GST Article – Purchasers required to withhold and remit GST payable by vendors: the general operation of the proposed legislation
Purchasers, vendors, some parties to gifts of land, and parties to long term leases of land need to be aware of proposed legislation currently before the Commonwealth Parliament. From 1 July 2018, some purchasers/transferees (and some lessees) of land will be required to remit GST which is payable by some vendors/transferors (and some lessors). Those vendors/transferors/lessors have notification obligations under the relevant legislation. This article outlines the respective obligations of vendors/transferors and purchasers/transferees. An accompanying article considers the transitional arrangements for implementation of those obligations.
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Purchasers need to be aware of their obligations to remit GST payable by vendors of land under proposed legislation which is currently before Parliament. Failure to do so will give rise to substantial penalties.
The legislation requires vendors to give certain notifications to purchasers. Vendors who fail to do so will incur substantial penalties.
Similar remittance and notification obligations are imposed on parties to long term leases – viz. a lease/licence for a term of at least 50 years. For convenience, this article focuses on sales of land rather than long term leases.
It should also be noted that remittance and notification obligations will apply to certain transfers of land which are made without consideration (e.g. supplies of land to which Div. 72 of the GST Act applies). For convenience, and as appears below, we include the persons receiving and making such transfers in our references to ‘Purchaser’ and ‘Vendor’ respectively.
The aim of the legislation is to ensure that the ATO receives payment of GST payable by Vendors of certain ‘new residential premises’ or certain ‘potential residential land’ (respectively within the meaning of the GST Act). In essence, the legislation seeks to prevent Vendors avoiding payment of GST on supplies of land where the Purchasers will not be able to claim input tax credits.
This article outlines the manner in which the withholding and notification obligations will apply to contracts made on and after 1 July 2018. In an accompanying article, we consider the manner in which the remittance and notification obligations will apply to contracts made prior to that date and where settlement occurs on or after that date.
Purchasers who must withhold and remit
Basically, where a person (Vendor) makes taxable supply (for GST purposes) of:
- new residential premises – other than those which are created through ‘substantial renovations’ (for GST purposes) of a building or which are ‘commercial residential premises’ (for GST purposes), or
- a block of ‘potential residential land’ which does not contain any building ‘that is in use for a commercial purpose’
the recipient of the supply (Purchaser) must pay an amount to the ATO.
The amount is discussed below. However, it is a statutory approximation of the GST which the Vendor is liable to pay in respect of the supply.
It will be recalled that the GST concept of ‘potential residential land’ is land which it is permissible (e.g. under town planning law) to use for residential purposes but does not contain any buildings that are residential premises (for GST purposes). As a note of caution – when dealing with vacant land in the context of a setting where both parties have a commercial/industrial/primary production focus in relation to its use, it may be easy to overlook the possibility that it may be technically permissible to use the land for residential purposes.
A block of ‘potential residential land’ may be either an appropriate broad acre lot on a property subdivisional plan or a more modest typical suburban-size lot – the size of the block is not relevant.
Note that the supply of land described in subparagraph (b) need not be the first sale of the block.
However, one entity may supply a block of potential residential land to another entity that is registered for GST and the latter is acquiring the block for a creditable purpose. In this case, the Purchaser is not required to remit an amount to the ATO.
Where the Purchaser has paid an amount to the ATO, the Vendor is entitled to a credit against the Vendor’s GST liability for this amount. Note that the credit does arise unless the Purchaser has actually paid the amount to the ATO. Vendors need to ensure that the payment is actually made – it is not sufficient that the Purchaser has merely withheld an amount.
The amount to be paid to the ATO and when it is to be paid
The Usual Calculation Case
The usual calculation of the amount which the Purchaser has to pay to the ATO is discussed below. Two special cases are mentioned later.
The amount which the Purchaser has to pay to the ATO will be the prescribed fraction of the price which is specified in the contract (Contract Price) exclusive of normal settlement adjustments – i.e. the price stipulated in the contract and which will be adjusted on settlement for rates, land tax, body corporate charges etc.
Technically, the Vendor is liable to pay GST in relation to the specified price after it is increased/decreased for certain settlement adjustments. However, the amount payable by the Purchaser is calculated on the specified price only. The legislative concession is appropriate because the relevant adjustments may not be known at the time the Purchaser is obliged to make the payment.
