Proposed GST Withholding – Property Transactions and the Margin Scheme

As highlighted in our previous update, the Government has released Exposure Draft Legislation (ED) that will introduce a GST withholding regime for purchasers of new residential premises or new residential subdivisions, commencing on 1 July 2018.

Location:
National
Division:
Tax Consulting
Industry:
Property & Construction
Publish date:
07 December 2017
Author:
Daryl Jones

Daryl Jones

Tax Consulting
Director
Brisbane
+61 7 3001 8816

P: +61 7 3001 8816

Overview

Broadly, the new regime provides that where an entity makes a taxable supply of new residential premises or a new subdivision of residential land, the purchaser will be required to make a payment of 1/11th of the consideration to the ATO, prior to or at the time consideration is first provided.

GST Withholding and the Margin Scheme

The ED provides that where the supply of new residential premises is made under the margin scheme, the supplier may apply to the ATO for a refund of a portion of the amount withheld by the purchaser. As such, the vendor will no longer have access to the funds for GST and will have a short-term impact on the entity’s cashflow.
 
In cases where a sale is made under the margin scheme, the GST payable will be less than 1/11th of the amount required to be withheld by the purchaser.  To minimise any cashflow impact on the vendor, that entity is able to apply for a refund of the amount of the GST that is anticipated would ultimately be refunded after their BAS for the relevant tax period is assessed.
 
The vendor must apply to the Commissioner in the approved form at least 14 days before the end of the tax period to which the taxable supply is attributed.
 
Where the vendor reports GST on a monthly basis, the vendor will not be able to claim a refund as it will not suffer a large cash-flow disadvantage, and will receive a credit and ultimately a refund on the lodgement of their monthly BAS.
 
If the vendor reports GST on a quarterly basis, the vendor will be able to apply to the Commissioner in the approved form for the refund in the excess GST. Where the Commissioner is satisfied that:
  • the entity has made a withholding payment, or has purportedly made a withholding payment; and
  • the margin scheme applies to the sale,
 then the Commissioner must refund the amount required if it would be fair and reasonable to do so (having regard to particular matters).
 
 
Example – Sale with Margin Scheme

ABC Pty Ltd (has annual GST turnover less than $20 million and thus reports GST quarterly) sells a new studio apartment to Alan on 31 July 2018 for $550,000 inclusive of GST.  The margin scheme is applied and the GST payable under the margin scheme is $40,000 (based on a margin of $440,000).  The sale will settle on 31 July 2018 and full payment of consideration is required at settlement
  • ABC Pty Ltd must notify Alan, of certain matters and in the required form by 17 July 2018 (14 days before the supply occurs)
  • At settlement, Alan must make a payment of $50,000 direct to the Commissioner and $500,000 to ABC Pty Ltd.
  • ABC Pty Ltd will apply to the Commissioner in an approved form for the refund of the excess GST of $10,000 (being $50,000 less $40,000).
  • ABC Pty Ltd must apply for the refund at least 14 days before the end of the September 2018 quarter. Alternatively, ABC Pty Ltd can apply for the refund as early as 31 July 2018.
  • ABC Pty Ltd has received overall net payments of $510,000 ($500,000 from Alan and a $10,000 refund from the ATO).
The following will need to be reported on the September 2018 quarter BAS for ABC Pty Ltd.
  • Label G1 Total Sales: $440,000
  • Label 1A GST on Sales: $40,000
Example – Sale with no Margin Scheme
 
XYZ Pty Ltd (has annual GST turnover of more than $20 million and thus reports GST monthly) sells a new studio apartment to Bob on 31 July 2018 for $550,000 inclusive of GST.  It is a taxable supply and the margin scheme is not applied.  The sale will settle on 31 July 2018 and full payment of consideration is required at settlement.
  • XYZ Pty Ltd must notify Bob, of certain matters and in the required form, by 17 July 2018 (14 days before the supply occurs).
  • At settlement, Bob must make a payment of $50,000 direct to the Commissioner and $500,000 to XYZ Pty Ltd.
  • XYZ Pty Ltd will receive a credit for $50,000 from the ATO for the GST already paid by the purchaser (so that it will not need to pay the GST again when paying the net amount for the period).
  • XYZ Pty has received overall net payments of $500,000 ($500,000 payment received from Bob).

The following will need to be reported on the July 2018 monthly BAS for XYZ Pty Ltd.
  • Label G1 Total Sales: $550,000
  • Label 1A GST on Sales: $50,000