Explanatory Memorandum(Circulated by authority of the Minister for Revenue and Financial Services Minister for Women Minister Assisting the Prime Minister for the Public Service the Hon Kelly O'Dwyer MP)
Chapter 5 - Payment of GST on taxable supplies of certain real property
Outline of chapter
5.1 Schedule 5 to the Bill amends the TAA 1953, ITAA 1997 and the GST Act to require purchasers of new residential premises and subdivisions of potential residential land to make a payment of part of the purchase price to the ATO.
Context of amendments
5.2 The Government announced in the 2017-18 Budget that from 1 July 2018 purchasers of new residential premises or new residential subdivisions would need to remit the GST on the purchase price directly to the ATO as part of the settlement process.
5.3 Currently, supplies of new residential premises are generally subject to GST and the supplier remits the GST to the ATO in their next BAS. This can be up to three months after settlement.
5.4 One of the main forms of non-compliance with these obligations involves developers selling properties for a purchase price that reflects their GST obligations but dissolving their business before their next BAS lodgment to avoid remitting the GST (this is known as a form of 'phoenixing').
5.5 The ATO uses a range of strategies to tackle non-compliance with the GST law in the property development industry. The strategies are labour intensive, and costly to undertake and sustain.
5.6 Phoenixing to avoid paying GST has grown significantly over the last decade. As of November 2017 the ATO has identified 3,731 individuals that have actively engaged in this activity over the last 5 years. These individuals controlled over 12,000 insolvent entities responsible for $1.8 billion in debt that has been written off. The insolvent entities also claimed $1.2 billion in input tax credits between 2013 and 2017.
5.7 The ATO's compliance activities in collecting correct amounts of GST that are due and payable on property transactions are hindered by the delay that occurs between when the GST is paid to the supplier and when their liability arises. By effectively making purchasers pay GST when consideration for the property is provided, this measure removes the delay in the payment of GST which is the main enabler of current evasion activity in this area.
Summary of new law
5.8 Where an entity (the supplier) makes a taxable supply of new residential premises or a subdivision of potential residential land by way of sale or long term lease, the recipient of the supply (the purchaser) is required to make a payment of part of the consideration to the ATO directly, prior to or at the time consideration is first provided for the supply (other than as a deposit).
Comparison of key features of new law and current law
|New law||Current law|
|Payment of GST on taxable supplies of certain real property|
|Purchasers of new residential premises or subdivisions of potential residential land must make a payment to the ATO of part of the price.
The supplier of new residential premises or a subdivision of potential residential land must remit any GST payable to the ATO after lodging their BAS, taking into account any credit available for the payment made by the purchaser (see below).
|If an entity makes a taxable supply of new residential premises or a subdivision of potential residential land, the entity must remit the GST to the ATO after lodging their BAS.|
|Notice provided by supplier to recipient|
|Suppliers of residential premises or potential residential land by way of sale or long term lease must provide the recipient with a notification before making the supply.||No equivalent.|
|Credit to suppliers for GST withheld|
|The supplier of new residential premises or subdivisions of potential residential land is entitled to a credit for the amount of any payment made to the ATO by the purchaser.||No equivalent.|
Detailed explanation of new law
Application of the measure to certain new residential premises and subdivisions of potential residential land
5.9 Generally, the amendments made by Schedule 5 require the purchaser to withhold an amount if it is the recipient of a taxable supply of:
- new residential premises, other than those created through a substantial renovation and commercial residential premises; or
- subdivisions of potential residential land;
by way of sale or long term lease. [Schedule 5, item 1, subsections 14-250(1) and (2)]
5.10 The term 'new residential premises' is defined in section 40-75 of the GST Act. Generally, premises will be new residential premises where they have not previously been sold as residential premises, have been created through substantial renovations of a building, or have been built to replace demolished premises on the same land.
5.11 Where the new residential premises were not created through 'substantial renovations' (within the meaning of the GST Act), and are not also 'commercial residential premises', a withholding obligation applies to supplies of the property by way of sale or long term lease. The exclusion of substantial renovations ensures that a purchaser does not have to determine whether renovations are 'substantial renovations' of the property, which may be difficult to assess at the time of purchase. Similarly, commercial residential premises are excluded to make it clear that a withholding obligation does not apply in relation to residential premises that are both 'new residential premises', and 'commercial residential premises'. [Schedule 5, item 1, subsection 14-250(2)]
5.12 A withholding obligation also applies to taxable supplies of potential residential land included in property subdivision plans by way of sale or long term lease, where the subdivision does not contain any buildings that are used for a commercial purpose. The term 'potential residential land' is defined in section 195-1 of the GST Act, and means land that is permissible to use for residential purposes, but that does not contain any buildings that are residential premises. This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not currently contain any residential premises. The withholding obligation applies each time the land is supplied, rather than just on the first supply. [Schedule 5, item 1, paragraph 14-250(2)(b)]
5.13 However, a withholding obligation does not apply if the recipient of the taxable supply is registered for GST, and acquires the potential residential land for a creditable purpose. This ensures that the obligation does not apply to certain business to business transactions. [Schedule 5, item 1, paragraph 14-250(1)(b)]
5.14 The application of the measure to subdivisions of potential residential land, other than in a business to business transaction, is intended to cover house and land packages, where a purchaser may receive a taxable supply of a vacant block of land which is the subject of a property subdivision plan. [Schedule 5, item 1, paragraph 14-250(2)(b)]
5.15 Where a supply is between members of a GST group, or is made by the operator of a GST joint venture to a participant in the joint venture, then those supplies are not taxable supplies and the withholding obligation does not apply (subsections 48-40(2) and 51-30(2) of the GST Act).
5.16 Both withholding obligations are limited to supplies by way of sale or long term lease (broadly, a lease for a period of 50 years or more). This limits the application of the withholding obligation to permanent transfers of property, broadly consistent with the definition of new residential premises. [Schedule 5, item 1, subsection 14-250(2)]
5.17 The obligation to make a payment falls on the recipient of the supply. Where there are multiple recipients, such as where a couple may purchase a property as tenants in common, each recipient is treated as receiving a separate supply in proportion to their interest in the property. The amount of the payment that each recipient is required to make is proportionate to their interest in the property. Where the recipients of the supply are joint tenants, they are treated as having received a single supply, and they each have an obligation to make the payment. Either one of the joint tenants may discharge this obligation. [Schedule 5, item 1, subsection 14-250(11)]
Example 5.1 - Joint withholding at settlement
Gerald and Beth acquire new residential premises for $1.1 million. They acquire title to the property as tenants in common. The sale is not under the margin scheme, so the amount of the payment is 1/11th of the value of the contract price.
