Quick Guide GST Withholding Laws

 

Simplified Matrix

 

We’ve produced a short flowchart and matrix as a quick guide to help clients consider their GST withholding questions on the contracts. We have also prepared a more detailed guide below.

Before we Get Started Read Our Obligatory legal disclaimers!

The matrix below has simplified the applicable law to provide a very broad and high-level overview of buyer and seller obligations when buying and selling real property. It does not consider particular circumstances of buyers and sellers, unique exemptions or all aspects of the applicable law.

Regardless of the outcome of the questions and answers below, we strongly urge you to obtain tax advice as soon as possible.

Failure to obtain advice or provide the correct answers in your contract could result in financial loss or penalties or both under your contract and under federal tax law. We do not know your situation and cannot be responsible for any loss you suffer by relying on this matrix.

A More Detailed Summary

Overview

Why introduce the change?

To cut out phoenix activity[1] within the property development industry.

How will it impact your instructions and contracts?

The overwhelming majority of mum and dad Sellers will be business as usual.

There needs to be a taxable supply. If your Seller is not required to be registered for GST, there’s no withholding obligation, so you tick yes/no for Buyer (more on this below) and then tick the first box in the next section and get on with the deal.

Agency Risk – protect your position

Our recommendation is:

  • Don’t guess the answers; and
  • contact your franchisor/licensor to see what they recommend in terms of additional disclaimer provisions in your standard T’s & C’s in your Form 6 appointment; and
  • if they don’t recommend anything, give us a call.

Transitional stuff (pre 1 July)

  • If you have a contract that was entered into before 1 July 2018; and
  • Payment, other than the deposit, is made before 1 July 2020,

this will not apply.

Call Options signed before 1 July are not considered to be contracts, the relevant date being the date on which the option is exercised.

When does the buyer have to withhold?

When:

  • The buyer is NOT registered for GST (they’ve ticked NO to the first box); and
  • the Seller is registered for GST and is selling:
    • New Residential Premises; or
    • Potential Residential Land.

Buyers “2 point‘ Question

“Is the Buyer registered for GST and acquiring the Land for a creditable purpose?”

Is Buyer registered for GST?

The safest and most accurate way to answer this is to have the buyer to ask their accountant, and for the accountant to let you know.

If you want to speed things up, you could check online at the Federal Department of Industry, Innovation and Science https://abr.business.gov.au/ and type in the name, ACN or ABN of the entity that is buying the property to see if they have an Australian Business Number (ABN) and are registered for GST.

Caution: You can have an ABN but still not be registered for GST. So check both on that website.

What is a creditable purpose?

If you think of a creditable purpose as a purpose to do with the carrying on of a business of some sort, the issue should be clear. If it’s not, get them to ask their accountant and get back to you. A common example would include spec home builder buying a vacant parcel of land.

So if the Buyer IS registered AND it’s a creditable purpose…

If the answer to the above two questions is yes, then the yes box should be ticked.

If the yes box is ticked, then there are no withholding obligations, the Seller then ticks the first box in the second part of that section of the contract and life goes on.

The Seller stuff

We first need to establish whether the sale comprises New Residential Premises or Potential Residential Land.

New Residential Premises

Premises that:

Have not been previously sold as residential premises; or

are new buildings, built to replace demolished ones on the same land.

A couple of distinctions:

  • New Residential Premises are also defined under the GST law to include premises created through substantial renovations, but these are excluded from the Withholding Obligation;
  • New Residential premises won’t be new if been used solely for renting for a period of at least five years since they were constructed.

Potential Residential Land

This will essentially be vacant land, on or off the plan, and not units / houses. Note it could potentially include non-residential land which could still be used for residential purposes so bear this in mind in rural subdivisions. Industrial is clearly out.

What happens if the Seller does not give the notice in accordance with the law?

The Seller commits an offence, and faces penalties over $20,000, but the contract is still binding.

How much and who remits it?

1/11th of the Price, or 7% if margin scheme applies (becoming rare). The Seller actually remits it to the ATO.

[1] Phoenix activity describes a situation where a developer will incorporate a company, use that company to buy and develop land, sell the development stock, then liquidate the company without remitting GST to the ATO, (and probably PAYG tax and Super) only to do it all again with a new company in another development.

Basic Road Map – Start Here

Is the Land New Residential Premises or Potential Residential Land? Read our Detailed Summary for an explanation on New Residential Land or Potential Residential Land. 

If No
GST withholding is not applicable.
If Yes

GST withholding may be applicable. Check the GST status of the Seller and the Buyer below to determine whether withholding is applicable or not.

Seller

Buyer

Withholding Applies

Developer (GST registered)
Mum and Dad (not registered for GST)
 
Developer (GST registered)
GST registered + creditable purpose (for example builder)
 
Mum and Dad (not registered for GST)
GST registered + creditable purpose (for example builder)
 
Mum and Dad (not registered for GST)
Mum and Dad (not registered for GST)
 

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