New GST Withholding Rules For Property Transaction

Monday, June 25, 2019

A new system for withholding GST in property transactions will commence from 1 July 2018.

This has been brought in to counter significant loss of revenue by the ATO where GST on property transactions has not been submitted to the ATO.

How it will work?

The new GST withholding rules will apply to any taxable supply of “new residential premises” or “potential residential land”.

“New residential premises” are brand new residential premises but do not include those created through substantial renovation or commercial residential premises.

“Potential residential land” is land created by subdivision but does not include a subdivision that contains any buildings used for commercial purposes.

When it will start?

The rules will apply to any settlements that take place from 1 July 2018. If a contract was entered into before 1 July 2018 then the new rules do not apply unless the settlement date is on or after 1 July 2020.

Seller to give notice to buyer about GST

A seller of residential property will need give the buyer notice as to whether the supply of property is subject to GST withholding. Where the supply of property is subject to GST withholding then the seller must give the buyer written notice which includes:

  • the developer’s name and ABN,
  • the amount that the buyer is to withhold, and
    when the buyer must pay the withheld amount.

Failure by the seller to provide the necessary notice to the buyer can mean that the seller will be liable for a fine of 100 penalty units (currently $21,000) for an individual and 500 penalty units (currently $105,000) for corporations.

Forms to be completed by the buyer

The buyer will need the notice given by the seller to input information online in two separate forms called a Form 1 and a Form 2. It would be in the best interests of the seller to require the buyer to complete these forms as part of the contract and to provide copies of the completed forms to the seller to confirm that they have been completed properly.

The amount of GST to be withheld

  • The amount of GST to be withheld will be:
    one eleventh of the contract price, or
  • 7% of the contract price where the margin scheme applies.

When the GST withholding must be paid?

The buyer is required to pay the GST to the ATO on or before the settlement date.
Failure by the buyer to withhold the GST and pay it to the ATO can mean that the buyer will be liable for an administrative penalty (currently a sum equal to 100% of the amount to be withheld).

Supplier credit for GST withholding tax

The seller/supplier must include the GST liability in its BAS but is entitled to a credit equal to the amount of GST withheld.

Developers in particular will need to be ready for these new rules and will need to ensure that sale contracts contain sufficient provisions to address the new rules.

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