Gerald and Beth are each taken to have received a separate supply, and each have an obligation to make a payment to the Commissioner in equal shares.
Gerald has received a 50 per cent interest in the property. Gerald is taken to have paid $550,000 for that supply. Gerald must pay $50,000 to the Commissioner on or before the day they provide consideration for the property. Beth must pay the same amount to the Commissioner.
Between them, Gerald and Beth are required to withhold $100,000 from the amount they pay to the vendor. They may make a payment to the ATO at the same time.
Example 5.2 - Joint withholding at settlement
Assume the same facts as above, except Gerald and Beth acquire the property as joint tenants.
In this case, Gerald and Beth are taken to have received a single supply, and they have an obligation to withhold $100,000. The obligation to make the payment may be discharged by either of the parties.
They may make a single payment to the ATO.
5.18 To avoid any unintended consequences, the Commissioner may, by legislative instrument, determine that the withholding obligation does not apply to certain kinds of supplies of new residential premises or subdivisions of potential residential land. [Schedule 5, item 1, subsection 14-250(3)]
Timing of withholding obligation
5.19 Where a purchaser receives a taxable supply to which the withholding obligation applies, they are required to pay to the Commissioner an amount on or before the day that consideration for the supply (other than consideration provided as a deposit) is first provided, or if the parties are associates and no consideration is provided, on the day the supply is made. [Schedule 5, item 1, subsections 14-250(1) and (4)]
5.20 In the majority of cases, consideration (other than a deposit) is provided on the day of settlement of the property. Where this is the case, the intention is that the purchaser must make a payment to the Commissioner on or before the day on which settlement occurs. Where consideration under a contract is paid by instalments, the intention is that the purchaser instead has to make a payment by the end of the day that they make the first instalment payment, as this will be when consideration is first provided. Generally, this outcome aligns with the GST attribution rules, as the tax period in which consideration is first paid is generally when the supplier is required to pay the amount to the Commissioner. [Schedule 5, item 1, subsection 14-250(4)]
5.21 Money that is held as a deposit is generally not considered to be consideration (within the meaning of the GST Act), unless the deposit is forfeited or is applied as consideration for the supply. When a purchaser provides consideration to another entity as a deposit, the purchaser does not face a withholding obligation at that time. If that deposit is later forfeited, and the intended supply of new residential premises or potential residential land does not occur then there would be no withholding obligation. Instead, the withholding obligation applies to the first payment of consideration that is provided other than as a deposit. This is expected to simplify compliance for purchasers. The withholding obligation also applies for the first payment if it includes both a deposit and any additional amount of consideration. [Schedule 5, item 1, subsection 14-250(4)]
5.22 To avoid any unintended consequences, the Commissioner may, by legislative instrument, vary the day by which the payment is to be made to the Commissioner for specified types of supplies. This may include varying the number of payments that are to be made to the Commissioner, so that amounts may be paid by instalments on multiple different specified days. For example, where consideration is provided in instalments, the Commissioner could provide that withholding payments may be made by the end of the day on which each instalment is paid. [Schedule 5, item 1, subsections 14-250(4) and (5)]
The amount to be paid
5.23 The amount to be paid to the Commissioner is a proportion of the 'contract price' or if the contract does not specify a contract price, the price of the supply. [Schedule 5, item 1, subsection 14-250(6)]
5.24 The contract price is, effectively, the price set for the supply in the contract, not taking into account any potential adjustments that may occur (regardless of the likelihood of any of these adjustments occurring). Using the contract price, if it exists, provides entities with certainty about the amount that needs to be withheld. [Schedule 5, item 1, subsection 14-250(6)]
5.25 The price of a supply is the amount of money paid for the supply, or if the consideration is not expressed as money, the GST inclusive market value of the consideration (section 9-75 of the GST Act). [Schedule 5, item 1, subsection 14-250(7)]
5.26 The proportion of the contract price that must be withheld differs based on whether the margin scheme applies to the supply. [Schedule 5, item 1, subsection 14-250(6)]
5.27 If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price or price. [Schedule 5, item 1, paragraph 14-250(6)(b)]
5.28 If the margin scheme applies to the taxable supply, the purchaser must withhold 7 per cent of the contract price or price, or a greater amount that has been determined by the Minister in a legislative instrument. However, any determination by the Minister cannot require more than 9 per cent of the contract price or price to be withheld, which prevents an amount being set in excess of the GST payable on the supply. [Schedule 5, item 1, subsection 14-250(8) and paragraph 14-250(6)(a)]
5.29 Special rules apply to supplies made between associates for less than the GST inclusive market value. In this case, the purchaser must pay to the Commissioner an amount equal to 10 per cent of the GST exclusive market value of the supply. This is consistent with the rules that generally apply to the GST treatment of transactions between associates. Where no consideration is provided, the purchaser must pay the amount to the ATO on the day on which the taxable supply is made. [Schedule 5, item 1, subsection 14-250(9)]
5.30 In some cases, a transaction may consist of multiple different types of supplies under a single agreement. It is also possible that a single contract may be for a composite supply which includes a taxable supply to which the withholding obligation applies. Where it is possible to ascertain the amount that is attributable to the supply to which the withholding obligation applies, the purchaser only has to withhold a proportion of that reduced amount, depending on whether the sale is under the margin scheme or not. [Schedule 5, item 1, subsection 14-250(10)]
5.31 If the consideration under the contract is expressed as a single amount that covers all taxable supplies, it may not be possible to determine at the time consideration is provided the proportion of the consideration that relates to the particular supply (or part of a composite supply) to which the withholding obligation applies. This is unlikely to be common for supplies of real property. However, where this is the case, the purchaser must withhold from the whole of the price. [Schedule 5, item 1, subsection 14-250(10)]
5.32 This rule creates the appropriate incentive for the supplier to assign a proportion of the price to the supply to which the withholding obligation applies, as they will have a larger amount withheld and suffer a cash-flow disadvantage if they do not. [Schedule 5, item 1, paragraph 14-250(10)]
Example 5.3 - Withholding at settlement
On 3 December 2018, Rick enters into a contract for the purchase of a new apartment from MortimerHomeCo for $700,000. The margin scheme does 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. MortimerHomeCo 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.
