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GST withholding for property transactions

GST withholding for property transactions

By David P Lloyd and Murray McCutcheon

Real Property Taxation 

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Lawyers engaged in the sale and purchase of land need to understand the GST withholding regime and the changes which are to be made to the standard contract of sale of real estate co-published by the LIV and the REIV to accommodate it.

Snapshot

  • There is a new GST withholding regime on sales of new residential premises and potential residential land.
  • The GST withholding generally follows the foreign resident CGT withholding requirements but with some significant differences:
  • no clearance certificates
  • additional offences, penalties, liabilities and defences
  • new vendor notification to purchasers
  • potential complexities for sales of farms and businesses.The 2017 federal budget saw the announcement of the introduction of a new GST withholding regime on and from 1 July 2018 for property transactions. This is in addition to the foreign resident capital gains withholding regime which came into effect on 1 July 2016 and the changes to it, which took effect on 1 July 2017.

The relevant legislation

The new regime is to be established by legislation which is expected to be schedule 5 of the Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth).1 The Act will add Subdivision 14-E and be headed “GST payable on taxable supplies of certain real property” to Schedule 1 of the Taxation Administration Act 1953 (Cth).The proposed legislation incorporates many definitions from the Taxation Administration Act 1953 (Cth), the Income Tax Assessment Act 1997 (Cth) and A New Tax System (Goods and Services Tax) Act 1999 (Cth). Those definitions are generally preceded with an asterisk where used in this amending legislation. In this article an asterisk is only used where the defined word first appears.

Outline of the legislation

In broad terms, by proposed s14-250 of Schedule 1 to the Taxation Administration Act 1953 (Cth), a purchaser who is a recipient of a taxable supply described below must pay the Commissioner of Taxation (Commissioner) one-eleventh of the *price or 7 per cent of the price where the *margin scheme applies (“the amount”) on or before the date any part of the *consideration (other than the deposit) is first provided, or the date determined by the Commissioner. In other words, payment is due at settlement, unless another date is provided under a Commissioner’s determination.

This obligation only applies to *taxable supplies that are:

a) *new residential premises:

  • that have not been created through *substantial renovations of a building; and
  • are not *commercial residential premises; or

b) *potential residential land:

  • that is included in a *property subdivision plan; and
  • that does not contain any building that is in use for a commercial purpose; and where
  • the purchaser is not registered within the meaning of the *GST Act; or
  • the purchaser has not acquired the potential residential land for a *creditable purpose.

However, the obligation to withhold does not apply to any kind of supply that the Commissioner determines by legislative instrument.

The expression “new residential premises” is defined in s40-75 of the GST Act. Generally speaking, a property will fall within the definition if it has not previously been sold as residential property or it results from the construction of a new building to replace demolished premises on the same land.

The expression “potential residential land” is defined in s195-1 of the GST Act as land which is permissible to be used for residential purposes but does not contain any buildings which are residential premises. Not all potential residential land attracts the payment obligation. Rather, the payment obligation arises in relation to the purchase only of potential residential land which is included in a plan of subdivision2 and has not previously been sold as potential residential land included in the plan of subdivision.

The legislation appears to be designed to include within its ambit sales of new residential premises and potential residential land which form part of the sale of a farm or business. This is evident by proposed s14-250(8) providing for a *reduced amount of withholding which is referrable to new residential premises and potential residential land where there is a mix of those supplies and other supplies and it is practicable to ascertain the price of those supplies at settlement rather than the total price of all supplies.

The regime does not purport to impose a tax as such, but rather establishes an obligation on the part of the purchaser to make a payment on account of the vendor’s potential liability for GST under the GST Act as a consequence of the sale of the land.

The payment obligation arises in respect of settlement of a contract of sale of land occurring on or after 1 July 2018, even if the contract was entered into before that date,3 but with an exemption4 for existing contracts entered into earlier than 1 July 2018 where settlement takes place before 1 July 2020. In other words, the payment obligation will apply to contracts of sale entered into before 1 July 2018 where the settlement occurs after 30 June 2020.

The amount to be paid by the purchaser is one-eleventh of the sale price (or 7 per cent [but up to 9 per cent if so determined by the Commissioner] of the sale price where the margin scheme applies) set out in the contract of sale, not the adjusted sale price payable at settlement which takes into account the usual adjustment of outgoings.

The vendor is entitled to a GST credit for an amount withheld by the purchaser from the contract consideration but only if and when the purchaser pays the withheld amount to the Commissioner. This replicates the position under the foreign resident capital gains withholding regime. A major change from that regime is that there is no process for a clearance certificate to be obtained from the Commissioner. The purchaser is strictly liable to pay the Commissioner the GST amount the purchaser was entitled to withhold from the contract consideration. The legislation provides a defence to the penalty for failing to withhold by the purchaser if there are no circumstances for the purchaser to believe that a statement or indication by the vendor about the amount to be paid to the Commissioner is incorrect.