Where there is not a Contract Price, the amount is calculated as the prescribed fraction of the amount which is the ‘price for the supply’ (for GST purposes). For instance, this situation arises where the consideration provided by the Purchaser is (or semble includes) a contra supply.
The prescribed fraction to be applied will depend on whether margin scheme applies to the supply of the land. If margin scheme applies, prima facie the fraction is 7%. However, this can be changed by legislative instrument. Where the margin scheme does not apply to the supply of the land, the fraction is 1/11th.
The Purchaser must pay the amount to the ATO on/before the day on which any of the consideration (other than consideration which is provided as a deposit) for the supply is first provided. In effect, a payment of first instalment of the consideration will trigger the Purchaser’s obligation to pay the relevant amount to the ATO.
It appears that the whole of the relevant amount will be prima facie payable notwithstanding that the amount is more than the instalment. However, it is anticipated that the Commissioner will exercise a power conferred by the legislation to vary the date for payment, in order to enable the amount to be paid progressively so that the amount to be remitted is paid using sum(s) withheld from later instalments of consideration.
Technically, the legislation does not require an amount to be withheld but only imposes an obligation on the Purchaser to pay the requisite amount. However, the legislation enables withholding to occur by providing legislative protection (see s. 16-20 TAA Sched. 1) for Purchasers which do withhold the requisite amount from payments due to Vendors and remit that amount to the Commissioner of Taxation. As in practice, Purchasers will withhold and remit the requisite amount, this article uses the term ‘withholding amount” when referring to the amount to be remitted to the ATO and to the remittance obligation as a ‘withholding obligation’. However, failure to withhold does not relieve the Purchaser of the obligation to remit.
Two Special Calculation Cases
In two special cases, the foregoing calculation and payment process is varied.
|Special Case||Calculation of Withholding Amount||Time of Payment|
|Vendor makes a taxable supply to which Div. 72 of the GST Act applies – viz. a supply to a Purchaser which is an associate of the Vendor and is made either without consideration or for consideration below the ‘GST inclusive market value’ (for GST purposes) of the land.||10% of the ‘GST exclusive market value’ (within the meaning of the GST Act) of the supply.
|Subject to the Commissioner’s power of variation:
|The Vendor makes:
||Where it is possible to ascertain the amount (the ‘reduced amount’) which is attributable to the supply to which the withholding obligation applies, the purchaser has only to withhold the prescribed fraction of the reduced amount. Where it is not possible to ascertain the reduced amount at the time any consideration (not being a deposit) is first provided, the Purchaser must remit the prescribed fraction of the whole of the price.||As per the Usual Calculation Case.|
While readers need to recognize the special cases exist so that timely detailed advice can be sought, they are not discussed in detail.
However, Vendors should recognise the second special case provides an incentive to assign a proportion of the price to the supply to which the withholding obligation applies. Failure to do so will result in a larger amount being withheld and an associated cash-flow disadvantage.
The Vendor’s Obligation to notify
The legislation aims to reduce the compliance burden on Purchasers by requiring Vendors to give timely written notification of certain matters to Purchasers.
Key points for Vendors are:
- Subject to exceptions mentioned in points (b) and (c), the notification must be given in respect of supplies ‘by way of sale or long term lease’ of all residential premises (not merely supplies of new residential premises) and in respect of supplies of potential residential land. It is presently considered that the requirement for a supply being ‘by way of sale’ does not avoid the need to give a notice in respect of supplies for which consideration is not given and which, being made to associates, are taxable supplies under Div. 72.
- Notice is not required in relation to the supply of commercial residential premises.
- Notice is not required in relation to the supply of potential residential land where the Purchaser is registered for GST and is acquiring the land for a creditable purpose.
- The notice must state whether the Purchaser is required to pay an amount to the ATO in pursuance of the legislation. For example, a notice must be given in respect of the supply of existing residential premises (in contradistinction to new residential premises) and this would be a case in which the notice would state a payment is not required – the input taxed supply of existing residential premises does not trigger a payment obligation for the Purchaser.
- Very important practically, the notice must inform the Purchaser of (i) the amount the Purchaser is required to pay in respect the supply; (ii) when the amount is payable – either specifying the relevant date or more generally describing the time of payment such as ‘time of settlement’, ; (iii) the GST inclusive market value of so much of the consideration as is not expressed as an amount of money; and (iv) the Vendor’s name and ABN. Regulations may prescribe other matters to be included in the notice.
