Under the new arrangements, purchasers will withhold the GST on the purchase price of new residential premises and new residential subdivisions, and remit the GST directly to the tax office as part of settlement.
The law allows for a two-year transitional arrangement, meaning contracts entered into before 1 July 2018 will not be affected by this change as long as the transaction settles before 1 July 2020.
Failing to remit GST is a classic phoenixing strategy, where a developer dissolves their business and sets up a new entity to avoid remitting the GST to the ATO.
There are several other tax-related items in the bill, which you can read in full here.
Targeting unscrupulous property developers has been heralded as a win for clients, but associations like CPA Australia fear those doing the right thing will be hit with an unfair compliance burden.
“While making purchasers responsible for withholding GST sounds simple enough, it is the experience of our members that GST on property transactions can be complex, including calculating the GST payable, and that such transactions may be outside the skills of lawyers and accountants, let alone conveyancers who will have a major role in complying with the new law,” CPA Australia’s head of policy, Paul Drum, told Accountants Daily.
“Certainly, shifting the burden to purchasers will put considerable pressure on conveyancers, and given the underlying complexity, we’re concerned about those with insufficient knowledge advising purchasers on their GST payable,” he said.
For the Institute of Public Accountants, the concern is the window of time professionals and clients have to absorb and prepare for the changes.
“Conveyancers, legal advisers, financiers and other advisers will need to quickly get their heads around impacts of the new changes,” general manager of technical and policy at the IPA, Tony Greco, told Accountants Daily.
“There are well entrenched behaviours out in the marketplace and it will take time for everyone to adjust so the 1 July 2018 start date will catch some purchasers out. Purchasers who fail to remit the GST to the ATO may be liable for a penalty,” he said.
Firms like BDO are concerned about the unintended consequences and knock-on effect to parties such as creditors.
“While most compliant developers may welcome the measure allowing the commissioner to receive the GST on settlement, the concern is that the measure is detrimental to all other creditors by ensuring that the commissioner is now first in the queue to get paid from the settlement proceeds. Effectively, the commissioner now has a priority over all creditors including secured creditors,” BDO tax partner, Fady Abi Abdallah, told Accountants Daily.
The good news
HLB Mann Judd’s partner for taxation services, Peter Bembrick, similarly acknowledged the compliance hurdles for clients and professionals, but believes the new law is a better option than the alternatives.
“The main alternatives considered were for the ATO to devote ever-increasing resources to chasing down non-complying developers, or to do nothing, neither of which were viewed as acceptable by the government,” Mr Bembrick told Accountants Daily.
“If these changes achieve the objectives of cutting down on phoenix activity in the property development space, which gives the whole sector a bad name, that can only be a good thing,” he said.
Mr Bembrick also pointed to some positives in the changes which he believes will best serve the interests of honest parties to a property development transaction.
“The government’s approach is a sensible one, as the GST component of the purchase price will be sent directly to the ATO by the purchaser, removing the potential for vendors of new residential property such as property developers to avoid meeting their GST obligations,” he said.
“It is also good to see the measures aimed only at sales of new residential property, the exclusion of substantial renovations of existing premises (being too subjective for a purchaser to evaluate) and a special withholding rate of 7 per cent where the GST margin scheme is used,” he added.
“As this is a non-final withholding regime, the vendor still has the opportunity to report the transactions in its BAS and claim credits for any GST already withheld, so the main impact is on those vendors who may not otherwise have been fully compliant,” he said.