By Russell Cocks, Solicitor
First published in the Law Institute Journal
Six months after the ATO introduced new GST Withholding obligations on purchasers of real estate, those changes are starting to have an effect.
In an attempt to reduce avoidance of GST obligations by vendors arising from the practice of illegal phoenix activity, the ATO introduced a GST Withholding obligation on 1 July 2018. The intent of these changes is to require purchasers of certain types of real estate to withhold a portion of the purchase price from the vendor and pay that money to the ATO, to be applied as a credit towards the vendor’s GST liability. This is not a new tax, just a new method of collecting an existing tax. However, as is usually the case when the ATO seeks to transfer responsibility for tax collection, unintended consequences may result in the ‘innocent’ tax collector facing unexpected consequences.
Notice
Unfortunately, the introduction of the Withholding obligation has been complicated by the introduction of a parallel NOTICE obligation on vendors. It is logical in a transaction that generates a purchaser Withholding obligation to require the vendor to notify the purchaser that the obligation exists, but the vendor NOTICE obligation does not mirror the Withholding obligation and applies to a wider set of transactions than the Withholding obligation applies to. By way of example, one of the categories where the purchaser must Withhold is the sale of NEW residential premises but ALL vendors of ALL residential premises are obliged to give a NOTICE. In the case of not-new residential premises, the NOTICE states that the purchaser is NOT obliged to Withhold and given that the vast majority of residential sales are of existing (as opposed to new) properties the effect of the legislation is to require a vast number of vendors to advise the purchaser that no Withholding is required. This obligation appears to be counter-intuitive and has resulted in considerable misunderstanding in relation to the application of the Withholding obligation. It is difficult to glean the motivation behind this wider NOTICE obligation and perhaps this anomaly might be rectified in any review of the legislation.
The most efficient way to deal with the NOTICE obligation when no Withholding is required is to include the NOTICE in the contract with the statement that no Withholding is required. If Withholding is required, the NOTICE must provide the vendor’s name, vendor’s ABN, specify the Withholding amount and when it is payable (at settlement) and may be provided in the contract, or subsequently.
Obligation
In summary, the purchaser must Withhold if the contract relates to:
- new residential premises.
This category can be seen to apply to apartment and townhouse sales where there was a perception of illegal phoenix activity.
- potential residential land.
This category applies to greenfield subdivision sales, again a potential phoenix scenario.
However, this category is wider than lots on a proposed plan. It applies to potential residential land that is included in a (registered) plan of subdivision. It therefore applies to sales of residential lots off-the-plan (because the plan is registered prior to settlement) but also applies to the sale of ANY residential land that is a lot on a plan of subdivision – effectively ALL vacant residential land.
However, Withholding is only required where the vendor makes a taxable supply. Off-the-plan sales by land developers will be in the course of an enterprise and therefore taxable supplies attracting Withholding, but most sales of one-off vacant residential lots will NOT be in the course of an enterprise and therefore will not be a taxable supply and will not attract Withholding. Notwithstanding that no Withholding is required, the vendor must still give the purchaser NOTICE that Withholding does not apply.
Again, this seems counter-intuitive and restricting the obligation to off-the-plan sales might be a future improvement.
Payment
If the vendor gives NOTICE that Withholding applies the purchaser must lodge a form of Withholding notification with the ATO and will then receive a lodgement reference number (LRN) acknowledging the notification and a payment reference number (PRN) to be used when lodging a settlement date confirmation form at the time of payment to the ATO.
Tip Box
•GST Withholding applies to new residential premises and vacant residential land.
•Withholding NOTICE must be given with ALL residential sales.