- The notice must be ‘given before making the supply’.
- Failure to give the notice is a strict liability offence (i.e. absence of fault is not relevant, apart from an honest mistake of fact) carrying a maximum of 100 penalty units (i.e. $21,000 – being currently $210 per penalty unit, with corporations liable to a maximum penalty of up to 5 times this amount). A failure to give the notice would include an omission to make one or more of the required representations or inaccuracy in making any of those representations.
- An offence is committed, even though the failure to give the notice occurs in respect of a supply (see point (a)) that does not give rise to a withholding obligation for the Purchaser.
- The failure to give the notice also constitutes an administrative penalty carrying 100 penalty units. The tax legislation contains provisions which prevent both the administrative penalty and a penalty for the offence being imposed. There are limited circumstances relieving a Vendor from the administrative penalty.
- Vendors may like to consider including the required notifications in contracts of sale to ensure they fulfil their notification obligations.
Several practical issues arise out of the foregoing.
Firstly, in relation to point (c), Vendors will need to ascertain whether the Purchaser is acquiring the land for a creditable purpose and, if so should consider seeking contractual confirmation of this and an appropriate contractual indemnity where the Vendor relies on inaccurate information supplied by the Purchaser.
Secondly, in relation to point (d), a similar issue arises. It was noted earlier that a Purchaser is not required to remit the requisite amount to the ATO where the Purchaser is acquiring potential residential land and the Purchaser is entitled to an input tax credit in relation to the acquisition.
A third issue is the requirement that the notice must be given before the supply is made. In the normal case of a sale of land under a standard contract, this is usually recognized as occurring (for GST purposes) at the time of settlement and it is anticipated a corresponding view of time of supply would apply for withholding purposes. In so far as the Purchaser is required to make the requisite payment to the ATO before the time of supply of the land, a Purchaser may want to consider a contractual term requiring the Vendor to provide the notice in a more timely manner. It is suggested below that the contract of sale might be structured to provide the requisite notice.
In connection with the Vendor’s notification obligations, key points for Purchasers are:
- The Vendor’s failure to provide the notice does not relieve the Purchaser of the obligation to pay the requisite withholding amount to the ATO.
- Where a Purchaser has not received the required written notice from the Vendor, the Purchaser will be able to obtain the protection of s. 16-20(1) TAA 1. Under this provision, the Purchaser’s payment of an amount (as required by the legislation) to the Commissioner of Taxation discharges the Purchaser’s liability to pay that amount to any entity other than the Commissioner.
- Where the Purchaser fails to pay the requisite withholding amount to the ATO in relation to new residential premises because (i) the Vendor has given a notice wrongly stating the premises were not new residential premises or wrongly stating a withholding payment is not required, and (ii) it was not unreasonable for the Purchaser to believe the notice was correct, then such circumstances are a defence to the failure to pay.
The foregoing discussion is illustrated in the following example which is drawn from the Explanatory Memorandum in relation to the proposed legislation. The second part of the example in relation to use of a bank cheque anticipates the comments under the next heading.
|Example — Withholding at settlement|
Purchaser pays amount to the ATO
On 3 December 2018, Rick enters into a contract for the purchase of a new apartment from MortimerHomeCo for $700,000. The margin scheme does not apply to the sale.
The contract of sale included the required notice providing relevant details to enable Rick to withhold and remit the correct amount to the ATO at settlement. MortimerHomeCo advises Rick that he will be required to make a payment of $63,636, which is 1/11th of the contract price of $700,000, on or before the day of settlement.
Settlement occurs on 6 June 2019. Rick’s conveyancer makes a payment to the ATO at settlement of $63,636 (being the GST component of the purchase), and notifies the ATO of a payment of the withholding amount.
Because Rick has paid $63,636 to the ATO, he does not have to provide this amount to MortimerHomeCo, even though the contract price states that the consideration includes the $63,636.
MortimerHomeCo receives a credit for this amount in its June BAS, and does not then have to make a payment of the amount when paying its net amount for the tax period ending 30 June.
Payment by bank cheque at settlement
Assume that Rick’s conveyancer does not make a payment to the ATO directly, and instead provides a bank cheque made out to the ATO to MortimerHomeCo for $63,636.
Rick is protected from penalties if MortimerHomeCo does not provide this amount to the ATO as the bank cheque for the required amount has been provided at settlement and his conveyancer keeps a record of that exchange.
