GST Retention – Are you in for a Cash Flow Surprise?

with 5 Comments

GST Retention – How The Law Affects Your Cash Flow –

GST Retention
avoid disputes

Why you might get less than you thought from that sale! Big changes were introduced by the Federal Government in the way that they collect GST back in July 2018 on “New Residential Premises” & “New Residential Subdivisions” which affects many of our clients.

In an effort to combat a perceived non-compliance with GST law from the property development industry the Federal Government has now released the Treasury Laws Amendment (2017 Measures No. 9) Bill 2017. This requires that purchasers of new residential premises’ or new residential subdivisions’ will be required to remit the GST component of the purchase price directly to the Australian Taxation Office (ATO) at the time of settling the purchase contract of such properties. That’s GST retention.

Trouble is that it was not widely publicised and many people are surprised when they learn about it. By then it’s usually too late to do anything about it, so don’t trying disputing it with your buyer as he’s just following the law!

How much cash does it affect?

Put simply GST Retention means that you will receive that much less cash as a part of your settlement proceeds when you sell a property included in this legislation. The legislation requires the buyer to deduct at settlement of the sale a proportion of the purchase price that equates to one eleventh [1/11] of the sale price and remit it directly to the ATO.

For example, if you sold a vacant lot you just subdivided for $550,000, this legislation requires that the buyer deduct 1/11th of the price, equating to $50,000, and remit it directly to the ATO. Now that is a substantial chunk of money to most people, especially if you were counting on receiving it yourself.

The buyers are legally obliged to do that under the legislation which also places legal obligations on the seller and provides substantial penalties on parties that do not comply.

2 important Questions –

These determine if GST Retention applies to you

1. What is ‘new residential premises’?

The term ‘new residential premises’ is defined in section 40-75 of the Goods and Services Tax (GST) Act 1999(Cth) (GST Act). A premises is considered to be ‘new residential premises’ if the premises has:

  • not previously been sold as residential premises;
  • been created through substantial renovations of a building; or
  • been built to replace a demolished premises on the same land.

2. What is ‘new residential subdivisions’?

The definition of ‘new residential subdivisions’  is broad. It includes any ‘potential residential land’ contained in a subdivision plan which has not previously been sold.

‘Potential residential land’ is defined in section 195-1 of the GST Act, and means land that is permissible to use for residential purposes, that does not contain any buildings that are used for residential premises. This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not contain any residential premises.

 

Note: Bearing in mind that we are not Accountants or registered tax agents we are not able to offer advice on this topic, other than to suggest that if you feel it may apply to you, then you should speak with your accountant about it. More detailed information can be found here

GST Retention

5 Responses

  1. Lisa John
    | Reply

    GST withholding will apply to a taxable supply of land by a vendor who is registered or required to be registered for the GST under the Bill. Both new residential premises and land that is potentially residential land.

    • Adrian Stagg
      | Reply

      Yes, thanks Lisa. Sounds like you know more than me. I think that the operative words here that will catch a lot of people out are “required to be registered” as many people don’t realise that the existing legislation requires them to be registered for GST.

  2. Kerry
    | Reply

    Why is land or residential property considered a ‘Goods’ or ‘Service’?

    • Adrian Stagg
      | Reply

      That’s something that you need to ask the ATO and those that drafted the relevant legislators. It does mean that there is a significant lump of tax built into the price of every new town house, home unit, block of land and house and land package however.

  3. A.K. Pandey
    | Reply

    Hello Admin,
    Thanks for sharing this information, I really appreciate your concern about changing the things after GST.

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