GST Withholding on Real Estate Contracts

GST Withholding

The GST Withholding Requirements on real estate contracts have now come into effect and will apply to contracts for the sale of residential houses, units and vacant land.

Why is this needed and why the change?

Some developers have not been remitting GST after settlement of contracts. The ATO will now collect the GST component of land contracts from buyers on settlement to reduce the risk of non-payment.

What contracts will be affected?

All contracts entered into after 1 July 2018 for the sale of:

  1. New residential premises (substantially renovated premises are exempt, however off the plan unit sales will be captured); and
  2. Potential residential land (newly subdivided lots).

However, contracts for potential residential land are not affected IF the Buyer is:

  1. Registered for GST; or
  2. Acquiring the land for a “Creditable Purpose” (effectively, purchasing the property in the course of carrying out their business )

Some contracts signed prior to 1 July 2018 will also be captured, but only if they settle after 1 July 2020.

What are the parties’ obligations?

The obligation is on Buyers under these contracts to withhold at settlement and pay to the ATO, an amount equal to either:-

  1. 1/11th of the purchase price (not taking into account any adjustments); or
  2. If the margin scheme is being applied, 7% of the purchase price (this amount may be increased by the commissioner in future, up to 9%).
When must the ATO be paid?

Generally the payment must be made to the ATO on the day of settlement.

If the contract is an instalment contract, the ATO must be paid on the same day as the first instalment is paid.

Changes to REIQ Contracts

The latest editions of the REIQ House and Land and Residential Unit Contracts address the new withholding requirements by including:

  1. A warranty from the Buyer as to whether or not they are registered for GST and acquiring the property for a creditable purpose. Agents will have to ask this question of all Buyers;
    • If the Buyer’s answer is “Yes”, the GST Withholding provisions won’t apply if the land being sold is potential residential land.
    • If the Buyer’s answer is “No”, the GST Withholding provisions will apply, and the Buyer is  required to make the GST payment to the ATO;
  2. A notice from the Seller notifying the Buyer that either:
    • they are not required to remit the GST to the ATO (that is, the property being purchased isn’t captured by the new requirements); or
    • Confirming they are required to remit the GST to the ATO (that is, the property being purchased is captured by the new requirements). In this case, the Seller must provide a further notice to the Buyer before settlement, setting out:
      • The Seller’s name and ABN;
      • The amount the Buyer will be required to remit to the ATO;
      • When the Buyer will be required to make that payment;
      • The value of any non-monetary portion of the purchase price (if any); and
      • Other requirements as may be specified by the regulations.
  3. In relation to this notice, Agents will need to make sure that Sellers understand whether the property is, or is not, captured by the new requirements. If in doubt, the Seller should be referred to their accountant, tax agent, or solicitor for clarification; and
  4. New clauses 2.5(5) and (6) of the Standard Terms & Conditions which set out the obligations of the Buyer and Seller under the new requirements.

These clauses require the Seller to collect the cheque for the GST withholding amount at settlement and pay it to the ATO promptly after settlement.

Under the legislation, it is the Buyer’s responsibility to pay the GST withholding amount to the ATO. These clauses effectively appoint the seller as the buyers agent to collect the cheque for the GST withholding amount and remit it ti the ATO.

Agents should be alert to requests from Buyer’s solicitors to amend this clause by Special Condition so that the Buyer keeps and remits the cheque to the ATO.

Points to be aware of when preparing contracts

Going forward, we recommend you take the following steps when preparing contracts to make sure they comply with the new requirements:-

  1. When engaged to sell new residential houses, units or subdivided lots, ensure the Seller is across the new requirements;
  2. Draw the Seller’s attention to the GST withholding notice in the contract and make sure the relevant boxes are ticked in the contract;
  3. Making sure the Seller is aware that they will not be receiving the full purchase price at settlement. The Seller should check that this will not create problems with their bank at settlement;
  4. Make sure the Buyer advises whether or not they are registered for GST and acquiring the land in the course of their business and that the relevant boxes are ticked in the contract.

If you have any questions or would like to discuss further, please feel free to contact us.

Alistair Cowen
Senior Solicitor

Alistair Cowen DBL Solicitors