we have answers.
As part of the government’s plans to crack down on illegal phoenix activity, on 29 March, amendments to GST law were made requiring purchasers of new residential property to withhold GST from the contract price and pay it directly to the ATO.
If you’re an accountant or lawyer, take note. By getting to grips with the ins and outs of this change in legislation, not only are you keeping yourself informed, but you can also help steer affected clients away from potential penalties for non-compliance.
Here’s our simple run-down on what it’s all about.
Identifying phoenix developers
According to the ATO, illegal phoenix activity is ‘when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying debts.’
For some property developers, this type of activity has been identified as an easy way out of financial strife. The business claims to be insolvent, pockets the GST from the property sale (which should have been remitted), then uses it for working capital to pay for other liabilities and setting up a new business.
Thanks to this legislative change, this fraudulent ‘rising from the ashes’ is longer possible.
Laying down the GST law
Prior to 1 July 2018, property developers would receive the full amount of the sale price from the purchaser at settlement. GST would then be paid upon submission of their next business activity statement (BAS).
Since that date, purchasers must now withhold the GST and remit it directly to the ATO. This amount currently stands at 1/11th of the purchase price, or 7% if the vendor is using the margin scheme – no settlement adjustments are used. The balance of the sale price is then paid to the seller.
Importantly, this requirement only applies to sales of new residential property, or subdivisions of land. It does not affect existing residential properties or commercial properties. It also excludes any sale entered into before 1 July 2018 and paid before 2020.
Ongoing liability for vendors
This change in law means that developers no longer have the opportunity to commit GST-based illegal phoenix activity – they are no longer the middle man, so to speak.
However, while the purchaser must now pay the GST directly on their behalf, responsibility for ensuring this happens stays with the vendor.
As stipulated in the legislation, the vendor must provide the purchaser with a written statement setting out the amount to be withheld and paid to the ATO. There are penalties in place for those who fail to do so.
If no statement is provided, the purchaser must still pay the set 1/11th of the purchase price. However, if the amount they subsequently submit as a result of this failure to supply a statement is incorrect, the purchaser won’t be penalised.
If you’re wondering whether purchasers need to register for GST because of this new requirement, they don’t. They simply need to fill in two forms – GST property settlement withholding notification and GST property date confirmation – then pay the ATO.
GST credit implications
A common question coming up is, how do these changes affect the GST credit process? The answer? It remains the same. Developers can still input credits for the amount withheld by the purchaser when they submit their returns and may be entitled to a refund.
If a property developer has outstanding tax debt this may cause significant problems, as GST credits will be applied against these outstanding debts before a refund is issued.
By making purchasers withhold the GST portion of the price tag and submit it to the ATO, this new legislation is essentially taking the match away from the phoenix. Developers can no longer start a new ‘fire’ and the government can level the playing field.
Whether you’re coming from a financial or legal advisory standpoint, you can help get this information out there.