Settlement occurs on 6 June 2019. Rick's conveyancer makes a payment to the ATO at settlement of $63,636 (being the GST component of the purchase), and notifies the ATO of a payment of the withheld amount.
Because Rick has paid $63,636 to the ATO, he does not have to provide this amount to MortimerHomeCo, even though the contract price states that the consideration includes the $63,636.
MortimerHomeCo receives a credit for this amount in their June BAS, and does not then have to make a payment of the amount when paying their net amount for the tax period ending 30 June.
Example 5.4 - Withholding when sale is under the margin scheme
Assume the same facts as in Example 5.3, except Rick and MortimerHomeCo have agreed that the margin scheme applies to the supply and no determination has been made by the Minister that a percentage greater than 7 per cent needs to be withheld in relation to supplies to which the margin scheme applies.
In MortimerHomeCo's notice to Rick, they instead advise that the amount Rick will be required to pay is 7 per cent of the contract price of $700,000.
Example 5.5 - Payment by bank cheque at settlement
Assume the same facts as in Example 5.3, except Rick's conveyancer does not make a payment to the ATO directly, and instead provides a bank cheque made out to the ATO to MortimerHomeCo for $63,636.
Rick is protected from penalties if MortimerHomeCo does not provide this amount to the ATO as the bank cheque for the required amount has been provided at settlement and his conveyancer keeps a record of that exchange.
MortimerHomeCo forwards the cheque to the ATO on the same day. When the cheque is received by the ATO, MortimerHomeCo gets a credit for this amount in their June BAS and does not then have to make a payment of the amount when paying their net amount for the period.
Example 5.6 - Withholding at settlement using the PEXA platform as agent for the purchaser
Assume the same facts as in Example 5.3, except an online conveyancing portal is used to complete the transaction.
PEXA is an online conveyancing portal used for completing property settlements. PEXA's portal enables payments to be made directly through it so all parties have complete assurance and visibility of the relevant transaction details.
Each party inputs the required details to PEXA's portal to enable the transaction to be completed. In preparation for the settlement, Rick and MortimerHomeCo input the relevant account information, payment amounts and property information (as a shared line item so that each party has visibility of the account details).
Rick transfers the whole of the consideration to PEXA, which through their financial settlement facility disburse 1/11th of the purchase price to the ATO, and the remainder to MortimerHomeCo.
MortimerHomeCo receives a credit for this amount in their June BAS, and does not have to make a payment of the amount when paying their net amount for the tax period.
Example 5.7 - Withholding on land where premises not built
Alison buys land in a new master-planned development. The vendor selling the land has also indicated the purchase of the land is subject to the construction of a new home built on that land by an agreed developer.
Alison agrees to this condition and the vendor prepares a land contract, and a building contract is drawn up separately. Alison settles on the land first, withholds the GST on the contract price of the land and remits that to the ATO at settlement.
As the contract for the construction of the house is for the supply of goods and services and not land, the withholding does not extend to the supplies under this contract. GST on those supplies is paid in the usual way.
Notification by suppliers of residential premises or potential residential land
5.33 To help purchasers comply with their obligation to withhold, an entity that makes a supply of residential premises or potential residential land by way of sale or long term lease is required to notify the purchaser in writing of certain matters before making the supply. [Schedule 5, item 1, subsection 14-255(1)]
5.34 Unlike the withholding obligation, which only applies to new residential premises or new subdivisions of potential residential land, the notification requirement applies to the supply of residential premises or potential residential land by way of sale or long term lease. However, the supplier does not have to provide a notice in relation to potential residential land where the purchaser that receives the notice is registered for GST, and acquires the land for a creditable purpose. The supplier also does not have to give a notice where the supply is of commercial residential premises. [Schedule 5, item 1, subsections 14-255(1) and (2)]
5.35 Where the supply does not require a payment to be made by the recipient to the Commissioner (for example, because it is an input taxed supply of existing residential premises), then the supplier only needs to provide this information. [Schedule 5, item 1, subsection 14-255(1)]
5.36 Where the purchaser must make a payment to the Commissioner, the supplier must identify this in the notice, and also advise the purchaser of the amount that must be paid to the Commissioner. This simplifies compliance for the purchaser, and makes the supplier responsible for working out if there are any determinations in effect from the Commissioner that mean that a withholding obligation does not apply in relation to the supply, or that varies the amount to be withheld. [Schedule 5, item 1, subsection 14-255(1)]
5.37 Where the supply requires a withholding payment to be made, the following other matters must also be included in the notice to the purchaser:
- the name and ABN of the entity that made the supply;
- when the purchaser is required to pay that amount to the Commissioner;
- where some or all of the consideration is not expressed as an amount of money - the GST inclusive market value of the consideration that is not expressed as an amount of money; and
- such other matters as are specified in the regulations.
[Schedule 5, item 1, subsection 14-255(1)]
5.38 The time when a purchaser is required to pay the amount to the Commissioner may be expressed in the notice as a specific date, if known by the entities, or more generally, for example, by stating that the payment is to be made at settlement.
