GST withholding obligation at settlement

If you are buying or selling a residential property in Australia — or even land that could be used to build a residential property (also known as ‘potential residential land’) — you will need to be aware of your GST withholding obligations.

That being said, it can be tricky to understand exactly what you are obliged to pay at settlement. We’ve compiled a quick guide to your GST withholding obligation to help guide you through the process.

What is the GST withholding regime?

On March 29, 2018, a law was officially passed to change the way that GST was managed. This was due to the phenomenon of “phoenixing”, in which a developer agrees on a price that includes GST at settlement but dissolves the company before the GST is paid to the federal government. Afterwards, the developer would simply start a new company and begin the process all over again.

As a result, billions of dollars in GST and GST tax credits have been lost. To prevent this from happening in the future, the Australian Taxation Office (ATO) now requires anyone purchasing certain residential properties to pay them the GST directly at settlement.

Failure to comply with these measures will result in penalties for both the buyer and the seller. The buyer will be liable to a fine of the amount of GST owed, and the seller will be required to pay either $21 000 (individuals) or $105 000 (corporations).

How much will be withheld?

Under this law, the amount of GST that must be withheld falls under two categories:

–>If the margin scheme does not apply to the property, the buyer is obliged to withhold 1/11th of the contract price of the property.

–>Under a margin scheme, the buyer must withhold 7% of the contract price.

Who does GST withholding apply to?

If you have entered a contract as of 1 July 2018 — or have entered into a contract prior to this date but settled after 1 July, 2020 — you are required by law to withhold GST. That being said, the law is only applicable to sales in which property is considered a taxable supply.

If you are buying a:

  • New residential premises;
  • House and land package;
  • Off-the-plan property;
  • Display home;
  • New apartment;
  • Potential residential land;
  • Property subdivision plan; and
  • Land that could be used to build new residential premises.

You are required to withhold GST and pay it to the ATO.

Still not sure whether you fit the bill? The answer is simple: if you are obliged to withhold GST, the seller must provide you with a written notification.

The Legal Practitioners’ Liability Committee (LPLC) have provided the following flow charts to further clarity and provide guidance on the GST withholding obligations:

  • Flow chart one. Do GST withholding provisions apply?
  • Flow chart two. GST withholding provisions apply- steps when acting for vendor.
  • Flow chart three. GST withholding provisions apply- steps when acting for a purchaser.

So, what do you need to do?

When purchasing any residential property in Australia, there are a few steps you must take:

  1. Obtain a written notification from the seller that states whether or not the sale will be subject to GST.
  2. Lodge a GST property settlement withholding notification. This lets the government know the details of your arrangement and what is owed in terms of withheld payments. At this stage, you will be given a lodgement reference number (LRN) and payment reference number (PRN) to identify your particular transaction.
  3. Lodge a GST property settlement date confirmation once the settlement has occurred.
  4. Pay the withheld amount (to the nearest dollar) to the ATO. You can also satisfy your obligation by providing a cheque made out to the ATO to the vendor during the payment for your first instalment or settlement, or you can authorise PEXA to distribute the funds to the ATO.

Alternatively, you can appoint someone —ideally a registered tax or BAS agent — as your representative to handle all of your GST withholding obligations. In this case, you will need to provide them with a signed declaration to authorise them.

For all further questions and inquiries on GST withholding obligations contact our office on (03) 8590 8370.

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

 Last updated: 13 August 2020 Article by: Halil Gokler

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