From 1 July 2018 new GST withholding rules will apply on the sale of new residential premises.

Background

The Commonwealth Government is introducing new laws in order to prevent what is known as ‘phoenixing’. Phoenixing occurs ‘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’[1]. As the law currently operates, purchasers of new residential premises pay GST to developers as part of the purchase price. The developers are then required to remit the GST to the Australian Taxation Office (ATO) in their next Business Activity Statement (BAS). This means that developers can have as long as three months from the date of settlement to remit the GST to the ATO. This lapse in time allows developers to engage in phoenixing, by stripping a business of its assets and dissolving it. The ATO as an unsecured creditor is therefore unable to recover the GST owed by the developers[2].

Phoenixing is a significant problem that has increased substantially over the past decade. Over the past five years, the ATO has identified approximately 3 700 individuals that have controlled more than 12 000 insolvent entities that are not only responsible for $1.8 billion in debt being written off, but have also claimed $1.2 billion in GST credits[3]. It is hoped by the Australian Government that these changes to the law will substantially reduce phoenix activity by property developers.

Summary of the New Law

From 1 July 2018 new GST withholding rules will apply on the sale of new residential premises. For the purpose of the new laws, premises are considered to be new premises if:

• they have not previously been sold as residential premises;
• they have been created through substantial renovations of a building; or
• have been built to replace demolished premises on the same land[4].

New residential premises are subject to GST obligations when a taxable supply is made of the property. Section 40-75 of the GST Act 1999 (Cth) sets out when premises are to be considered new residential premises. Premises will be considered to be new residential premises ‘where they have not previously been sold as residential premises, have been created through substantial renovations of a building, or have been built to replace demolished premises on the same land’[5]. A taxable supply arises by way of sale or long term lease[6]. Where a taxable supply is made by an entity (such as a property developer), the purchaser is required to make a direct payment to the ATO prior to or at the time of consideration, for part of the consideration[7]. This will generally be the day of settlement of the property.

Amount to Pay

Where the margin scheme does not apply, the purchaser must withhold for the ATO 1/11^th of the contract price. If the scheme does apply, the purchaser must withhold 7%.[8] Further, when a supply is made for less than the ‘GST inclusive market value’ between associates, the purchaser must pay as GST 10% of the ‘exclusive market value of the supply’[9]. However, where potential residential land is acquired for creditable purposes by a recipient that is registered for GST, a withholding obligation does not apply.

Multiple Recipients

In situations where there are multiple recipients of the supply, each recipient is ‘treated as receiving a separate supply in proportion to their interest in the property’[10]. This may occur in situations such as where a property is purchased by a couple as tenants in common.

When to Pay

The purchaser’s obligation to remit GST to the ATO must be met on or before the day that consideration for the supply is provided. This will generally be the day of settlement. Similarly, where consideration is provided under a contract paid in installments, the purchaser must make payment to the ATO by the end of the day that they make the first installment payment.

Obligations to Notify

Where a tax withholding obligation applies, vendors are required to notify purchasers of their obligation to remit GST to the ATO. The notification must be made in writing. Failure to notify is a strict liability offence that imposes a maximum penalty of 100 penalty units. Courts may impose a penalty 5 times the maximum in situations where a corporation fails to notify the purchaser. Importantly, failure to notify does not affect the obligation of a purchaser to make payment to the ATO. There also exists an obligation for purchasers to notify the ATO of the amount that is due to be paid.

The Government believes that these changes to the law will ‘protect GST revenue and stop tax evasion by unscrupulous property developers’[11]. Whilst this may be case, these changes to the law impose new obligations on both vendors and purchasers. Given these changes, parties on both sides of a transaction of new residential property should seek independent legal advice.

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Joshua Briggs
Law Clerk

josh@petergell.com.au

 

[1] Australian Taxation Office, Illegal Phoenix Activity (16 March 2018) https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Illegal-phoenix-activity/

[2] Commonwealth, Parliamentary Debates, House of Representatives, 7 February 2018, Kelly O’Dwyer.

[3] Ibid.

[4] Explanatory Memorandum, Treasury Laws Amendment (2018 Measures No. 1) Bill 2018, 49.

[5] Ibid.

[6] Ibid.

[7] Ibid 48.

[8] Ibid 53.

[9] Ibid 53.

[10] Ibid 50.

[11] Commonwealth, Parliamentary Debates, House of Representatives, 7 February 2018, 491, Kelly O’Dwyer.