MortimerHomeCo forwards the cheque to the ATO on the same day. When the cheque is received by the ATO, MortimerHomeCo gets a credit for this amount in its June BAS and does not then have to make a payment of the amount when paying its net amount for the period.
Examples 5.3 and 5.5 of the Explanatory Memorandum
Penalties for failing to withhold and GIC
If the Purchaser fails to pay the requisite amount to the ATO, the Commissioner can impose an administrative penalty equal to the amount that should have been paid – s. 16-30 TAA Sch. 1.
However, as noted above – where the Purchaser fails to pay the requisite withholding amount to the ATO in relation to new residential premises because (i) the Vendor has given a notice wrongly stating the premises were not new residential premises or wrongly stating a withholding payment is not required, and (ii) it was not unreasonable for the Purchaser to believe the notice was correct, then such circumstances are a defence to the failure to pay.
Where, on or before the day on which payment is required, the Purchaser provides the Vendor with a bank cheque which is payable to the Commissioner and in the requisite withholding amount then (notwithstanding the Vendor does not deliver the cheque to the Commissioner) the provision of the bank cheque is a defence – see proposed s. 16-30(3) TAA Sch. 1.
Where the Purchaser fails to pay the requisite withholding amount to the ATO at the required time, the Purchaser will incur GIC (i.e. general interest charge) liability.
Purchaser to notify ATO of withholding/remittance
As noted in the earlier example, the Purchaser is obliged to notify the ATO of the withholding/ remittance of the requisite amount.
Under the proposed legislation (see proposed amendments to s. 16-150 TAA Sch. 1), notification is to be given in the ‘approved form’ and is to be given:
- on or before the day specified in a legislative determination which is issued by the Commissioner; and
- in the absence of such legislative determination, on or before the day on which the amount is due to be paid (regardless of whether it is paid).
Note that the notice must be given irrespective of whether payment is made.
Apart from the use of bank cheques as noted under the preceding heading, payments are to be made (s. 16-85 TAA Sched. 1) in accordance with the Purchaser’s general withholding payment obligations, namely:
- in the case of large withholders (for general tax administration purposes ) – electronic payment; and
- in the case of medium and small withholders (for general tax administration purposes) – electronic payment or other means approved in writing by the Commissioner.
The proposed legislation is contained in Schedule 5 of the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018.
There is an Explanatory Memorandum in relation to the Bill.
Having regard to the profile of our readers’ organizations, we anticipate that purchase, sale or transfer of new residential premises would be relatively rare. However, purchases of blocks of potential residential land would be a common occurrence. As a result, the exception to the withholding obligation arising where a Purchaser is registered for GST and is acquiring the block for a creditable purpose is likely to be a relevant factor in many but not all circumstances in which the organizations are Purchasers.
Looking at the legislation from the reciprocal perspective of selling/transferring land, the breadth of the circumstances in which Vendors must give a notice is likely to make the notification obligation a matter which our readers will need to keep to the forefront of their minds.
As a practical matter, it suggested that both Vendors and Purchasers should strive to ensure the contract of sale contains the written notification which the Vendor is required to provide to the Purchaser. This is especially pertinent to instalment contracts, as it presently appears the statutory obligation to provide the written notice prior to settlement does not ensure that the notice will be received by the Purchaser before the time at which the remittance must be made (vis. at the time the first instalment (exclusive of the deposit) is payable).
Where there is a land transfer to which Div. 72 of the GST Act applies, the transferor (i.e. Vendor) and the transferee (i.e. Purchaser) should ensure that the requisite notice is provided in a timely way. Indeed, a gratuitous transfer of relevant land to an associate now comes at a ‘cost’ of the transferee having to make a cash payment to the ATO and the parties to the transfer may want to consider whether there should be an arrangement for a monetary adjustment between themselves.
Readers also need to consider the proposed legislation when contemplating granting or taking a long term lease of land.
Readers can anticipate an ATO publicity campaign alerting legal professionals and real estate agents to the operation of the proposed legislation once it becomes law. However, readers should proactively raise the application of the legislation with their legal and accounting/financial advisers when consulting them in relation to any sale/purchase/transfer of land or grant/taking of a long term lease and obtain detailed specific advice.
Disclaimer: Information provided in this article, while correct at time of publishing, is subject to change.