Understanding the implications of GST withholding legislation in property transactions

A withholding legislation for GST was introduced on 1 July 2018. This legislation requires purchasers to withhold the GST amount of the purchase price and remit it to the Australian Taxation Office (ATO) upon settlement. The formation of the legislation was a consequence of numerous instances of ‘phoenixing’, where companies would abuse the remittance period between settlement and the lodgement of their next business activity statements by deregistering their companies and creating new ones to avoid their GST payment obligations. It is estimated that $1.8 billion in GST debt was accumulated before the legislative amendments. Companies claimed an estimated $1.2 billion in GST input credits from 2013-2017.

The legislation is contained in section 14-250 of the Taxation Administration Act 1953 which specifies that GST must be withheld if you are the recipient of a taxable supply which is potential residential land or a new residential premises (excluding commercial premises or any substantial renovations made to a property). Purchasers who are not registered for GST or are not acquiring the land for a credible purpose (i.e. in the course of their business) remain exempt from this provision. To help the purchasers meet their obligations, vendors are required to notify the purchaser in writing whether a GST payment is to be withheld. This requirement is not mandatory in instances where the purchaser is registered for GST and acquires the land for a credible purpose or for commercial residential premises.

There are two methods of calculation when working out the withholding amount:

1. The non-margin scheme; and
2. The margin scheme.

The non-margin scheme applies to fully taxable supplies and is 1/11th of the contract price. The margin scheme allows for 7% of the contract price to be withheld (even though the GST amount payable may be more or less than the 7% required to be withheld). In both cases, the vendor will receive a credit from the ATO, the difference being that they may claim a GST refund under the margin scheme, if an amount more than necessary was initially withheld.

At SettleIT, the operations team extracts the information found in either the contracts provided or vendor disclosure statements. This information is entered into an Electronic Network Operator (ELNO) space, which creates the GST Forms 1 and 2 which are submitted to the ATO. The ATO will verify the information contained in the Form 1 and create the destination line for the withholding payment in the ELNO directions. If there are no issues with the Form 1, a Form 2 is prepared and readied for submission at settlement.

The key takeaway from the legislation is that parties need to be aware whether their conveyance will require GST to be withheld. Vendors must be aware of their reporting obligations, or they may be fined by the ATO, and purchasers must conversely adhere to their payment obligation. Payouts to mortgagees may be affected given the GST component will not be collected by the vendor at settlement and may attract penalty interest. Given this risk, vendors should prepare for how the reduced cash flow at settlement will affect their dealings.

Don’t let GST compliance be a burden on your property transactions. Take advantage of tax accountant expertise and resources to simplify your conveyancing process today.

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