New GST Withholding Arrangements of Sales of New Residential Premises & Potential Residential La
As at 1 July 2018, new legislation will come into effect regarding arrangements for payment of GST by developers for new residential premises and potential residential land.
The term “new residential premises” is defined, by section 40.75 of the GST Act 1999, as:
having not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or
having been created through substantial renovations of a building; or
having been built, or contain a building that has been built, to replace demolished premises on the same land.
The term “potential residential land” means land on which it is permissible to use for residential purposes, but that does not contain any buildings that are residential premises as defined in section 195.1 of the GST Act 1999.
The responsibility for payment of GST by a developer will shift to the purchaser of new residential premises. The purchaser will be required to withhold the GST component of the property purchase price and provide the withheld amount to the ATO on or before the completion date of the contract for sale. The developer will be required to serve the purchaser with notice of withholding prior to the completion date. The developer is entitled to a credit for the withheld amount paid to the ATO by the purchaser.
However, the developer does not have to provide notice of withholding in relation to potential residential land where the purchaser is registered for GST and acquires the land for a creditable purpose or where the premises is classified commercial residential premises.
This arrangement is to prevent ‘phoenixing’, whereby a developer dissolves their business before having to remit the GST received to the ATO. These measures ensure developers are paying the right amount of tax to strengthen the integrity of GST on property transactions.
In preparation for the changes, service of withholding notices should become part of the normal process for the sale of new residential premises and potential residential land. There will be special consideration to payment by instalment contracts so that the developer and purchaser can comply with the withholding requirement.
There will also be a two-year transitional period for existing contracts. Contracts entered into prior to 1 July 2018 will not be required to meet the withholding requirements, as long as the completion date is before 1 July 2020.
Jenkins Legal Services is able to provide advice for both developers and purchasers on new residential premises and potential residential land so that they fully comply with the new legislation.