Developers need to take careful consideration of new GST withholding requirements when entering into instalment contracts for the purchase of residential property, or potential residential land. Quite often, vacant greenfield land falls in the category of potential residential land and is most commonly transacted pursuant to a contract that provides for multiple instalment payments.
Nearly a year after the introduction of the GST withholding laws, property developers are continuing to get tripped up by the new regime. Introduced on 1 July 2018, purchasers of new residential property or potential residential land are now required to withhold the entire GST component of the purchase price from the vendor at the time the first payment of an instalment is due (excluding the deposit). These has ramifications for both parties in two significant ways:
- Often, the GST on the purchase price payable to the ATO will be greater than the instalment amount that the purchaser is required to pay to the vendor (which is a problem for the purchaser); and
- As the first instalment will, in most cases, need to be paid by the purchaser directly to the ATO, the vendor is not receiving a payment on a date that it otherwise expected to receive.
What you need to know
Vendors of residential property or potential residential land included in a property subdivision plan must provide the purchaser with notification prior to the date that payment of the first instalment (other than the deposit) is due stating whether the purchaser is required to withhold GST from the vendor and pay it directly to the ATO. The payment will be 1/11th of the contract price or if the margin scheme applies, 7% of the contract price. Where the contract does not require instalment payments, the vendor’s notification will only be required prior to settlement.
More often than not, structuring the deal on the basis of multiple payments will be advantageous for both parties as the purchaser can negotiate a longer settlement date and the vendor usually receives a higher price.
However, prior to committing to a contract of sale of new residential premises or potential residential land that requires multiple payments, parties should, in the first instance, ascertain whether GST is payable on the supply and then carefully consider the instalment regime that they initially agreed to implement. It is important to note that in some cases the GST that the Purchaser will be required to pay to the ATO on the first instalment date may be greater than the first instalment amount it had agreed to pay.
Failure by a purchaser to withhold GST and pay it to the ATO gives rise to an administrative penalty under existing provisions. ATO penalties can be significant and, if unexpected, may result in the purchaser being unable to meet the instalment price required by the contract.
Sarah enters into a contract for a vacant block of land for the purpose of developing residential premises. The supply attracts GST and, as such, the purchase price is $22m plus GST. The parties agree to a 10% deposit on exchange of contract and then ten equal instalments of $2m each.
After the initial deposit, the payment of the first instalment of $2m triggers Sarah’s obligation to withhold GST (1/11th of $22m) and pay this amount to the ATO.
When entering into an instalment contract for the purchase of a new residential premises, purchasers should properly account for GST withholding requirements to avoid significant penalties or risk defaulting an instalment payment of the purchase of the property.
For more information on the GST withholding provisions, please see our detailed article on the new legislation or contact the Madgwicks Property team to discuss for obligations for your existing or future developments.