From July 2017, buyers of some residential property will be obliged to withhold and pay 10% of the purchase price to the ATO, at settlement.
As you may be aware, the term ‘phoenix company’ is sometimes applied to a company which is deliberately liquidated to avoid paying its debts, including taxes.
Some unscrupulous developers have used phoenix companies to develop and sell residential property without paying GST to the ATO on those sales.
The Australian Government has now passed legislation to ensure it always receives the GST, by putting the onus on all buyers and sellers of ‘residential property’ and ‘potential residential land’.
The effect of the legislation is very wide reaching, and effectively means the ATO is receiving very large sums, much sooner, as well as more information.
Who is affected?
Sellers of residential property and of potential residential land who enter contracts dated after 30/6/2018 must give written notice to the buyer informing them whether GST is payable on the sale, before supplying the property. [Such notice is not required for commercial residential property (e.g. caravan parks, hotels and the like) or commercial property or for potential residential land (if the purchase is a business to business transaction)].
If GST is payable on the sale, the notice must also include details about the seller and the amount of GST payable and when such payment is due.
The seller may suffer a penalty of up to 100 penalty units (currently $11,000) if it fails to provide the required notice.
Every relevant buyer is then required to pay GST (generally 10% of the price) directly to the ATO (rather than to the seller) as part of the settlement proceeds. The seller is (eventually) entitled to a credit for the amount payable on its GST return.
Penalties apply if the seller fails to give a notice, or if the buyer fails to make payment.
Even if a seller does not provide a notice, or if the notice stating no payment is required is not reasonably believable, the buyer is still obliged to make payment to the ATO under this new legislation.
In what circumstances is GST payable?
The buyer’s liability arises when there is a taxable supply of:
certain types of ‘new residential premises’ as defined in the Act; or2)
‘potential residential land’ (unless the buyer is registered for GST and acquiring the property for a ‘creditable purpose’)
If GST is payable, the buyer must pay 1/11 of the contract price, [unless the margin scheme applies (in which case 7% of the contract price must be paid)].
The GST must be paid by the buyer to the ATO (generally by providing a Bank cheque drawn in favour of the ATO to the seller at settlement, or if there is no payment in the transaction, an amount equal to 10% of the GST exclusive market value must be paid to the ATO by the buyer on the day the supply is made.
We strongly advise all buyers of residential property and potential residential land obtain legal and accounting advice prior to entering contracts from 1 July 2018, to determine if GST applies to the purchase, to ensure the contract allows for payment of any GST to the ATO and to reduce the risk to the parties of incurring potential penalties from the ATO.
Thank you to our sponsors Garland Waddington Solicitors for this useful information.