When buying a new residential property or potential residential land, the purchaser must withhold a GST residential withholding payment from the contract price and pay this amount to the Australian Taxation Office (ATO) on settlement. The residential withholding payment is Goods and Services Tax (GST) payable on the sale.
Previously, this GST was paid to the vendor on settlement to pay to the ATO themselves. However the ATO found that some companies were dissolving before remitting the GST to the ATO and then creating a new company for their next development. This process is called ‘phoenixing’ and led to unpaid GST to the ATO which initiated the introduction of the Residential GST Withholding payment.
How is the GST Residential Withholding Payment Calculated?
The withholding amount is usually calculated as either:
- 7 percent of the contract price (if the margin scheme applies);
- 1/11th of the contract price; or
- 10 percent of the GST exclusive market value of the property.
The amount can also depend on the current GST law. The seller needs to disclose the amount payable in the Contract for sale.
When settlement occurs, the purchaser then has an obligation to pay the withheld amount of GST directly to the ATO and the balance of the sale price of the property (not including the withholding amount) to the vendor.
It is important to note that the payment amount is paid out of the purchase price and is NOT an additional payment required.
How is the GST Residential Withholding Payment made?
Initially, the vendor must provide the purchaser with written notification about whether the payment must be made. In order to make the payment, the purchaser must complete two online forms:
- GST property settlement withholding notification; and
- GST property settlement date confirmation (lodged after settlement).
The withholding payment is due on the date of settlement or once the first instalment is paid under an instalment contract.
What happens if the payment is not made?
If the vendor fails to provide the purchaser with written notice, they may face a fine of 100 penalty units ($22,000) and could be prosecuted in court or face an administrative penalty. If the vendor made an honest and reasonable mistake in failing to notify the purchaser, they will not be penalised.
If the purchaser fails to pay, the administrative penalty is the same as the amount that the purchaser was originally required to pay. The purchaser will not face penalties if they were relying on the vendor to provide notice of the requirement to pay the withholding payment. If the purchaser fails to lodge the required forms listed above, they can face penalties of 1 penalty unit for each 28-day period (up to 5 penalty units).
How to Lodge the Payment
The process to ensure payment is lodged with the ATO is an easy one. First, the seller provides you with a Supplier Notification which includes the supplier’s name and ABN, and the amount which must be withheld for GST.
After this but prior to settlement, you will need to lodge Form 1: GST property settlement withholding notification. You will need to obtain a copy of the contract and have the Supplier Notification with you. Once this is all complete, the ATO will confirm your lodgement.
Once this first phase is accomplished, on settlement day you must lodge a Form Two: GST property settlement date confirmation which will allow you to make the payment using the appropriate reference numbers which will then ensure that this amount is then credited to the seller’s GST account with the ATO.
These forms are facilitated via PEXA, the Property Exchange Australia Electronic Lodgment Network (ELN) and completed by the purchaser’s solicitor or conveyancer in PEXA prior to settlement.
When not to pay
You will not need to pay this GST amount on an existing property or where land has been subdivided where the seller is not registered for GST.
How the team at Burgess Thomson can help
The team at Burgess Thomson has substantial expertise in Business, Commercial and Property Law. With over 60 years’ combined experience, our solicitors successfully assist clients from start to finish in numerous property transactions. We are known for sound advice and our ability to comprehensively answer any questions in our area with utmost diligence. If you wish to discuss your matter with our team, please do not hesitate to call our office on (02) 4929 5602 to arrange an appointment.
