The new legislation came into effect on 1 July 2018. Any property contracts entered into from this date may be caught by the new rules, as well as contracts that were entered into before this date that settle after 1 July 2020.
The new regime requires purchasers of new residential premises and potential residential land to withhold the GST component of the purchase price from the vendor on settlement and to remit the GST payable on the supply directly to the Australian Taxation Office (ATO).
The GST withholding regime will impact residential property vendors and purchasers, as well as lawyers, conveyancers, financers and other parties who are associated with and facilitate property transactions.
What transactions are caught?
The new rules apply to supplies by way of sale or long-term lease of new residential premises.
They also apply to supplies of ‘potential residential land’ that is included in a property subdivision plan and that does not contain any residential buildings or buildings being used for commercial purposes.
For further information in respect of the operation of this regime click here to view our earlier bulletin which was drafted during the consultation phase.
There are requirements in respect of the notifications that vendors must issue to purchasers of residential property regarding their withholding obligations. In addition, purchasers (or their representative) of properties where the withholding rules apply will be required to complete and lodge two forms with the ATO. The first form will establish property and purchaser details that can be referenced by the ATO. The second form will confirm to the ATO when payment is made and in the process generate a credit for the vendor against their GST liability.
The accurate completion and lodgement of these forms is necessary to ensure that purchasers meet their withholding obligations and vendors receive a credit against their GST liability.
The ATO has addressed some technical issues relating to the GST withholding regime in its recent Law Companion Guide Ruling (LCR 2018/4), however, other issues, particularly operational issues, should be addressed to ensure that any risk of non-compliance with the rules is minimised.
Risk of Penalties
Failure to comply with the new rules exposes both the vendor and the purchaser to the risk of significant penalties. Vendors may face penalties of $21,000 for failure to provide a proper notification (up to $105,000 for companies) and purchasers who fail to withhold could face a penalty equal to the GST amount that was not withheld.
What action should you take?
Given the potential for significant penalties and the risk of issues arising at settlement, we recommend that parties involved in property transactions review their contracts and settlement processes and documentation to ensure smooth compliance with the new rules. We also recommend that you familiarise yourselves with the ATO’s processes and your obligations under the new regime.
Our specialist team of GST advisors are able to advise you on the specific impact of the rules to your transactions and assist you with the transition process.
Please contact your Pitcher Partners representative for further information.