Offence for failing to notify
5.39 Where a person fails to give the required notice in writing to the purchaser, they have committed an offence. A person has failed to give the required notice where they do not make one or more of the required representations, or if they make incorrect representations. [Schedule 5, item 1, subsection 14-255(4)]
5.40 Because this is a strict liability offence, it is not necessary to establish fault in failing to make any or all of the required representations. Strict liability is appropriate in this case because the offence is committed by failing to make the required representations. It is important for the integrity of the regulatory regime to make suppliers responsible for a failure to provide an accurate notice, regardless of their intentions. Withholding is being introduced to address non-compliance by certain suppliers and it would undermine the effectiveness of the regime if suppliers could knowingly fail to provide a notice when required without consequences. Suppliers have clear notice about their obligations and the matters covered in the notice are either known or readily able to be determined by the supplier. If notices are not provided by a supplier, then purchasers may not have the information that they require to make a withholding payment. [Schedule 5, item 1, subsections 14-255(4) and (5)]
5.41 Because the offence is subject to the general defence for strict liability offences set out in the Criminal Code, a person will not be subject to the offence if they can show they have made an honest mistake of fact (section 9.2 of the Criminal Code). This would include where a person made an honest and reasonable mistake about whether the property was new residential premises or existing premises, and failed to give the required notice as a result. However, multiple instances of similar misstatements may indicate that an honest and reasonable mistake has not been made. [Schedule 5, item 1, subsections 14-255(4) and (5)]
5.42 The maximum penalty for the strict liability offence is 100 penalty units. A penalty unit is currently $210. Where a corporation is convicted of the offence, the penalty that the court may impose is 5 times the maximum penalty that the court could impose as a penalty for the offence (section 8ZF of the TAA 1953). This penalty creates a strong disincentive for potential phoenix companies to misrepresent that a property is not 'new residential premises' or 'potential residential land' to avoid the withholding obligation from applying. The penalty amount is set having regard to the significant sums of money involved in such real property transactions. Without a strong disincentive, phoenix operators may not be discouraged from making such a false representation. [Schedule 5, item 1, subsection 14-255(4)]
5.43 The offence applies to all entities that supply residential premises or potential residential land, to reduce the compliance burden on purchasers. This means that each time residential premises or potential residential land are supplied, the vendor must advise the purchaser if a withholding payment must be made. The representation by a vendor that receiving a supply of residential premises or potential residential land does not require a payment to be made is important to the operation of the defence for the administrative penalty that applies for failing to make a withholding payment. It provides a basis for the purchaser to determine whether they are required to make a payment or not. [Schedule 5, item 1, subsection 14-255(1)]
5.44 If a purchaser has not been presented with a notice indicating if they are required to make a payment, there may be uncertain as to whether they are under an obligation to withhold. To provide certainty to purchasers and conveyancers where they are uncertain about their withholding obligations, they can make a payment to the Commissioner and will not face penalties if they do so. Making the payment to the Commissioner will discharge them from liability to account for the amount of the withholding payment to any other entity (section 16-20 of Schedule 1 to the TAA 1953). This provides certainty to purchasers and conveyancers in cases where a supplier has failed to provide a notice. Where this occurs and there was no obligation for the purchaser to make a payment, the supplier may apply to the Commissioner for a refund of the amount of the payment that was made in error. Because the Commissioner may have regard to the circumstances that gave rise to the error when deciding whether to issue a refund, a factor that may be considered is whether it appears the purchaser's error was a result of the supplier deliberately failing to provide a certificate. This provides a strong incentive for the supplier to issue a notice, as they will suffer a cash-flow disadvantage and will have to apply to the Commissioner for a refund if they do not issue the notice. [Schedule 5, items 1 and 4, section 18-85 and subsection 14-255(3)]
5.45 An administrative penalty may also be applied where a person fails to make the required representation. The elements that are required to establish the administrative penalty are the same as the elements for the criminal penalty. The penalty is 100 penalty units. [Schedule 5, item 1, subsection 14-255(6)]
5.46 This penalty is subject to the rules in Division 298 of Schedule 1 to the TAA 1953 about the application of administrative penalties. It is also subject to the rule in section 8ZE of the TAA 1953, that prevents an administrative penalty being imposed where a prosecution for the criminal offence has been instituted, and that where a prosecution is later commenced, that the Commissioner must refund the amount of penalty imposed. [Schedule 5, item 1, subsection 14-255(6)]
5.47 Because this is an administrative penalty the provisions of the Criminal Code that provide a defence of honest and reasonable mistake of fact for strict liability criminal offences do not apply. However, the amendments provide that if a person:
- failed to give a notice containing the matters that are required to be included when making a supply of 'new residential premises' or a subdivision of potential residential land to which a withholding obligation applies; and
- reasonably believed at the time they gave the notice that they were not required to give a notice (for example, because they believed that the supply was a supply of commercial residential premises);
they are not liable to the administrative penalty. [Schedule 5, item 1, subsection 14-255(7)]
Defences for failing to withhold
5.48 The criminal penalty in section 16-25 does not apply to a failure to make a Division 14-E payment. However, the administrative penalty in section 16-30 does apply to such a failure. Because the penalty under section 16-30 applies, the TAA 1953 is amended to provide a number of specific defences for where a purchaser fails to withhold. [Schedule 5, items 14 and 15, subsection 16-25(2) and paragraph 16-25(4)(b)]
5.49 The first defence applies where the purchaser failed to pay an amount to the Commissioner if:
- the amount relates to a taxable supply of new residential premises (other than commercial residential premises) to which a withholding obligation applies; and
- the purchaser was given a notice under section 14-255 that either:
- stated that the premises were not new residential premises; or
- indicated that the purchaser will not be required to make a withholding payment in relation to the supply; and
- at the time that the purchaser was required to make a payment to the Commissioner, there was nothing that made it unreasonable for the entity to believe that the notice was correct.
[Schedule 5, item 2, subsection 16-30(2)]
5.50 The defence applies if the purchaser relies on the notice, unless other information relating to the supply makes this reliance unreasonable. This means that in order to obtain the benefit of the defence, the purchaser is not required to make any additional inquiries about the premises. Instead, they are only unable to rely upon the notice if information they are already aware of contradicts it or calls it into question. For example, a circumstance that might indicate that reliance on the notice was unreasonable is where the purchaser has made an off-the-plan purchase of a new apartment, but the vendor has represented in the notice that it is not new residential premises. [Schedule 5, item 2, subsection 16-30(2)]
5.51 The second defence applies where the purchaser failed to pay an amount to the Commissioner if:
- the purchaser gives the supplier a bank cheque on or before the day the payment is required to be made; and
- the bank cheque is for the amount the purchaser is required to pay to the Commissioner, and is payable to the Commissioner.
