If you are a property developer, a new GST withholding regime could soon have a significant impact on your business’ cash flow (and create a fair amount of confusion along the way).
The ATO recently issued an exposure draft for a new regime which could require purchasers of new residential property (and new residential land in some cases) to pay the GST component of the purchase price directly to the ATO at settlement, rather than to the property developer.
The measure was first announced in the May federal budget and aims to overcome the problem of some property developers not paying GST on their property sales to the ATO.
The new regime is planned to commence from 1 July 2018, however there will be transitional rules for some contracts entered into before 1 July 2018.
Under the proposed new rules, contracts entered into where part of the consideration (other than the initial deposit) is first provided after 1 July 2018 will be subject to the GST withholding.
Under the transitional rules, if the contract was signed before 1 July 2018 the new regime will not apply if the consideration for the supply (other than the initial deposit) is provided before 1 July 2020.
Under the current rules, developers have been able to collect the GST component of the sale value from the purchaser and hold the funds until their BAS for the relevant quarter was payable.
Under the new rules, the purchaser will need to withhold 1/11th of the purchase price and pay the amount to the ATO on or before the day on which any part of the consideration (other than the initial deposit) is first provided. This will usually be at settlement. If the purchase price is payable in instalments, the full GST amount (on the total purchase value) will be payable on or before the day the first instalment is paid (other than the initial deposit).
If the purchaser withholds the GST amount and pays it to the ATO, the developer will receive a credit on their BAS for the relevant quarter.
The regime is worse for supplies subject to the margin scheme. Under the new rules, the purchaser is still required to withhold 1/11th of the purchase price and pay it to the ATO. Developers will not receive a refund of the difference between the amount withheld and their reduced GST liability under the Margin Scheme until after they lodge their BAS for the relevant quarter and wait for their refund.
Quarterly BAS lodgers may be able to use an advanced refund mechanism, however the early refund may be delayed by the developer having to prove their eligibility to use the margin scheme and a review of their calculation methods.
In an attempt to make the regime run smoothly, the developer will be required to notify the purchaser at least 14 days prior to making the supply:
- Whether they are required to withhold the GST amount and pay it to the ATO; and
- The developers name, ABN, amount to be paid and due date for payment
If the developer does not notify the purchaser of the requirement to pay, a penalty of up to $21,000 per event may be applicable.
If the purchaser does not withhold and pay the GST amount to the ATO, they become liable to a penalty equal to the GST amount.
Did someone mention simplified tax system!
If you are a property developer, you need to start considering the potential impacts of the new regime on your cash flow, sales processes and internal reporting. Given the reporting penalties are so high and the cashflow impact is so significant you need to be reviewing your position and making arrangements now.