GST on New Residential Properties
The legislation detailing the changes proposed in the 2017-2018 Federal Budget surrounding how developers are required to account for GST on the sale of new residential premises (including sub-divisions) has now received royal assent.
From 1 July 2018, the obligation to pay the GST will be placed on the purchaser. As such, on the sale of a property the developer will no longer receive the full sale price, rather they will receive the sale price less the GST component. This includes pre-existing developments and future developments. There is a transitional arrangement that excludes contracts signed before 1 July 2018 as long as it settles before 1 July 2020. This will provide certainty for contracts that have already been signed. This also means contracts will need to be checked and reviewed pre 1/7/18 as well as the initial process.
Purchasers will be required to pay the GST amount to the ATO on or before the day the purchase price is paid. The GST will be 1/11th of the price except where the margin scheme applies and the purchaser must withhold 7 per cent of the contract price.
Developers will need to issue a notice to withhold 14 days prior to settlement. Failure to do so will result in penalties or the purchases withholding excessive amounts. Developers will report the GST amount through their business activity statement (BAS) and will be entitled to a credit for the amount paid to the ATO by the buyer, and a refund if it exceeds the actual GST liability. A simple example is:
In December 2018, Rick enters into a contract for the purchase of a new apartment for $700,000 from Builderco. The margin scheme foes not apply to the sale.
The contract of sale included the required notice providing relevant details to enable Rick to withhold and remit the correct amount to the ATO at settlement. Builderco advises Rick that he will be required to make a payment of $63,636, which is 1/11th of the contract price of $700,000 on or before the day of settlement.
On settlement Rick’s conveyancer makes a payment to the ATO of $63,636 and notifies the ATO of a payment of the withheld amount. Builderco receives a credit for this amount in its June BAS, and does not then have to make a payment of the amount when paying their net amount for the tax period ended 30 June.
Assuming the above facts are the same, except Rick and Builderco have agreed that the margin scheme applies to the supply, then Builderco should notify Rick that the amount of GST will be 7 per cent of the contract price of $700,000.
At present, the GST received by developers provides a cash flow advantage of up to 4 months where settlement occurs early as developers can utilise the GST component of the settlements to fund other working capital requirements, pay down debt or facilitate new projects. With effect from 1 July 2018 this 10% free cash float will no longer be available.
The impact on cash flow will have flow on implications when determining the feasibility of projects, for example the reduction in cash flow and the timing of the loss of GST will need to be factored into feasibility decisions. Where projects are underway or have a scheduled operation over the cut over period and are utilising the GST free cash float, developers should be reviewing existing cash flow requirements to ensure that relevant buffers are available. This will include liaising with tenders ahead of time to ensure covenants and other criteria are suitably adjusted or tolerances built in.
Should you have any questions about how these changes affect you please contact us or speak to your ESV engagement partner on 02 9283 1666.