[Schedule 5, item 2, subsection 16-30(3)]
5.52 This defence is intended to cover situations where a supplier requires the purchaser to provide them with a bank cheque that is payable to the Commissioner so the supplier can be certain that the payment has been made. The defence is to ensure that if the supplier does not provide the bank cheque to the Commissioner by the required time that the purchaser does not face a penalty. This is intended to provide certainty to purchasers that these types of arrangements will not expose them to penalties, which should minimise disruption to the usual settlement process. [Schedule 5, item 2, subsection 16-30(3)]
Withholding tax credits
5.53 An entity that makes a taxable supply to which the measure applies is entitled to a credit for the amount paid to the Commissioner by a purchaser in relation to the supply as a result of the withholding regime. The credit arises when an assessment has been made of the supplier's net amount for the tax period of the supplier in which the payment was made. [Schedule 5, item 3, subsections 18-60(1) and (3)]
5.54 The availability of a credit to the supplier is contingent on the purchaser paying the amount to the Commissioner. A credit does not arise merely because an amount has been withheld from a payment to the supplier. This ensures that the integrity of the credit system is not undermined by purchasers withholding amounts but not remitting them. [Schedule 5, item 3, subsection 18-60(1)]
5.55 The amount of the credit is the whole of the payment that is made. [Schedule 5, item 3, subsection 18-60(2)]
5.56 Where an amount is refunded, the amount of the credit that the supplier is entitled to receive is reduced by the amount of the refund that has been given, including by reducing the amount to nil if the whole of the amount has been refunded (section 18-5 of Schedule 1 to the TAA 1953).
5.57 Part IIB of the TAA 1953 (about Running Balance Accounts) sets out how the Commissioner must treat a credit once it has arisen. These rules apply to credits for amounts withheld under the new withholding regime.
Refunds for amounts where the payment is made in error
5.58 Where a purchaser withholds in error, but in purported compliance with the obligation to withhold, (for example, where residential premises are not new residential premises and therefore withholding does not apply), then the supplier may apply for a refund separate to the usual BAS process of the amount of the payment to the extent it was made in error. The amount that may be refunded is the amount that is withheld in error. [Schedule 5, item 4, subsections 18-85(1) and (2)]
5.59 The supplier must apply to the Commissioner in the approved form. The application must also be lodged at least 14 days before the GST is payable on the supply by the supplier (subject to the Commissioner's general powers in relation to approved forms). This restriction is to avoid any administrative complications that may arise because of the proximity in timing of giving a refund and the tax credit arising after assessment of the supplier's net amount. Because the supplier will receive a credit that may result in a refund after an assessment of their net amount at the end of the tax period, there is minimal disadvantage in waiting for the refund to arise under the BAS. This has the effect that a supplier cannot apply for a refund through this process once the credit arises at the time of assessment at the conclusion of the tax period and it is applied against the GST liability of the supplier. [Schedule 5, items 3 and 4, subsections 18-60(3), 18-85(1) and (2)]
5.60 If the supplier is entitled to apply for a refund, applies in the approved form, and the Commissioner is satisfied that:
- another entity has withheld an amount from a payment to the supplier and made a withholding payment, or has purportedly withheld an amount to the supplier and made a withholding payment; and
- the payment was made in error;
the Commissioner must refund the amount required if it would be fair and reasonable to do so. [Schedule 5, item 4, subsections 18-85(1) and (4)]
5.61 When determining what is fair and reasonable, the Commissioner must have regard to:
- the circumstances that gave rise to the obligation (if any) to make the payment; and
- the nature of the error; and
- any other matter the Commissioner considers relevant.
[Schedule 5, item 4, subsection 18-85(4)]
5.62 A person receiving a payment from which an amount is withheld under the amendments, may not claim a refund from the purchaser where the amount has been withheld in error. [Schedule 5, item 24, sub-paragraph 18-65(1)(a)(ii)]
Existing machinery provisions
5.63 The definitions of 'amount required to be withheld', 'amount withheld' and 'withholding payment' are amended to ensure that other machinery provisions in Schedule 1 to the TAA 1953 apply correctly to the measure. [Schedule 5, items 7, 8, 10 and 11, the definitions of 'amount required to be withheld', 'amount withheld' and 'withholding payment' (first and second occurring) in subsection 995-1(1) of the ITAA 1997]
5.64 Where a withholding payment is made to the Commissioner, the purchaser is discharged under the tax law from all liability to pay or account for that amount to any entity except the Commissioner, despite any provision of a contract that provides for the whole of the consideration to be paid to the supplier (section 16-20 of Schedule 1 to the TAA 1953).
5.65 Division 16 is specifically amended to ensure that certain machinery provisions apply to the measure correctly, including that:
- a purchaser that fails to make a withholding payment is required to pay the general interest charge on unpaid amounts (section 16-80 Schedule 1 to the TAA 1953); and
- amounts are to be paid to the Commissioner in the way set out in section 16-85 of Schedule 1 to the TAA 1953; and
- purchasers are required to notify the Commissioner on or before the day specified by the Commissioner by legislative instrument, or if no such instrument has been made, the date they make a payment (section 16-150 of Schedule 1 to the TAA 1953).
[Schedule 5, items 17, 20, 21, 22 and 25 subsections 16-70(3) and 16-150(1), (2), (3) and paragraph 389-20(1)(a)]
5.66 Unlike other types of Division 14 withholding payments, withholders are not required to be registered with the ATO, so the provisions relating to registration do not apply. [Schedule 5, items 18 and 19, paragraphs 16-140(1)(b) and 16-140(2)(b)]
5.67 A number of terms that are used in the GST Act are inserted into the dictionary in section 995-1 of the ITAA 1997, to ensure that where those terms are used they have the same meaning. [Schedule 5, item 9, the definitions of 'commercial residential premises', 'consideration', 'margin scheme', 'money', 'potential residential land', 'price' 'property subdivision plan' and 'substantial renovations' in subsection 995-1(1) of the ITAA 1997]
5.68 A number of notes are also inserted into the GST Act to direct readers that a withholding obligation applies in relation to those types of supplies. [Schedule 5, items 5 and 6, section 33-1 and subsection 40-65(2) of the GST Act]
5.69 An amendment is also made to paragraph 14-215(1)(d) in Schedule 1 to the TAA 1953 so that a purchaser is required to make a withholding payment under both the foreign resident capital gains withholding measure, and Division 14-E. [Schedule 5, item 13, paragraph 14-215(1)(d)]
5.70 A consequential amendment is also made to Division 18 of Schedule 1 to the TAA 1953, to ensure that the provisions that relate to credits for income tax do not apply to the measure. [Schedule 5, item 12 and 23, subsection 18-10(1)]
Application and transitional provisions
5.71 Generally, the withholding obligation and all associated amendments apply in relation to supplies for which any of the consideration is first provided (other than consideration provided solely as a deposit) on or after 1 July 2018, whether or not the supply was entered into before, on or after the commencement of the schedule. [Schedule 5, item 26]
General transitional rules
5.72 The exception to this general rule is where the contract for supply was entered into before 1 July 2018, and consideration for the supply is first provided before 1 July 2020, providing a two year transitional period for pre-existing contracts. [Schedule 5, item 27]
5.73 Where a contract is entered into before 1 July 2018, and consideration for the supply is first provided after 1 July 2020, then the amendments will apply. This means that after 1 July 2020, the supplier has an obligation to provide a notice before making a taxable supply. [Schedule 5, item 27]
Example 5.8 - Transitional arrangements
Jamie enters into a contract with Hal Developments on 22 June 2018 to purchase a new apartment for $750,000.