Practical issues for property sale transactions

To assist purchasers to comply with the payment obligation, vendors of any residential premises5 or potential residential land6 are required to give a written GST withholding notice in accordance with proposed s14-255 of Schedule 1 to the Taxation Administration Act 1953 (Cth) to the purchaser at least 14 days before settlement. The notice7 must state whether (or not) the purchaser will be required to make a payment under s14-250 and, if so, must also state the vendor’s name and *ABN and the amount of the payment required.

Curiously, there is no requirement for a vendor to provide a GST withholding notice under a contract entered into before 1 July 2018, no matter when settlement occurs.8

Section 16-20 of Schedule 1 to the Taxation Administration Act 1953 (Cth) effectively entitles but does not oblige the purchaser to deduct the relevant amount from the contract consideration by providing that the purchaser is discharged from any liability to pay the amount to any person other than the Commissioner. However, the purchaser is personally liable to pay the withholding amount to the Commissioner whether the purchaser deducts the amount from the contract consideration or not. This is the same as under the foreign resident CGT withholding regime.

Practitioners do not need to be registered with the Australian Taxation Office in order to make payment on behalf of a purchaser client. This is the same for foreign resident capital gains withholding payments.

The purchaser must pay two amounts, one under the GST withholding regime and another under the foreign resident capital gains withholding regime, if both regimes apply to the sale of the land.

Contract of sale of land – a new special condition creating new general condition 15B

It is desirable for the standard contract of sale of real estate co-published by the LIV and the REIV to be updated to reflect the new legislation. To this end, it is intended that a new special condition 5A be made available which will in turn add a new general condition 15B to the contract. General condition 15B will be designed not to replicate but to complement the legislation, and at the same time to provide some measure of protection to both vendor and purchaser. For instance, under the proposed general condition:

a) The vendor will have an obligation to supply the purchaser before settlement with such information as is necessary to enable the purchaser to make payment of the amount to the Commissioner after settlement; and

b) There will be mechanisms designed to ensure that any amount withheld from the settlement sum is in fact paid over to the Commissioner following settlement.

A further article will be published in the LIJ when the new special condition has been finalised.

What action needs to be taken?

The obligation on the part of a purchaser to pay one-eleventh (or 7 per cent for margin schemes) of the sale price to the Commissioner will apply to settlement of a contract of sale of land which occurs on or after 1 July 2018, even if the contract was entered into before that date, but subject to the exception for existing contracts entered into before 1 July 2018 where settlement takes place before 1 July 2020.

The new special condition 5A will be finalised when the relevant legislation has been passed and its provisions are known with certainty. In the meantime, it is proposed that a preliminary version based on the exposure draft legislation be made available for use by practitioners in contracts of sale with settlements on or after 1 July 2020 being prepared now.

So far as the standard contract is concerned, a separate sheet containing the new special condition 5A will be printed for use by legal practitioners and estate agents, and the online version of the standard contract will be appropriately amended. The proposed new general condition 15B will be compatible with contracts entered into before, on or after 1 July 2018.

 

David P Lloyd is a barrister with more than 37 years’ experience in the field of property law. He is the lead author of Sale of Land Act Victoria (Thompson Reuters, October 2015) and the forthcoming work Victorian Land Contracts, the primary focus of which is the standard contract of sale of land. He has been a member of the LIV Property Committee for more than 25 years and is a regular seminar speaker and contributor to the LIJ. He and Murray McCutcheon AM are the authors of the contract of sale of real estate co-published by the LIV and the REIV.

Murray McCutcheon AM is the longest serving member of the LIV Property Committee, a member of the Law Council of Australia (LCA) National Electronic Conveyancing Committee and chair of the Electronic Conveyancing Group.9 He is past chair of the LCA Australian Property Law Group, the LCA Legal Practice Section and the Property Law Reform Alliance. Murray was invested as a Member of the Order of Australia in 2015 for significant service to property and commercial law.

1. The legislation was introduced into the Commonwealth Parliament as schedule 5 of the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (Cth) on 7 February 2018. This article is largely based on the contents of the Bill as first introduced. The legislation in its final form may differ from the Bill.

2. The legislation uses the more generic term “property subdivision plan” which is defined in s195-1 of the GST Act, and plainly means a plan of subdivision.

3. Treasury Laws Amendment (2018 Measures No. 1) Act 2018, schedule 5 s23.

4. Note 3 above, s24.

5. Not just new residential premises but all residential premises.

6. Whether or not included in a plan of subdivision.

7. Known as a “GST withholding notice”.

8. Note 4 above.

9. Which represents the legal profession, licensed conveyancers and financiers through its members being the Law Council of Australia, Australian Institute of Conveyancers and the Australian Bankers Association.


Disclaimer: Views expressed by commentators are not necessarily endorsed by the Law Institute of Victoria Ltd (LIV). No responsibility is accepted by the LIV for the accuracy of information contained in the comments and the LIV expressly disclaims any liability for, with respect to or arising from any such views.

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