The New GST Withholding Law - Its Impact on Conveyancing
From 1 July, 2018, buyers of "new residential premises" or "new residential subdivisions" will be required to pay 1/11th of the purchase price to the Australian Taxation Office (ATO) (instead of to the seller) at settlement.
The New REIQ Residential Contract (15th Edition)
The Real Estate Institute of Queensland (REIQ) and the Queensland Law Society have reacted to these changes by releasing an updated edition of the "Contract for Houses and Residential Land" (15th Edition).
The buyer is required to complete the first question on signing the contract, while the second is completed by the seller when signing.
What are the Buyer's Notification Requirements?
The question that the buyer has to answer is:
- Whether the buyer is registered for GST? and
- If so, are they acquiring the land for a creditable purpose?
You can conduct a free online search to confirm whether the buyer entity is registered for GST by visiting www.abr.business.gov.au, or alternatively, have the buyer seek their accountant's advice.
What is a "creditable purpose"?
A creditable purpose is the carrying on of an enterprise (ie. a business).
Example: A building company purchases vacant land from a land developer to build a house and on-sell it.
If the buyer is registered for GST and is buying the land for a creditable purpose, the answer to this question would be "Yes".
However, for most "mum and dad" home buyers, they will not be registered for GST nor will they be acquiring the land for a creditable purpose and the answer to this question would be "No".
In this case, the answer to the next question (which applies to the seller) is relevant.
What are the Seller's Notification Requirements?
The seller is required to give notice to the buyer in every transaction whether the sale is the supply of either:
- New Residential Premises
- Residential Land (new or potential)
- Existing Residential Premises
If the property is the supply of "New Residential Premises" or "Potential Residential Land", then the seller may be required to give further details including the seller's name and ABN, the GST amount payable and the payment date (i.e. the settlement date).
What is a New Residential Premises?
A "New Residential Premises" is defined as premises that has not previously been sold as residential premises. It can also include premises which has been built to replace a demolished premises on the same land.
What is Potential Residential Land?
Potential Residential Land is land that it is permissible to use for residential purposes, but does not contain any buildings that are residential premises.
Example: Vacant subdivided lots in a residential development.
However, the definition is wide enough that it may include vacant rural property which may be used for residential purposes.
When GST is to be withheld
If the seller is registered for GST and is selling 'new residential premises' or 'potential residential land', the buyer will be required to draw a cheque for the 1111th of the purchase price (the GST amount) to the ATO to hand to the seller at settlement (or 7% if the margin scheme is applied by the seller).
If the seller is not registered for GST, then the buyer will not be required to withhold any GST from the sale at settlement.
No GST to be withheld where there is an Existing Residential Premises
Where a seller is selling an existing residential premises (that has been occupied by the seller or sold as a residence previously - ie. a second hand house), they buyer is not required to withhold any GST from the sale at settlement.
However, if the Seller is registered for GST and is selling a near new residential premises (less than 5 years old) used for investment purposes, they should seek further legal advice to ensure they provide the correct notices under the contract.
The Transitional Period
The GST Withholding Laws take effect from 1 July, 2018 and will apply to contracts dated after this time.
Failure to comply - $21,000.00 per offence
Sellers will need to comply with the Withholding Law requirements including the notification requirements, as non-compliance has strict penalties which are currently up to $21,000.00 per offence
Buyer's relief from Liability
If the seller puts the buyer on notice that they are required to make payment of 1/11th of the purchase price to the ATO (for the GST), the buyer only needs to provide the seller with a bank cheque in favour of the ATO for the GST amount on the settlement date to satisfy their obligations.
The McKays Conveyancing Team can assist with these new steps.
This new process will add further steps in the conveyancing process for sellers, buyers, their legal advisors and sales agents.
Given the cash flow interruptions where the GST is to be withheld, it will no doubt have an impact on both sellers and their mortgagees and financiers.
The questions and tick boxes set out in the 15th edition of the REIQ contract provide for a mechanism for sellers and buyers to comply with the new requirements.
The provisions required to be complied with where the supply is a New Residential Premises or Potential Residential Land are set out in Clause 2.5 of the Standard Terms of the Contract.
We recommend that both sellers and buyers consult their solicitor and accountant in respect of these changes prior to signing any contract.
We have a team of conveyancing solicitors that can easily assist and advise on this and other conveyancing queries anytime, whenever needed.