Developers face new GST issues on property sales12 May 2017 Topics: Tax disputes, Property and planning law, Tax and revenue
An unexpected measure in the 2017 Budget is that, as from 1 July 2018, purchasers of new residential properties or land in new subdivisions will be required to collect and remit GST to the ATO when buying. Developers will need to amend their contracts to protect their position following the changes.
What will the new GST reporting system look like?
The Budget Papers are light on detail but identify two policy drivers.
The first is that:
Some developers are failing to remit the GST to the ATO despite having claimed GST credits on their construction costs…
To the extent that there is a problem with businesses claiming input tax credits, and then failing to remit GST, this is not limited to the property industry. It is symptomatic of businesses struggling in any industry. In our experience, companies wound up at the request of the ATO often have outstanding GST liabilities.
The second driver is cash. The Budget Papers note that:
This measure is estimated to increase GST revenue by $660.0 million and associated payments to the States and Territories, net of administrative costs, by $1.6 billion over the forward estimates period. The difference is due to the timing of when GST is collected and recognised.
Based on the above, practically, the model can be introduced by:
1. introducing a withholding mechanism – similar to the non-resident CGT withholding regime; or
2. making purchasers liable for the GST.
The first option is the more likely given the experience with the non-resident CGT withholding regime in the last 12 months and the historical difficulty of figuring out how to make consumers liable for GST in other contexts (like digital supplies).
Practical issues for developers to consider
There are no details as to how the measures will be introduced, other than a comment that:
As most purchasers use conveyancing services to complete their purchase, they should experience minimal impact from these changes.
If it was simply a case of remitting 1/11th of the purchase price (plus or minus settlement adjustments), this would be a fair observation. However, the reality is that sales of new residential premises and vacant land mostly use the GST margin scheme – which is not known for its simplicity.
Assuming there is a withholding mechanism, the following issues will need to be considered:
1. How will the developer provide evidence of margin scheme calculations?
2. Will the developer or purchaser be liable if the GST margin is calculated incorrectly? Complications arise where:
a. the developer acquired the property after 9 December 2008 as a GST-free supply of a going concern or farmland;
b. the sold lot comes from land that has been consolidated into a different title;
c. the developer acquired part of the property as a taxable supply – and claimed input tax credits at 10%;
d. the developer acquired the land from a fellow member of a GST group, GST joint venture, associate or deceased estate.
3. How will a developer’s cashflow be affected if the ATO systems are unable to cope with the volume of requests – given there is no minimum purchase price?
4. If the measure is introduced from 1 July 2018, as advertised, what transitional measures need to be put in place? This will affect contracts being drafted now particularly for off the plan sales.
5. What happens if the purchaser fails to pay the withheld amount to the ATO? Will the developer retain a GST liability – in which case there would need to be indemnities in the contract.
6. What happens if the developer is providing development services to an owner, who will then sell the developed lots to third party purchasers? Presently, whether the owner is required to register for GST is an issue for the owner. That then becomes a risk that is passed onto purchasers.
We expect there to be a consultation process to work through the details.
Please contact a member of our team if you would like to discuss.