Tax Bites: Introducing GST Withholding Tax

Making good on an announcement made in the May 2017 Federal Budget, the Government has introduced draft legislation which, if enacted, will create a GST withholding tax liability on purchasers of certain real estate. Below is a snapshot.

Scope of the rules

To assist with streamlining the collection of GST by the ATO, the proposed new legislation will require purchasers of new residential property or vacant residential land to withhold GST on behalf of the vendor. This will mean that the purchaser, rather than the vendor, will become liable for remitting GST on these types of transactions to the ATO. While the new provisions are aimed fairly and squarely to improve the GST compliance of property developers, the new provisions can equally apply to many other types of transactions.

As the new GST withholding tax will only apply to sales of new residential property or vacant residential land, no withholding tax obligations will apply to the sale of second-hand residential property.

Another important limitation of the new rules is that they will only apply where the purchaser is not registered for GST. Thus, the GST withholding obligation will not apply to ordinary business-to-business transactions where both vendor and purchaser are registered for GST.

Withholding rate

The rate of withholding required to be remitted by the purchaser depends on whether the purchaser purchases the new residential property or vacant residential land as an ordinary GST taxable supply or under the GST margin scheme.

If the purchaser purchases the new residential property or vacant residential land as an ordinary GST taxable supply, the rate of withholding payable by the purchaser will be 1/11th of the contract value of the property. For instance, if the GST inclusive sale price of the property is $1,000,000, the purchaser will be required to withhold and remit $90,909 to the ATO.

Alternatively, if the purchaser purchases the property under the GST margin scheme, the rate of withholding payable by the purchaser will be 7% of the contract value of the property. For instance, if the GST inclusive sale price of the property is $1,000,000, the purchaser will be required to withhold $70,000.

GST obligations on the vendor

When completing their BAS, the vendor of the property will separately be required to disclose the sale of the property and the GST payable on the sale. However, the vendor will be eligible to claim a tax credit for the GST already withheld and remitted by the purchaser. In relation to supplies of property under the GST margin scheme especially, this could result in the vendor having to pay top-up GST or could result in the vendor receiving a refund of GST (depending on the calculation of the margin).

Commencement date of the new rules

The new GST withholding tax regime is scheduled to commence operation for any contract of sale that settles on or after 1 July 2018. However, for contracts entered into before 1 July 2018, the GST withholding rules will not apply to any consideration paid by purchasers prior to 1 July 2020.

If you have any further questions, please do not hesitate to contact Tim Olynyk on (03) 9810 0700 or at t.olynyk@banksgroup.com.au.

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