. Vendors who currently impose contractual obligations on purchasers in relation to the purchaser’s GST withholding obligations may wish to consider whether it is possible to amend the contract of sale to include such obligations.
Alternatively, if an amendment is not possible, vendors should understand what information they need to obtain from the purchaser and what written notifications they need to provide to the purchaser prior to settlement.
Vendors should also ensure that the purchaser fully understands their withholding obligations. We recommend that vendors actively track and follow up on the completion of the purchaser’s withholding obligations to ensure that the settlement process occurs smoothly.
What GST withholding rate applies?
The standard GST withholding rates will apply to any contracts which are now subject to withholding as a result of the transitional period ending.
For standard contracts of sale, the GST withholding rate is 1/11th of the contract price. The contract price does not include the value of any usual settlement adjustments that are calculated at the time of settlement (e.g. rates and taxes).
If the margin scheme applies to the contract, the withholding rate is 7% of the contract price.
If the supply of the property is between associates and is without consideration, or is for consideration that is less than the GST-inclusive market value of the supply, the withholding rate is 10% of the GST-exclusive market value of the supply.
The ATO has provided the following example on its website to explain how the end of the transitional period may affect existing contracts.
On 11 May 2018, Rachael entered into a contract to purchase a new home unit from developer Watson Home Co for a contract price of $650,000. Rachael pays a 10% deposit of $65,000.
As the supplier of the property, Watson Home Co needs to notify Rachael that she has to withhold $59,090 (1/11th of $650,000) and pay it to the ATO at settlement.
Rachael is required to complete and lodge the two online forms to the ATO.
Rachael’s property is finished and the settlement date is 2 July 2020.
At settlement, on 2 July 2020, Rachael must withhold and pay $59,090 to the ATO and pay Watson Home Co the balance of the contract price (being $525,910).
What are the next steps?
It’s important to review your existing contracts to determine whether any action is required in light of the upcoming end to the GST withholding transitional period. Contact a Pitcher Partners representative for further assistance.