Cash Flow Crunch for Property Developers
If you are a property developer or an adviser in the property development sector, you should be aware of the recent change to GST laws which became effective 1 July 2018. In summary, it is now a requirement for purchasers of new residential premises or potential residential land to withhold the GST from the contract price and remit it to the Australian Taxation Office (ATO). New property buyers become the GST collectors.
The amendment was made to ensure that GST from sales of new residential premises or potential residential land would be paid to the ATO and to prevent property developers from using phoenix activity to avoid having to remit these funds. Before the amendment, GST collected by some property developers would either not be paid to the ATO or it would be difficult for the ATO to collect. This is whilst property developers receive the benefit of claiming input tax credits for construction costs, often large refunds. The changes now put the onus of collecting and remitting the GST on the purchaser and the risk of non-collection is reduced.
The changes in effect, provide the ATO with a higher priority in payment over other creditors once a property is sold, including financiers who have financed the project. Previously, property developers would have access to the GST proceeds from sales and could apply these funds against debts owed to financiers to ensure that they comply with their obligations set out in their loan agreements. Given the change, financiers may impose additional requirements on property developers such as increasing pre-sales targets going forward.
Other examples of cash flow implications for property developers include:
- Should the property be sold utilising the margin scheme, the GST withheld by the purchaser could be greater than the actual GST liability. Property developers will have to wait until after they have lodged their Business Activity Statements (BAS) to obtain a refund from the ATO.
- The GST proceeds are no longer available for short-term cash flow needs as it previously would have been retained up until the due date of payment of BAS liabilities. These funds will now be retained by the purchaser.
The amendments will require new processes for both the vendor and purchaser and these are outlined as follows:
The vendor is required to issue to the purchaser with written notice at least 14 days before settlement if GST is applicable to the transaction and to be withheld. The notice should address the following:
- The amount of GST to be withheld;
- Payment due date; and
- Details including the vendor’s name and Australian Business Number (ABN).
Penalties apply to vendors who fail to comply with issuing the notice.
The vendor will still be required to complete a BAS at the end of their reporting period.
It is also important to keep in mind that the liability for the GST remains with the property developer.
The purchaser will need to complete two online forms:
- Form one – GST Property settlement withholding notification: to be lodged at any time after the contract has been entered into and up until the due date for payment of the withholding amount.
- Form two – GST Property settlement date confirmation: to be lodged on or before the date of settlement.
The GST is to be remitted to the ATO after lodgement of form two. The ATO will notify the vendor once the purchaser has made payment and the credit (GST withheld) will be applied against the vendor’s running balance account.
The amendments include transitional provisions which exclude contracts entered into before 1 July 2018 and settled prior to 1 July 2020.
The new rule does not apply to:
- Existing residential properties;
- Commercial or commercial residential premises; and
- New residential property created by substantial renovations.
Do you need help?
The cash flow impact of the amendments may not be felt immediately given the transitional provisions. However, they should not be ignored, and steps should be taken now to ensure that the cash flow implications for new and ongoing projects are addressed.
If the change to the GST laws is of concern for you or your client’s cash flow, the team at PKF are available to assist.