Currently, when new residential property is sold, GST is included in the contract price. The seller (typically a developer, builder or subdivider) will then pay this GST to the ATO through their business activity statement (BAS).
On 29 March 2018, the GST laws were amended so that now the purchaser of new residential property will have to pay GST directly to the ATO instead of to the seller. Following the payment of GST by the purchaser to the ATO, the seller will be entitled to a credit for this amount in their next BAS (up to three months later).
The new rules will apply to contracts entered into on or after 1 July 2018. Contracts signed prior to 1 July 2018 will only be subject to the new rules where the first payment (ignoring the deposit) is made after 1 July 2020.
What sales will be affected?
Sales that will be subject to the new rules include:
- The sale or long-term lease of new residential properties (those that have not previously been sold or leased as residential premises, or have been built to replace demolished premises on the same land).
- The sale of land that will potentially be used for residential purposes. This will include for example, the sale of a vacant block of land within a subdivision, sale of land that is sold as part of a house and land package or some off-the-plan purchases, and the sale takes place before any construction of the building has begun.
The types of property that will not be subject to the new rules are:
- Where the building is covered by a contract that is separate from the contract for the purchase of the land;
- A new residential property that is created by way of substantial renovations;
- Buildings that provide accommodation for the purpose of making a profit; such as hotels, motels and boarding houses;
- The transfer of a property between two businesses where the transaction takes place for business purposes. This would include property being built for the purpose of a new office location for a business; and
- The transfer of property from one member of a GST group to another.
How must payments of GST be made?
The purchaser must pay the full amount of GST to the ATO on or before the day on which any payment of the purchase price (excluding the deposit) is paid to the seller. This will usually be at the settlement date.
This means that the seller will no longer collect GST on new residential property, which previously may have been used as working capital.
Importantly, the contract price on which GST will be paid does not include settlement adjustments.
If the seller and purchaser are related and no payment is provided, payment of GST must still be made to the ATO on the day the supply is made (this will likely be settlement date in most cases).
Where payment is made to the seller by instalments, the full amount of GST payable is payable to the ATO by the date of payment of the first instalment to the seller (excluding the deposit). This may mean that the first instalment required under the contract may be paid entirely to the ATO as GST.
This has the potential to significantly impact cashflows of both the seller and the purchaser.
Whether registered for GST or not, all sellers of new residential property must provide the purchaser with a written notice prior to settlement, advising whether the purchaser will be required to pay GST to the ATO and if so, communicate the following additional information:
- The name and ABN of the seller;
- The GST required to be paid to the ATO; and
- When the GST is required to be paid.
Non-compliance with these new rules can result in severe monetary penalties, and even criminal prosecution. Practically, much more guidance is needed from the ATO on how to comply with these requirements.
What will you need to do?
To be prepared, those in the property development industry in particular will need to consider multiple issues.
Firstly, contracts for the types of sales that will be affected will need to be reconsidered to appropriately protect sellers and purchasers. For instance, for those sellers who provide land and buildings, the option of providing the land as a separate contract to the buildings will mean that only the land (and not the entire land and building price) will be subject to the rules. This may reduce the cashflow implications.
Secondly, as the new rules will apply to contracts signed before 1 July 2018, where the settlement occurs on or after 1 July 2020, existing contracts should be reviewed now to identify those contracts that will fall under these new rules.
Additionally, due to the cashflow issues that are created by the new rules, financing arrangements and bank covenants will need to be reviewed to ensure that cashflow can be adequately managed.
Property development structures involving a separate entity owning the land to the entity completing the development, will need to consider the impact of the changes on the payment structure under which both parties are paid for their respective involvement in the project.
Accounting software may need to be updated to account for the fact that a developer has a GST liability that it will not directly pay to the ATO on settlements.
Property lawyers and conveyancers will need to familiarise themselves with the new rules to ensure they administer it correctly on behalf of their clients.
If you’d like to discuss how the amendments to the GST laws may affect you (as either a purchaser or seller), contact me directly, or contact your local Crowe Horwath adviser.
Marcus Davis – Associate Partner, Tax Advisory