GST withholding at settlement: are you affected?

From 1 July 2018 there is a new GST withholding obligation imposed on purchasers of certain real property. Broadly, where a taxable supply is made involving the sale of either new residential premises or subdivided land that is potential residential land, the purchaser of the property is required to withhold GST from the purchase price and remit this to the Australian Tax Office (ATO) on or before settlement. The amount of GST required to be withheld is generally either 1/11th of the contract price of the property or 7% of the contract price of the property where the margin scheme applies.

The primary reason for these changes is to try and prevent what the government has identified as a significant loss of GST revenue due to ‘phoenix activities’ by property developers who sell properties as part of their business and close down or wind up the business before remitting the required amounts of GST to the ATO. These changes essentially shift the compliance burden for the collection and remittance of GST on certain property transactions from sellers to purchasers.

There is some confusion relating to the application of this new regime, particularly whether or not all sales of subdivided residential land are caught. The GST withholding requirement is only applicable where the sale of residential land is a taxable supply for GST purposes. The supply of subdivided residential land is a taxable supply where the supply is made in the course of furtherance of an enterprise, for example via a business undertaking (eg. a large scale property development) or by an entity that is registered or required to be registered for GST.

The GST withholding regime is not applicable to the sale of existing or ‘old’ residential premises or on the sale of subdivided residential land that constitutes the mere realisation of a capital gains tax asset by a person or entity that is not registered for, or required to be registered for, GST.

It is important that both sellers and buyers of real property are aware of these new rules, when they are applicable to them and what obligations they may have to comply with the requirements of the GST withholding regime. Settlement agents will generally draw this issue to the attention of both the seller and purchaser where necessary. A GST withholding annexure can be added to a standard purchase contract to deal with the compliance requirements of the new regime. Failure to comply with these rules can result in the ATO imposing penalties on both the seller and purchaser.