New homebuyers to start collecting GST for the ATO
In the 2017/18 Federal Budget, the Government announced changes that will require purchasers of newly constructed residential premises or new subdivisions to collect and pay GST directly to the ATO as part of the property settlement process.
The rationale behind the changes is the high level of non-compliance by property developers with their GST obligations. According to the ATO this non-compliance manifests itself in a form of ‘phoenixing’ whereby developers, after selling properties, dissolve their business to avoid having to pay GST collected on the sale.
The ATO has identified over 12,000 insolvent entities as having been involved in this practice with over $1.8 billion in GST debts being written off. Theses entities have also claimed over $1.2 billion in GST credits between 2013 and 2017 so with a total hit to the Government coffers of over $3 billion it’s easy to see why they are keen to address the issue.
The legislation to enact these changes was introduced to Parliament on 7 February 2018 and if passed the new scheme will commence from 1 July 2018. Here’s how it will work in very broad terms;
Applies to new residential premises and potential residential land. As usual the exact definition of these terms is not as straight forward as it looks but it will generally apply to off the plan apartments, house and land packages and residential property subdivisions.
The purchaser will be required to withhold up to 1/11th of the purchase price at settlement and pay it to the ATO on or before the day that settlement is due.
The exact method for how a purchaser will pay this GST is unknown at this stage but the ATO has said that they will not be required to register with the ATO as a tax withholder.
The Vendor is required to provide the purchaser with a notice setting out the prescribed information, including the amount of GST that should be withheld and paid to the ATO. Failure on the part of the vendor to comply may result in significant penalties being imposed.
This notice can also include a declaration that the property is not new residential premises and therefore the purchaser does not need to withhold and pay GST.
Penalties may also apply to the purchaser if they do not withhold correctly without having received this declaration but if there is sufficient information and evidence available that would mean that it was unreasonable for the purchaser to believe that the declaration was correct then the penalties will still apply.
If the purchaser is in any doubt as to whether the notice is unreasonable then they are able to withhold and pay the GST anyway. The vendor will then claim a GST credit for this from the ATO.
As I said, it’s easy to understand why something needs to be done to collect this GST but the bit I don’t get is this – if the ATO believes the non-compliance is a result of deliberate dishonest and fraudulent activity, wouldn’t the developer just continue their dodgy behaviour and issue fraudulent declarations so no GST was withheld?
The last two dot points above are the kicker in my opinion. With the threat of penalties hanging over their head, and a lack of a reliable definition for what ‘unreasonable’ means in this case, I think we will see purchasers leaning towards withholding in every instance irrespective of whether they have been given a declaration or not.
It seems as though applying a big stick policy to a totally innocent party to collect taxes on behalf of the ATO is alive and well.