GST & Property – The rules have changed again...
The government has introduced new legislation which brings forward the collection of GST on the sale of new residential premises or new residential subdivisions, effective 1 July 2018.
Under the new rules, the purchaser (not the developer) of new residential property is required to remit GST on the purchase price direct to the ATO as part of the settlement process. Practically we assume this will be managed by the purchaser’s conveyancing solicitor.
This is a kick in the proverbial for developers, who have historically been allowed the cash benefit of the GST at settlement. Developers have traditionally remitted the GST in relation to the sale in their relevant Business Activity Statement and paid direct to the ATO, which could be at least 3 months post settlement.
Why have the rules changed? Great question…..
According to the government, failure to remit the correct GST has been associated with ‘phoenixing’. That is, post settlement, a developer dissolves their business and sets up a new entity to avoid paying GST. The ATO claims these activities have been responsible for $1.8 billion in debt written off.
The new legislation is estimated to result in an increase in GST revenue of $590 million to the government. The Minister stated, “this measure clamps down on dishonest developers and levels the playing field for developers who pay the right amount of tax”.
It’s not all bad news though, the new rules allow for a transition period. Contracts entered into before 1 July 2018 are not affected by the change, provided they are settled before 1 July 2020.
If the margin scheme applies to the sale the withholding rate at settlement could be reduced to 7%.
The sale is still included in the developers relevant Business Activity Statement as usual. The developer is entitled to a credit for any GST withheld at settlement.
Developers are also entitled to claim the GST credits on development costs as normal.
The new change emphasises the importance of a detailed cashflow projection before commencement of any project.
As always, the above is general in nature please discuss with your trusted advisor.