In the recent Federal Budget, one change that hasn’t been given media attention is a change to the GST Legislation, which is to become effective from mid-July 2018 whereby purchasers of ‘new constructed residential premises’ and ‘new subdivisions’ become responsible to remit the GST to the Australian Taxation Office (ATO).
The Government has not published any details as to how these changes are going to operate other than claiming that the ATO expects to recover upwards of $650 million in GST revenue over the next four years.
It is understood that the ATO is concerned about a number of property developers who fail to pass on or remit the GST received from selling new residential real estate after becoming or declaring themselves insolvent, and as a consequence, failing to remit the GST.
At present, it is usual practice that the GST payable on the sale of new residential property is deducted as an adjustment at settlement and is retained by the developer who in turn remits to the ATO as part of its periodic BAS return. This new change will impact upon developers’ cash flows.
The change should not be a major concern to financiers as they usually carve out the GST and defer selling commissions from their entitlement to receive sale proceeds, which are to be appropriated in reduction of outstanding construction debt. However, that position alters where there is a default by the developer and the financier intervenes to collect 100 percent of the sale proceeds and appropriates towards payment of the debt outstanding. That situation leaves the developer with an unfunded exposure to the ATO.
However, if the financier appoints a controller (such as receiver or manager), they will then lose 10 percent of the value of their security on the basis that a controller, as agent of the developer, assumes the same GST liability as the developer to the ATO.
The most important change is to the responsibility of purchasers who may be ‘mum and dad’ investors or owner occupiers, who will now have a legal responsibility to pay the GST on the taxable supply associated with the purchase of residential real estate to the ATO.
To assist the purchasers, contacts of sale will need to be amended to specifically contain a calculation of the agreed amount of the GST payable, which is made more complex where the margin scheme has been adopted. A further issue will be who bears the responsibility to the ATO if the calculation of the GST payable is incorrect. Ideally, it should rest with the developer and not the purchaser who ordinarily will have no means available to verify the GST component on a GST inclusive sale price.
Another aspect is that the purchaser may not even be registered for GST purposes and may struggle to work through the process of remittance, which appears they will assume the legal responsibility to pay the GST to the ATO.
As with all new policy, the devil is always in the detail but on the face of it, this seems yet another interference in the orderly transaction of property purchases. It purports to place the ATO in a position to that of a secured creditor in respect to recovery of the GST above secured and unsecured creditors.