Property vendors and purchasers are subject to tough new GST laws, introduced to crack down on dodgy company directors who engage in illegal ‘Phoenix’ activities.
On 1 July 2018 a new GST regime was introduced requiring purchasers of new residential property and potential residential land, to withhold the GST component of the purchase price, and to pay the GST directly to the Australian Taxation Office (ATO).
The new GST laws were introduced to stop ‘‘Phoenixing’: a term used when the director of a company who sell residential property, or potential residential land on which GST is payable, dissolves the company before remitting the GST to the ATO.
Illegal Phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements.
According to the Australian Government, Phoenixing was estimated to cost the Australian economy $3.2 billion annually – $610 million for the tax office, $655 million for employees, and $1.93 billion for other business owners.
What properties are affected by the GST withholding requirement?
- New residential property is property that has not previously been sold as residential property or is new buildings which have replaced a demolished building on the same land.
- Potential Residential land is land that is permitted to be used for residential purposes and does not contain any buildings that are residential.
- Long term leases for at least 50 years.
The vendor is required to notify the purchaser in writing:-
If the purchaser is to withhold the GST amount on the purchase price on settlement
The specific amount the purchaser must withhold
When the amount must be paid to the ATO
Any additional requirements the ATO may request
When is the purchaser required to withhold GST
On receipt of the notice from the vendor the purchaser or their representative must complete two forms on the ATO website. Form 1 Settlement Withholding Notification and Form 2 Settlement Date Confirmation. The purchaser must provide a copy of both Forms to the vendor prior to or on completion. On settlement the purchaser must either pay the GST directly to OSR by using the Payment Reference Number issued by OSR or give a bank cheque payable to the ATO to the vendor.
The amount to be withheld
The amount to be withheld is generally either:-
1. Where the Contract price includes GST: 1/11th of the purchase price;
2. If the Margin Scheme has been applied: 7% of the purchase price;
3. 10% of the GST Exclusive Market Value of the property if the sale is between related parties.
Effect on the vendor
On receipt of payment from the purchaser the ATO will notify the vendor by email of the GST credit amount available. The vendor must still lodge its usual BAS Statement and will receive a credit for the amount received by the ATO.
What are the penalties for not withholding the GST
A vendor may have a penalty imposed on it for failure to give the required notice to the purchaser. There are two types of penalties:
1. A strict liability offence which will mean 100 penalty points if the vendor is found guilty; or
2. An administrative penalty which is also 100 penalty points.
(In New South Wales 1 penalty equals $110.00 and in Queensland 1 penalty equals $130.55).
The vendor may escape liability if it can prove it reasonably believed it was not required to issue the notice to the purchaser.
The purchaser may incur a penalty if the purchaser does not comply with the notice given by the vendor. The penalty amount equals the amount of the GST that the purchaser was supposed to withhold.
A penalty on the purchaser will not apply in the following circumstances:
1. Where the purchaser has reasonably relied on a notice from the seller which appears to be incorrect; or
2. Where the purchaser gave the vendor a bank cheque payable to the ATO together with the Payment Reference Number issued by the ATO.
It is extremely important for purchasers to retain evidence of the bank cheque by keeping a copy of the cheque and it is also advisable that the vendor or its representative sign an acknowledgement on settlement accepting the bank cheque.
Contracts dated before 1 July 2018
If the settlement date of the contract is after 1 July 2020 the same principles as discussed above will apply.
If the settlement date of the contract is before 1 July 2020 there are no obligations on the parties in relation to the new GST regime.
How Can Attwood Marshall Lawyers Property and Commercial Department Help?
- We have a dedicated Property and Commercial Department which is led by a senior solicitor and partner of the firm
- We have experience that is second to none, in providing both purchasers and vendors, with accurate GST advice
- We have a team of senior paralegals and a licenced conveyancer to ensure a flawless transaction for your property
- We thoroughly check all relevant searches, reports, building certificates, council approvals, titles and perform entity searches
- We methodically asses every line in your contract to make sure it is legally sound and specific to your needs, whether the property is residential or commercial
- If there are legal problems, we pick them up before it’s too late, to protect your finances, your asset and long term plans
- We step in and take whatever proceedings are necessary to protect your interests whether it be terminating a contract or by keeping a party to its obligations
Please do not hesitate to contact our Property & Commercial Department Manager Emily Spinks on direct line 07 5506 8214 or email firstname.lastname@example.org should you have any questions in relation to your obligations under the new GST legislation.
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