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Changes ahead—new requirements for GST withholding

April 2018

Changes to the process for remitting GST for new residential property and proposed residential land commence on 1 July 2018.

Legislation passed on 28 March 2018 includes requirements for developers to give notice to buyers and for how GST is collected and paid following settlements for contracts entered into after 1 July 2018, or for contracts entered into before 1 July 2018 which settle after 1 July 2020.

Here, lawyer Luke Hefferan reports on the notice requirements and what you need to do to prepare for these changes.

Notice requirements

Before settlement, the developer must give notice to the buyer confirming—

  • the developer's name and ABN
  • the amount of GST to be withheld by the buyer (1/11th of the contract price, or 7 percent of the contract price if the margin scheme is applied—this amount is calculated on the total contract price without any settlement adjustments)
  • when the buyer has to pay the withheld GST amount (payable on or before settlement but likely to be the settlement date in practice).

Supplies and penalties

It is important to note this notice requirement will apply to most sales of residential property, not just new residential property, even where it is clear no GST is payable (eg the sale of an established dwelling by a seller not registered, and not required to be registered, for GST).

The maximum penalty for failure to give notice to the buyer is $21,000 for individuals and $105,000 for corporations. Failure by the buyer to withhold and remit the GST incurs the buyer a penalty equal to the amount of GST plus a maximum penalty of $21,000. However, a buyer is released of all liability if they (reasonably) rely on the notice given by the developer and present a bank cheque for the GST amount to the developer at settlement.

Preparing for the change

We have updated our precedent development contracts to include the above GST information so the notice requirement is satisfied when the contract is entered into (and therefore will not require a separate notice in the lead up to settlement).

However, this approach requires the developer to consider the GST treatment at the beginning of the sell down process. We recommend developers make any necessary investigations regarding GST treatment for current or proposed developments where contracts are likely to be entered into after 1 July 2018.

Of course, we also recommend developers liaise with their financiers to ascertain how funds are to be distributed at settlement. This ensures there is adequate cash flow available throughout the settlement process as all GST proceeds will be payable to the ATO as of the settlement date.

Please contact a member of our Real Estate team if you need more information about how these changes affect you.