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  • Transitional arrangements for property contracts entered into before 1 July 2018

    The new laws are prospective and only apply on or after 1 July 2018.

    That means if your property sale contract was entered into (for example, exchanged) before 1 July 2018 and consideration (other than a deposit) for the sale is made before 1 July 2020, the new notification and withholding rules do not apply.

    The normal GST rules will apply for sale contracts for a taxable sale of new residential premises or potential residential land:

    • entered into before 1 July 2018
    • where any consideration for the supply (other than a deposit) is provided before 1 July 2020

    Note: The supplier will report and pay the GST on the sale when they lodge their next BAS.

    Important things to be aware of

    • A deposit or security paid on exchange of contracts is not consideration as it is usually held in a trust account on behalf of the purchaser until the property purchase settles. A deposit becomes consideration when it is either released to the supplier or forfeited.
    • A contract for the sale of a property is not entered into before 1 July 2018 if there is only an option granted to buy or sell the property. In most cases it will be necessary to look at the date at which that option is exercised to work out whether the transitional arrangements apply or not.
    • A supplier will not be required to notify the purchaser for contracts entered into prior to 1 July 2018 unless the consideration (other than a deposit) for the property sale takes place on or after 1 July 2020.

    Example 1: Transitional arrangements apply

    On 11 May 2018, Rachael enters into a contract for a new home unit with developer WatsonHomeCo for a contract price of $650,000 and pays a 10% deposit of $65,000. The margin scheme is not used.

    Settlement occurred on 31 May 2019, the deposit was released and the balance of the contract price ($585,000) was paid to WatsonHomeCo.

    Since this is within the transitional period, the new measure does not apply.

    WatsonHomeCo will remit the GST of $59,090 to us when their next BAS is due in July 2019.

    End of example

     

    Example 2: Transitional arrangements do not apply

    Assume the same facts in example 1, except the payment for the sale (other than the deposit) was first made on 2 July 2020 the transitional arrangements would not apply.

    WatsonHomeCo would be required to notify Rachael that she has to withhold $59,090 (1/11th of $650,000) and pay it to us at settlement.

    On 2 July 2020, Rachael withholds $59,090, releases the deposit of $65,000 and pays WatsonHomeCo the balance of the contract price $525,910.

    Rachael remits the withheld amount of $59,090 to us at settlement.

    When WatsonHomeCo lodge their next BAS, the withheld amount of $59,090 is credited against their GST liability for the sale.

    End of example

     

    Example 3: Transitional arrangements apply

    Ben enters into a contract with Canny Developments on 22 June 2018 to purchase a new apartment for $750,000 and pays a deposit of $75,000. The margin scheme is not used.

    Following delays in completing the whole development, settlement for the property takes place on 15 March 2020 when Ben pays the rest of the contract price and releases the deposit.

    Since this is within the transitional period, the new measure does not apply.

    Canny Developments is not required to notify Ben of the withholding requirement, nor is Ben required to withhold.

    Ben pays GST to Canny Developments as part of the purchase price, which Canny Developments account for when they lodge their next BAS.

    End of example

     

    Example 4: Transitional arrangements do not apply

    Assume the same facts in example 3; except completion of the project and settlement is delayed by a further six months.

    The first payment for the sale of the new apartment occurs on 15 September 2020 at settlement.

    As the first payment is made after 1 July 2020, Canny Developments will be required to provide Ben with a written notification that a withholding obligation applies. The notification also states the withholding is $68,181 (1/11th of $750,000) and it must be remitted to us at settlement.

    On settlement, Ben pays the withheld amount of $68,181 directly to us to be credited to Canny Developments when their next BAS is lodged.

    End of example

    Existing property development arrangements with agreed distribution or waterfall payment arrangements

    There is also transitional relief for certain longer term property development agreements (PDAs) between land owners and developers entered into prior to 1 July 2018, which do not complete until after 1 July 2020.

    Under these types of PDAs, there may be an agreed distribution or ‘waterfall’ payment arrangement, which provides for how the payment for the supply of the developed property is to be distributed amongst the parties to the arrangement, for example to pay for development services.

    Such an arrangement may specify how the supplier is to discharge their GST liability, and take this into account in the distribution of the money received from purchasers is to be divided between the parties to the PDA.

    Arrangements that are entered into prior to 1 July 2018 may not contemplate a withholding obligation applying. In that case, if the existing distribution arrangement is in place, the parties may not be in the position that they would be in if the withholding obligation did not apply.

    To avoid parties to a PDA being advantaged or disadvantaged as a result of the withholding obligation, transitional relief will apply if four conditions are met. Those conditions ensure the relief only applies where it is necessary to avoid unintended consequences.

    1. The PDA must have been entered into before 1 July 2018, with at least one party supplying development services to the supplier (vendor) of property to which the new measure applies.
    2. The distribution of consideration under the PDA either requires an amount must be distributed to the vendor for the payment of the vendor’s GST liability (taking into account entitlements to input tax credits) or distributions of the consideration, between the parties, must be adjusted to take into account the vendor’s GST liability.
    3. If the distributions under the arrangement were to be made when an amount has been withheld, and the parties would not be in the same position as they would have been in if there was no withholding obligation.
    4. A withholding payment has been made (for example, to us by a purchaser) in relation to the taxable supply of the property.

    Where all four conditions are met, the amount of the payment that is made to us is deemed to have been received by the supplier, and an extra distribution of GST to the supplier of the property from the received payments is not required.

    This applies in cases where the supplier either receives the proceeds of sale directly, or is entitled to a distribution of the proceeds of the sale from a third party.

      Last modified: 15 May 2018QC 55431