GST at settlement

From 1 July 2018, buyers & sellers of residential homes & vacant land will be required to comply with new notification & withholding requirements in respect to GST payable by the sellers.

The new measure was announced by the government in the 2017-18 Federal Budget. It aims to improve the integrity of the GST system, and capture millions of dollars in lost tax revenue.

To start, let’s watch the ATO’s explanatory video!

 

What are the notification requirements?

All contracts entered into from 1 July 2018 for residential homes & potential residential vacant land require the seller to provide a Withholding Notification.

The notification can be included in the Contract of Sale or can be provided separately.

The notification should specify to buyers whether or not they are required to withhold an amount of GST.  If they are required to withhold, then the withheld amount is remitted to the ATO upon settlement.

Hold up, what do they mean by ‘potential residential vacant land’?

Potential Residential Land is a term defined in the GST Act as ‘land that is permissible to use for residential purposes but that does not contain any buildings that are residential premises’.

Simply put, it refers to land that is zoned for residential use or is permitted to be used for residential purposes.

What if GST is not applicable to the settlement?

For many residential transactions between individuals, GST will not apply to the sale.

In these instances, the seller simply gives a Withholding Notice to the buyer to state that the supply is not taxable.   Nothing further needs to be done by either party.

How do I know if GST should apply to my sale?

It’s important to note that the measure does not change the amount of GST payable by suppliers.

If you’re unsure whether you are liable to pay GST on any sale, you should speak to your accountant.  Settlement agents are unable to give tax advice.

How do these changes affect commercial properties?

Comparatively, the measure does not apply the following property types:

  • Commercial property
  • Substantially renovated new residential premises
  • Mixed use commercial/residential premises
  • Certain business to business potential residential land transactions

For these transactions there is no notification or withholding obligation on the parties.

How much tax will be withheld under this measure?

The general rule is that the sale price specified in the Contract of Sale.  However there are some exceptions to this rule where the buyer & seller are related or the property is sold for less than market value.

The rates of withholding are as follows:

Supply Rate of Withholding
New residential premises or potential residential land 1/11th of the sale price
New residential premises or potential residential land under the margin scheme 7% of the sale price
Certain supplies to related entities or parties (e.g. for nil or reduced consideration) 10% of the GST exclusive market value

How does the GST at Settlement measure affect buyers?

If the seller’s Withholding Notice specifies that the withholding does apply, there are some additional steps that need to then be followed.

  1. Any time after entering into the Contract of Sale, the Buyer or their settlement agent must lodge a Form 1 Withholding Notification. This must be done on the ATO’s website prior to settlement.
    Upon lodging this form, the buyer is provided with the unique Payment Reference Number (PRN) and the unique Lodgement Reference Number (LRN).
    Even if there are multiple buyers listed on the Contract of Sale, only one PRN and LRN is issued by the ATO.
  2. At the time of settlement, the buyer or their settlement agent must lodge a Form 2 Settlement Date Confirmation. The Form 2 is submitted on the ATO’s website and requires the PRN & LRN generated from the Form 1.
  3. Using the PRN, the buyer or their settlement agent pays the amount of GST withheld directly to the ATO.  Once the payment is processed, the buyer will receive an email confirmation for their records.

Payment can be made using the following methods:

  • E-Conveyancing (if the transaction is settled on PEXA)
  • Cheque

How does the ATO know which seller the buyer’s payment is for?

It is especially important for the buyer or their settlement agent to use the correct PRN.  This ensures that the credit is transferred to the correct supplier’s GST property credit withholding account.

The supplier/seller will receive email confirmation from the ATO once the payment has been credited.

Consequently, when the seller lodges their quarterly Business Activity Statement (BAS), the withheld amount is available as a credit against the BAS net amount.

What are the penalties for non-compliance?

The ATO has provisions to penalise both buyers & sellers who do not adhere to the new measure.

The ATO can enforce fines, including for the following offences:

  • The seller failing to give the required Withholding Notification to the buyer
  • The seller failing to give the correct details to the buyer on the Withholding Notification
  • The buyer failing to pay the withheld amount to the ATO

Additionally, it is important for buyers to note that if the seller has failed to provide a written notification, they cannot simply just accept this.

In some instances it may be reasonably expected for the buyer to know that there is a GST obligation.  An example is when purchasing off-the-plan from a developer.  The buyer is still obliged to lodge the two online forms, withhold and remit the GST to the ATO in these instances.

How does this impact off-the-plan settlements?

The ATO has put transitional arrangements in place.  As a result, the new measure does not apply to contracts signed prior to 1 July 2018 and settled before 1 July 2020.

For any contracts not settled until after 1 July 2020, the GST at settlement measure will apply.

Disclaimer

Please note, this information is general in nature.  You should not rely on it as taxation advice.

If you are unsure how the ATO’s GST at Settlement measure relates to your Contract of Sale, please speak to your conveyancer.

If you are unsure about your obligations regarding GST, please speak to your accountant. 

For more information about the ATO’s GST at Settlement measure, please visit their website.