The Australian Government has recently passed the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (New Laws), which will make buyers of certain real property liable for paying GST on the purchase price.
The reason for the New Laws
Currently, property developers who are liable to pay GST on the supply of new residential premises or a subdivision of potential residential land (New Residential Premises) remit the GST to the ATO when they pay lodge their next business activity statement. This can be up to three months after completion of a sale.
A common practice in the industry is for developers to sell properties for a GST inclusive price, but then dissolve before lodging their next business activity statement.
The ATO is normally unable to recover the GST as an unsecured creditor of the liquidated developer.
This tax evasion is a type of ‘phoenixing’ activity. The amount of phoenixing activity in Australia has continued to escalate in recent years.
The New Laws
In an attempt to resolve this issue, the New Laws will:
- make buyers of New Residential Premises liable to pay the GST on the supply. Buyers will generally need to withhold the GST from the purchase price paid to the developer at the time of settlement and remit it to the ATO;
- not remove the liability of the developer to pay the GST, but the developer will receive a credit to the extent that the buyer has paid the GST to the ATO; and
- require the developer to issue a notice to the buyer with specified information in relation to any need to pay GST.
The New Laws will apply to both sales and long term leases of New Residential Premises.
The obligations under the New Laws will generally apply to transactions that complete on or after 1 July 2018. However, there will be a transitional period during which the obligations do not apply if the contract for sale was entered before 1 July 2018, and the sale completes before 1 July 2020.
Instead of targeting phoenixing developers, the New Laws will place additional risk on all parties to transactions involving New Residential Premises.
The obligation on the buyer to withhold for GST purposes is another complication to the property settlement process, which already includes the foreign resident capital gains withholding regime which came into effect on 1 July 2016.
Parties to New Residential Premises transactions will need to review their contracts and processes to ensure compliance with the New Laws.
The New Laws may resolve the ATO’s issues with collecting GST, but it is likely that the underlying problem of property developer phoenixing will remain. Other parties affected by this type of phoenixing, including contractors and suppliers of the developer, will remain exposed to this practice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.