The Government’s decision to change the way goods and services tax is paid on the purchase of new residential properties, which was announced in the Budget, has left tax agents and property lawyers with plenty of unanswered questions and lots of potential problems for investors.
Purchasers of newly constructed residential properties and subdivided residential lots will be required to remit the GST directly to the Australian Taxation Office as part of the settlement.
Currently, GST is included in the purchase price and it is the developer who remits any GST. The ATO has been concerned that some developers fail to remit the GST, despite having claimed GST credits on their construction costs.
The measure is proposed to start in July next year.
Matthew Cridland, a lawyer at K&L Gates, says the ATO is concerned about the activities of “phoenix operators” who establish special purpose companies to undertake residential developments.
The SPC claims full input tax credits for GST incurred on land, construction and development costs. As no sales occur during the development phase of the project, these credit claims trigger cash refunds from the ATO. However, when the project is completed and the new residential premises or residential lots are sold, the SPS does not remit the GST on the sales.
While the ATO can initiate recovery action against the SPC, the prospect of recovering the GST is reduced once all the sales proceeds have been distributed out of the SPC. In any case, such recovery action is costly and time-consuming.
Cridland says the new measure seeks to address these concerns by requiring purchasers to pay the GST component.
He says this gives rise to a number of difficult issues. Taxpayers and their advisers will need guidance on any transitional arrangements. For example if a developer is entering a contract for an off the plan apartment today, with the sale to be completed after July next year, what is the GST arrangement?
“There is presently no detail about this will work,” Cridland says.
There are a number of other issues that will need to be considered:
- While the purchaser will have to pay the GST, who is actually liable for it? Is the purchaser making the payment on behalf of the developer or is the purchaser the one liable? Who is liable is the GST is not paid?
- If the obligation to pay the GST is shifted to the purchaser, is the purchase price changed to exclude the GST? This will have an impact on the stamp duty payable on the purchase.
- Developers sometimes offer buyers sales incentives that may include goods and services. If those things are supplied together with the property, will the purchaser be liable for GST on those things as well?
- Where rental guarantee payments are made to a buyer, the ATO currently accepts that this may involve a refund of part of the purchase price and trigger an adjustment to GST. Will the vendor still be entitled to such an adjustment when the GST liability on the sale is shifted to the purchaser?
The full impact for developers and buyers will not be known until draft legislation is released.
Law firm Dentons says the purchaser may be required to collect a notional amount and a final amount will only be calculated when the developer submits its business activity statement. This GST amount remitted by the purchaser may end up being more than the developer’s actual liability.
“It may not be reasonable to expect purchasers to manage complex GST calculations, involving the developer’s costings,” Dentons says.
Adam Rinaldi, a lawyer at Piper Alderman says most purchasers would be unlikely to be registered for GST but will now have the responsibility for remitting the GST.
Rinaldi says: “The consequences for non-payment of GST by the buyer are not clear. Will the vendor remain liable if the buyer fails to pay GST or is the buyer liable? This issue will affect the drafting of contracts and may result in the developer requiring an indemnity from the buyer in relation to the payment of GST.”
He says it will be difficult for the buyer to verify whether the vendor has a GST liability and to work out the amount of that liability.