Last year, the Australian government proposed budget reforms to Goods and services tax (GST).

If introduced, the reforms will fundamentally change the way GST operates on the sale of new residential premises and subdivisions and therefore, may impact on many residential development projects.

The proposed reforms were recently introduced to Parliament and if passed, will apply from 1 July 2018, subject to some transitional provisions.

What does this mean for stakeholders?

1. For all taxable supplies of residential premises, and subdivided lots sold as part of a residential subdivision – apartments, townhouses, houses, house-and-land packages (but not renovated houses):

• Purchasers will be required to withhold 1/11th of the contract price and pay this to the ATO directly (if the margin scheme doesn’t apply);
• Purchasers will be required to withhold 7% of the contract price and pay this to the ATO directly (if the margin scheme applies);
• Purchasers will satisfy the requirement to withhold if they hand over at settlement a bank cheque for the amount made out to the ATO (and keeps evidence of that);
• Purchasers will not have to pay that amount to the Vendor (despite what the Contract of Sale says); and
• Vendors will get a credit for the withheld amount, and then be liable for the correct GST amount on their business activity statement (BAS), as currently occurs.

2. For transactions with multiple Vendors and/or multiple Purchasers, the rules will effectively apply to each entity for their portion of the supply.

3. The Vendor must notify the Purchaser at or before Settlement if these new rules will require them to withhold. The notification must include:

• The Vendor's name and ABN;
• The amount the purchaser must withhold and remit to the ATO;
• When that amount must be remitted;
• If there is non-monetary consideration, the GST inclusive market value of that consideration.

4. Failure by the Vendor to notify the Purchaser as required is a strict liability offence and will result in a penalty to the vendor ($21,000 per transaction).

5. Purchasers can rely on the notification received from Vendors, unless it would be unreasonable to do so (given the nature of the property/transaction). If the Vendor doesn’t issue a notice at all, the Purchaser still has the obligation to withhold.

6. The Vendor gets a credit for the amount withheld by the Purchaser on their next BAS. This means:

• If the amount withheld was equal to the GST payable, then the credit will offset the GST liability so no additional GST is payable/refundable by the Vendor;
• If the amount withheld was less than the GST payable (because the margin scheme applied, but the GST payable was more than 7%), the credit will offset some of the GST liability, and the remaining GST liability will be payable by the Vendor to the ATO;
• If the amount withheld was more than the GST payable (because the margin scheme applied, but the GST payable was less than 7%), the credit will offset the GST liability and the balance will be refundable to the Vendor.

7. There are transitional provisions (contrary to Treasury's earlier comments). These apply as follows:

• The new rules do not apply to contracts entered into prior to 1 July 2018, provided the consideration for the supply (ie settlement) occurs prior to 1 July 2020.

8. Property Development Agreements (PDAs) DMAs and DAs are also covered.

• If the waterfall provision in the PDA requires the parties to distribute the Vendor’s GST liability, but that GST has already been withheld at settlement (and as a result the parties would be left in a different commercial position), the Vendor is deemed to have received that GST amount for the purposes of applying the waterfall.

Our views

The legislation is broadly consistent with that flagged by Treasury during the consultation phase. Importantly:

1. Vendors will need to be very careful to comply with the notification requirements given the $21,000 strict liability penalty for failure to do so.
2. The new rules do not work perfectly where there are multiple Vendors or multiple Purchasers. Extra care should be taken in these circumstances.
3. It is unclear whether the withholding obligations apply to non-monetary consideration (in the case of land swaps and the like).
4. The proposal to 'rewrite' the contractual bargain between the parties vis a vis the operation of the waterfall in PDAs is concerning (at the very least). Specifically, although undoubtedly well intentioned, depending on the language adopted by the waterfall clause, it could give rise to unintended consequences regarding the economic bargain struck between the Vendor and developer. Every PDA still on foot at 1 July 2018 should be reviewed to determine the impact of this new legislation.