In May 2017 the Federal Government Budget included proposed measures to shift the responsibility for remitting GST on the sale of new residential premises from property developers to purchasers.
No further commentary or guidance has been released since the budget announcement, however the proposed changes are intended to take effect from 1 July 2018.
With the risk that any put and call option arrangements entered into in late 2017 will cover supplies of new residential premises post 1 July 2018, developers should be mindful of what the proposed measures mean for them.
Below is a summary of the proposed measures, and an outline of what actions developers should consider taking to protect their interests.
What transactions will be affected
The proposed changes simply refer to developers of “new residential premises”. Therefore all developers, irrespective of the scale of development activities, should be conscious of the proposed changes to the law.
Why the change
The government is concerned that there is a risk to GST revenue in circumstances where developers claim input tax credits during the life of a project, but go into liquidation on the completion of a project leaving unpaid GST liabilities owing to the Australian Taxation Office (ATO). By implementing this measure the government aims to increase GST revenue collections by $660 million over the next four years.
When are the proposed measures to take effect?
Whilst the budget papers refer to the measures taking effect from 1 July 2018, it is not yet clear how the new rules will apply to:
- existing off-the-plan contracts where settlement will occur after 1 July 2018,
- contracts entered into between 9 May 2017 (budget night) to 1 July 2018 where settlement will be after 1 July 2018, or
- put and call options which are exercisable after 1 July 2018.
How could the changes be introduced
There is currently no draft legislation, however it is thought that the proposed changes could be implemented in one of two ways:
- introducing a withholding mechanism – e.g. an interim withholding burden placed on the purchaser,
- which is then applied towards the developer’s GST liability, or
making purchasers directly liable for the GST.
Most new residential premises are sold to people wishing to use the premises for private or domestic purposes and/or for input taxed supplies of residential accommodation. The majority of purchasers therefore are unlikely to be registered for GST. On this basis it is expected a withholding mechanism is more likely, with the withholding to be identified and dealt with as part of the conveyancing process.
How will the proposed changes affect developers
If an obligation is placed on a purchaser to withhold any GST liability on a developer’s supply of new residential premises then this will have an impact on the developer’s cash on hand. Currently, a developer would receive sale proceeds and potentially have up to four months before any GST component is required to be remitted to the ATO. Accordingly, developers will need to consider the impact the changes will have on their working capital.
Developers will also need to ensure sufficient documentation is provided to purchasers or their representatives to ensure the correct amount of GST is identified and remitted to the ATO.
What action should developers be taking now
Developers need to be mindful of any arrangements they are entering now, which may relate to the supplies of new residential premises which will settle on or after 1 July 2018. This includes any arrangements involving put and call options which might be exercised on or after 1 July 2018.
Whilst the quantum of GST on the supply of new residential premises will not be altered under the proposed measures, the terms of any legal arrangements documenting affected supplies will need to be drafted in a way that contemplates the proposed measures. In particular legal documents impacting supplies made on or after 1 July 2018 should be drafted in light of the proposed changes, including by addressing the impact the proposed changes could have on the obligations of each party to the contract.
We recommend that developers seek legal advice to ensure legal documents regarding affected supplies are properly drafted.