Settlement for the property takes place on 15 March 2020, and no consideration is provided before that date. As settlement takes place before 1 July 2020, Hal is not required to notify Jamie of the withholding requirement, nor is Jamie required to withhold.
Hal Developments must remit any GST payable as a result of the supply to the ATO on its next BAS.
Example 5.9 - Transitional arrangements
Assume the same facts as in example 5.8, except settlement is delayed by six months, and the premises settle on 15 September 2020.
As this settlement takes place on or after 1 July 2020, Hal is required to provide a notice to Jamie, indicating that a withholding obligation applies in relation to the property. On settlement, Jamie provides Hal with a bank cheque for the amount of the withholding payment, which Hal's solicitor then provides to the ATO.
Existing property development arrangements
5.74 Under certain property development agreements, there may be an agreed distribution or 'waterfall' payment arrangement, which provides for how the consideration for the supply of the property is to be distributed amongst the parties to the arrangement. Such an arrangement may contemplate how the supplier is to discharge their GST liability, and take this into account in the distribution of the consideration between the parties. However, those 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.
5.75 To avoid parties to an arrangement being advantaged or disadvantaged as a result of the withholding obligation, transitional relief will apply if four application conditions are met. The four application conditions are an integrity requirement restricting what types of arrangements are within the scope of the transitional relief, to ensure that it only applies where it is necessary to avoid unintended consequences.
5.76 The first application condition requires that an arrangement must have been entered into before 1 July 2018 between an entity making a taxable supply to which the amendments apply and one or more entities, at least one of which is supplying (or is to supply) development services in relation to the real property. The arrangement must also deal with the distribution between the parties to the arrangement of the consideration for the taxable supply. [Schedule 5, subitem 28(a)]
5.77 The second application condition is based on the distribution of the consideration. To satisfy this condition, under the arrangement either of the following must occur:
- an amount must be required to be distributed to the supplier for the payment of the supplier's liability to GST for the taxable supply, which is to take into account any relevant entitlement to input tax credits; or
- distributions of the consideration, between the parties, must be adjusted to take into account the supplier's GST liability.
[Schedule 5, subitem 28(b)]
5.78 The third application condition is about the position of the parties if the withholding obligation did not apply. To satisfy this condition 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, then the transitional relief will apply. [Schedule 5, subitem 28(c)]
5.79 The fourth application condition requires that a withholding payment has been made in relation to the taxable supply. [Schedule 5, subitem 28(d)]
5.80 Where all four application conditions are satisfied, the amount of the payment that is made to the Commissioner is deemed to have been received by the supplier. This applies in cases where the supplier either receives the proceeds of sale directly, or is entitled to a distribution of the proceeds of sale from a third party. [Schedule 5, item 28]
5.81 In the first case, where the supplier is the recipient of the proceeds, the supplier would distribute the proceeds to the other parties as though the supplier was in possession of the full amount, and a payment was not made to the ATO. [Schedule 5, item 28]
5.82 In the second case where the supplier is not the recipient of the consideration, the arrangement may require funds to be paid into an account, such as a trust account, where the trustee will then distribute the consideration to the parties to the arrangement. Where this occurs, the supplier is taken as having received a distribution of the amount of the payment under the arrangement, because they will ultimately be entitled to a credit of equal value. [Schedule 5, item 28]
5.83 This is intended to preserve the position of all parties to a property development agreement that existed prior to 1 July 2018 and avoid windfall gains.
Example 5.10 - Property Development Agreement
Hamilton Enterprises owns a large parcel of land that they intend to develop into a multi-staged residential village, consisting of houses, townhouses and high-rise apartments. Hamilton wants to retain control over the land.
On 1 July 2015, Hamilton enters into a PDA with William Developments that outlines the development process and how the money from each of the sales of new properties would be distributed between Hamilton and William. (Condition 1)
The arrangement provides for 20 per cent of the purchase price to be distributed to Hamilton from the trust account as a priority. The balance of the amount is to be distributed to William as a fee for its development services. The distribution between the parties is set in a way that takes into account Hamilton's GST liability. (Condition 2)
If the withholding obligation did not apply, and someone purchased a new apartment from Hamilton for $1.1 million Hamilton would receive $220,000 and William would receive $880,000 under the distribution. In this scenario, Hamilton will have a GST liability of $100,000 and William will have a liability of $80,000 for the supply of development services. Hamilton will be eligible to claim an input tax credit of $800,000 so that its net GST liability is $20,000.
After GST has been paid, Hamilton receives a net $200,000 and William receives a net $800,000. The total GST paid to the ATO is $100,000.
If withholding did apply, and a purchaser paid $1,000,000 into the trust account held on behalf of Hamilton and William, the distribution without any modification would be $220,000 (20 per cent of the purchase price) and $780,000 respectively.
Hamilton is also entitled to a $100,000 credit, so is not in the same position as it would have been in had the withholding measure not applied. Similarly, William has received $100,000 less from the distribution, and is also not in the same position. Accordingly, it is necessary to apply the transitional relief where a withholding payment is made. (Condition 3)
Jade buys a new apartment from Hamilton for $1.1 million, inclusive of GST. Jade pays $1.0 million of the purchase price into the trust account held on behalf of Hamilton and William. Jade pays $100,000 to the ATO as a withholding payment. (Condition 4)
Because Jade has made a payment to the ATO, when amounts are being distributed from the trust account Hamilton is taken to have been distributed the amount of the payment. This means that Hamilton will only receive a further $120,000 as a distribution, and William will receive $880,000.
