Avoid Excess GST Withholding Being Tied Up with the ATO – Get the GST Withholding Right
Get the details wrong on your contract and associated documentation, and you could see excess GST being withheld and remitted to the ATO by the purchaser, leaving an unnecessary lag in cashflow.
The GST withholding laws have been operating since 1 July 2018, with purchasers of new residential premises, or new subdivisions of potential residential land, required to withhold an amount of the purchase price, representing the GST payable on the transaction.
There are transitional rules, however, essentially whenever any of the consideration (other than a deposit) is first provided on or after 1 July 2018, these withholding rules will apply.
To assist purchasers with their withholding obligations, these new rules require the vendor to provide a notice to the purchaser before or with the contract. This notice should advise whether the purchaser is required to withhold GST and if so the notice should include the name and ABN of the vendor, the amount to be withheld and remitted to the ATO, and the date the amount is to be remitted.
However, not all contracts require the full GST to be withheld and remitted to the ATO. You should understand the exceptions allowed under this legislation, and ensure you are providing the necessary information to the purchasers, to ensure these exceptions are not overlooked in your settlements.
The purchaser is only required to withhold GST where they are the ‘recipient’ of a ‘taxable supply’, by way of sale or long-term lease, and the supply is of:
(i) New residential premises (apart from some exclusions); or
(ii) Potential residential land where particular requirements are met.
Make Sure All Exemptions Have Been Applied
There are a number of exemptions under this legislation. Familiarise yourself with the exemptions, and ensure they are correctly applied where applicable. There will be no GST withholding obligation under the following situations:
Where the sale is not considered a taxable supply:
- Where the vendor is not registered for GST and not required to be registered for GST as the sale is not in the course or furtherance of an enterprise;
- The sale of residential premises is input taxed because they are not ‘new residential premises’; or
- The sale is a GST-free supply, for example, as part of a GST-free supply of a going concern or GST-free farmland.
Where the sale is specifically excluded under the “new residential premises” definition:
- A sale of new residential premises that has only been created through substantial renovations; or
- A sale of ‘commercial residential premises’ (these include hotels, motels, inns, hostels and caravan parks).
Where the sale is specifically excluded under the “potential residential land” definition:
- The property is not considered ‘potential residential land’;
- The property is not included in a ‘property subdivision plan’;
- The property contains any building that is in use for a commercial purpose; and
- The purchaser is registered for GST or is registered but does not purchase the property for a creditable purpose (to any extent).
A property is considered potential residential land when it is land used for residential purposes, but it cannot contain any buildings that are residential buildings. You would need to consider zoning and other land use laws to determine this.
A property subdivision plan must be registered with the relevant State or Territory. A property will be purchased for a creditable purpose where it is purchased in carrying on an enterprise but is not considered input taxed or private or domestic in nature. It does not matter the extent to which the purchaser acquires the potential residential land for a creditable purpose. A partly creditable purpose will mean no GST withholding obligation. LCR 2018/4 provides a further example on this “A purchaser who is registered and purchases potential residential land under the margin scheme is not making a creditable acquisition. However, they may still be acquiring the property for a creditable purpose. If so they will not have a GST withholding obligation in those circumstances.”
Make Sure the Correct GST Withholding Amount Has Been Applied
Generally, the GST withholding amount to be paid by the purchaser is 1/11th of the contract price. This is the contract price, and not the settlement price, which may include numerous adjustments. However, there are circumstances where a reduced percentage can be applied. The following table from LCR 2018/4 summarises this:
Watch Instalment Contracts
Excluding a genuine deposit, the first part payment under an instalment contract is the first day on which the purchaser must remit the GST withholding amount on to the ATO.
What If the Incorrect GST Withholding Has Been Remitted to the ATO?
Once the purchaser has remitted the GST withholding amount to the ATO, the vendor will be entitled to a credit on their business activity statement (BAS) for the amount of the payment made to the ATO. However, where the amount withheld is greater than the GST payable on an entity’s BAS, there is no automatic refund. The amount remaining will be carried forward and applied against future lodgements payable, the excess will not be refunded.
This excess may happen where the full 1/11th was remitted to the ATO incorrectly even though the margin scheme is being applied, or the margin scheme calculation results in GST payable of less than the specified 7% withholding. Where the sale is made under the margin scheme, the vendor may apply to the ATO for a refund of a portion of the amount withheld by the purchaser. It is important to note, the vendor must apply to the ATO for this refund no later than 14 days before the day the BAS is due for lodgement for that period.
You must apply for the refund, it is not automatically refunded with the processing of the BAS. This takes time and impacts any cashflow that may be expected at the end of the settlement, with flow-on effects with distributions to investors and financiers, or equity needed for the next development.
Not all contracts for new residential premises, or new subdivisions of potential residential land, require the full GST to be withheld and remitted to the ATO.
The vendor must give written notice to the purchaser before making the supply. Getting this wrong could lead to a substantial deficiency in expected cashflow at the end of a project. Get the correct advice to ensure only the minimum amount of GST is being withheld and remitted to the ATO.