The reason for the change can be found in the ATO submission to the 2015 Senate Inquiry into “Insolvency in the Australian construction industry”. The ATO identified 3,355 individuals controlling over 13,000 entities had engaged in non-compliance with GST laws. As a result, over $2 billion in debt was written off. To date, the ATO’s compliance activities have proven to be inadequate as the problem usually emerges well after the property transaction has finalised.
Currently, GST is included in the purchase price of a new residential premises and the developer is required to remit GST to the ATO in the next BAS. This allows opportunities for non-compliance – such as “phoenixing”. In phoenixing, it is likely that the Phoenix entities have received significant GST refunds during construction and then collect GST on settlements of sales. The entity then goes into liquidation before paying the ATO. Later, the developer business continues to operate through a new entity.
The Federal Government has now introduced legislation which will require purchasers of new residential property to withhold 1/11th of the purchase price and pay this to the ATO.
As a result, the developer will then receive a credit for this GST through their BAS lodgement process. This will remove the time-lag in GST payments and limit the chance for tax avoidance.
This new GST requirement will apply as follows:
There are significant consequences for developers who will have to prepare new vendor contracts to comply with the new law, deal with their financier on apportionment of settlement proceeds and deal with the cash flow effect of not having the use of the GST for 1 to 3 or more months if not normally remitted on time as part of standard business practice.
This new legislation applies from 1 July 2018 and developers need to prepare as a matter of urgency.
Our property and tax experts are able to assist you in understanding and adapting to the new regime and can work with you to ensure compliance and avoid any potential penalties.
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Madison Marcus Law Firm produced this article. It is intended to provide general information in summary form on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.