Hamilton will have a GST liability of $100,000 on the supply of the property and William will have a GST liability of $80,000 for its development services. Hamilton will be eligible to claim an input tax credit of $80,000 so that its net GST liability is $20,000. Hamilton receives a $100,000 credit for the withholding payment, which entitles it to an $80,000 refund from the ATO when it lodges its BAS.
At the end, William receives $800,000, Hamilton receives $200,000 and the ATO is paid $100,000. This places the parties in the position they would have been in had the withholding obligation not applied.
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Payment of GST on taxable supplies of certain real property
5.84 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
5.85 Schedule 5 to this Bill amends Schedule 1 to the TAA 1953 and makes a number of consequential amendments to the ITAA 1997 and GST Act, to require purchasers of new residential premises or new residential subdivisions to remit the GST on the purchaser price directly to the ATO as part of the settlement.
5.86 Where a purchaser fails to make a withholding payment, an administrative penalty applies to the purchaser, which is subject to a number of specific defences.
5.87 To facilitate the operation of this regime, suppliers of residential premises or potential residential land are required to give a notice to the purchaser which indicates whether a withholding obligation applies in relation to the supply.
5.88 The amendments also require information to be collected and reported to the ATO, to enable the withholding payment regime to be administered.
Human rights implications
5.89 The amendments made by this Schedule engage the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights (ICCPR), as entities that are required to make a payment to the ATO will need to provide personal information to the ATO about the transaction.
5.90 This reporting obligation is compatible with the prohibition, as it is neither arbitrary nor unlawful. In addition, it is aimed at the legitimate objective of ensuring that the ATO has sufficient information about the transaction to administratively process it, and assign a tax credit to the supplier. The requesting of this information for that purpose is a proportionate means of achieving that objective, as it only requires the minimum amount of information necessary to identify relevant taxpayers and transactions.
5.91 Taxpayer information held by the ATO is subject to strict confidentiality rules that prohibit tax officials from making records or disclosing this information unless a specific legislative exemption applies.
5.92 To the extent that the amendments engage Article 17, they do so appropriately. This is because the collection of the information is required to assign credits to taxpayers, and to the extent that personal information is collected and stored, its disclosure or use is limited to where a specific legislative exemption applies.
5.93 A number of provisions of the Schedule engage article 14(2) of the International Covenant on Civil and Political Rights, that a person shall have the right to be presumed innocent until proven guilty according to law.
5.94 Where a purchaser fails to make a withholding payment, they are subject to an existing administrative penalty under section 16-30 of the TAA 1953. The amendments create a number of specific defences to this administrative penalty, each of which engage Article 14(2) because they displace the assumption that every element of the contravention must be proven to establish the penalty.
5.95 Generally, the defences apply where:
- a purchaser has been given a notice required by law by the supplier that indicated that the purchaser did not have to make a withholding payment, and there were no circumstances that existed that made it unreasonable for the purchaser to rely on that notice; and
- a purchaser has provided a bank cheque to the supplier which is payable to the ATO for the withholding amount.
5.96 In both cases, these matters are within the knowledge of the purchaser. It would be unreasonably time consuming to ask the ATO to disprove in each case whether there was any circumstances which made it unreasonable to rely on the notice. Similarly, it is within the knowledge of the purchaser whether they have provided a bank cheque to the supplier. The purchaser would be able to more easily establish whether there were any such circumstances that made it unreasonable to rely on the notice, or if they have provided a bank cheque to the supplier.
5.97 Accordingly, because the matters are within the knowledge of the purchaser it is appropriate that the purchaser must establish the defence, and that the ATO does not have to prove that the matters included in the defence are not present in order to apply the administrative penalty.
5.98 The notice provision in section 14-255 also engages Article 14(2), as it creates a strict liability criminal offence where a vendor fails to provide the required notice to the purchaser. Where strict liability applies to the offence, it will be made out by the existence of the physical fault elements, without the need to establish fault.
5.99 Strict liability is appropriate in this case, as requiring proof of fault about why a required notice was not provided would undermine the deterrent effect that the offence is intended to have, as it would be difficult to establish fault elements in relation to the physical element, which could be constituted by an omission. It is important for the integrity of the regulatory regime to make suppliers responsible for a failure to provide an accurate notice, regardless of their intentions. Withholding is being introduced to address non-compliance by certain suppliers and it would undermine the effectiveness of the regime if suppliers could knowingly fail to provide a notice when required without consequences. Suppliers have clear notice about their obligations and the matters covered in the notice are either known or readily able to be determined by the supplier. Where a notice is not provided by a supplier, or it is false in a material particular, then purchasers may not have the information that they require in order to comply with their obligations under the taxation law, and may fail to make a withholding payment.
5.100 Because the offence is subject to the CCA 1995, a person will not be subject to the offence if they can show they have made an honest mistake of fact (CCA 1995 section 9.2). This includes where a person was mistaken about whether the premises were new residential premises or whether they were existing residential premises.
5.101 To establish this defence, a person bears the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. If the defendant can discharge this burden, the prosecution must prove those matters beyond a reasonable doubt. This is easier for a defendant to discharge, and does not completely displace the prosecutor's burden; it merely defers that burden until after the evidential burden is discharged.
5.102 Accordingly, the application of strict liability is appropriate for failing to provide a notice.
5.103 This Schedule is consistent with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither be unlawful nor arbitrary. To this extent, the Schedule complies with the provisions, aims and objectives of the ICCPR.
5.104 This Schedule is also consistent with article 14(2) of the ICCPR, as the way in which the Schedule engages with the right that a person shall be presumed innocent until proven guilty according to law is appropriate and adapted. To this extent, the Schedule complies with the provisions, aims and objectives of the ICCPR.
REGULATION IMPACT STATEMENT
5.105 This Regulation Impact Statement relates to the 2017-18 Budget measure to address GST integrity in the property development sector. The measure provided that from 1 July 2018, purchasers of new residential premises and new subdivisions would remit the GST owed on the purchase price directly to the ATO as part of the settlement process.
5.106 GST applies to the sale of new residential  and commercial premises (such as houses, hotels, office buildings), and new subdivisions. Special GST rules apply for property development  , reflecting the large value and complex nature of such transactions and the period of time between acquisition of land and development and sale of the land and any buildings.
1. The Problem
5.107 There have been a growing number of businesses in the property development industry that have failed to remit GST to the ATO after the sale of new residential premises or new subdivisions. This failure to remit is due to businesses intentionally dissolving before their next Business Activity Statement (BAS) is lodged to avoid remitting the GST, or through businesses having not sufficiently budgeted to meet their GST obligations.
5.108 The ATO has been using a range of strategies to tackle failure to remit due to both of these reasons, but with limited success. These strategies have included taxpayer guidance, improved debt collection practices and enforcement activities. The strategies are labour intensive, highly intrusive, and costly to undertake and sustain. More importantly, the risk has not abated. The "after the fact" nature of the activities has proven to be inadequate; as the problem usually emerges well after the property transaction has occurred.
5.109 By allowing vendors to remit GST after the sale of new residential premises and new subdivisions up to 3 months later through their BAS, there is time for businesses to dissolve and avoid paying the GST to the ATO (sometimes described as "phoenixing"). As the ATO is an unsecured creditor, they never receive the GST owed even though the vendor bears a legal obligation to pay the GST.
5.110 The high value nature of the transactions, and consequently the large amount of GST involved, magnifies the risk that the GST amount will be diverted to other purposes.
5.111 This issue is primarily concentrated in the residential premises development sector, due to the much larger size of this sector compared to the commercial premises development sector. The ATO considers there is less risk in the commercial premises development sector as the smaller size of this sector (about 1/12th the size of the residential property development industry) makes it easier to monitor. Therefore, the Budget measure specifically relates to the residential premises development sector where many of these issues frequently arise. A consideration for the future is whether commercial transactions should be included, which would require further assessment of the extent of the problem within the commercial development sector, and balance this with the costs of extending the withholding to business-to-business commercial property transactions.
2. Why is Government action needed?
5.112 As this problem poses regulatory failures, there is scope for Government action to correct these failures, which cannot be addressed by the market through private actors, or by any other means.
5.113 The problem is large enough to warrant addressing by the Government. Despite sustained compliance activity, the problem remains; for example, in April 2015, the ATO reported to the Senate Standing Committee on Economics, "Inquiry into Insolvency in the Australian Construction Industry", that 3,355 individuals had been identified as being in control of over 13,000 entities with a history of insolvency in the property development industry. These entities are part of the population considered to be at risk of "phoenix" behaviour.
3. What policy options are being considered?
Option 1: Require purchasers of new residential premises and new subdivisions to remit GST to the ATO at the time of settlement
5.114 Under this option, purchasers of new residential premises or new subdivisions would be required to withhold 1/11th of the purchase price, and to pay this amount directly to the ATO as part of the settlement process. The GST would be credited by the ATO to the vendor's account. This would remove the opportunity for non-compliance by the developer.
5.115 As noted above in the problem identification section, since the main mischief of phoenixing has been found to occur in the residential premises development sector, this option applies only to sales that are new residential premises developments and new land subdivisions rather than new commercial premises development.
5.116 This option does not change the amount of GST owed, and keeps the legal obligation to pay GST on the vendor. It would apply to all new residential premises and new subdivision sales, and to all developers without any exemptions or carve-outs for developers who are perceived to be more compliant or have a turnover over a specified threshold. Carve outs were considered and raised by stakeholders but found not to be viable for the following reasons.
5.117 The ATO has noted this type of phoenixing activity occurs across the industry, and not only in the smaller or medium end of the market.
5.118 Introducing exemptions creates competition concerns by favouring larger businesses over small businesses and imposes barriers to entry for newer developers.
5.119 There are also difficulties in the case of Joint Ventures (JV), where one party is exempt and the other is not.
5.120 Carving out larger entities adds to complexity for conveyancers, purchasers, developers and would add to the tax administration cost and complexity for the ATO. For example:
5.121 Conveyancers would have to make further enquiries for each transaction to discover whether developers were in or out of the regime.
5.122 Developers would have to prove their compliance history with the ATO in order to get an exemption certificate (depending on the operation of the model). Developers would face additional burdens in seeking to extend compliance certification on their special purpose vehicles (SPVs) and in joint venture arrangements which are distinct entities for tax compliance purposes.
5.123 The ATO would have to continually monitor developers to discover whether they were complying with their requirements.
5.124 Other features of this model include:
- Processing refunds through the BAS, where the GST owing is less than 1/11th due to the margin scheme applying.
- Not making the transfer of title conditional on the payment of the GST by the purchaser, as this poses legal and practical difficulties in addition to compliance costs for State Governments in updating IT systems and changing their conveyancing Acts.
- Ensuring the interpretation of where GST is payable on new residential properties and new subdivisions remains consistent with existing definitions under the GST Act.
- Introducing a two-year transitional arrangement so that the option applies to contracts entered into from the announced start date (1 July 2018), and to all settlements that take place from 1 July 2020.
Option 2: Expand the ATO compliance function
5.125 This option proposes to expand the ATO's compliance function in the property industry. The ATO's compliance resources could be increased by 9 full-time equivalent staff, which would need to be funded by States and Territories.
5.126 The ATO uses a range of tools to deal with vendors that avoid paying GST on property transactions. This includes:
- collecting information about current and planned developments from property developers to assist in identifying future sales;
- using ATO formal investigation powers to seek information from individual developers and third parties;
- enforcing tax requirements through garnishee notices;
- undertaking prosecution action when required; and
- making an assessment for part of a net amount in a tax period when a vendor has a previous history of poor compliance.
5.127 This option would supply additional resourcing that would enable the ATO to carry out these and additional activities, such as:
- utilising policy 'nudges' such as sending letters, or incentivising compliance through education campaigns to support and encourage compliance; and
- enforcing higher penalties for non-compliance, through regulatory change and enforcement by exercising the Commissioners discretion.
Option 3: No change - continuing the current approaches
5.128 Under this option, no changes would be made. The ATO would continue with its current compliance and enforcement activities.
4. What is the likely net benefit of each option?
Option 1: Require purchasers of new residential premises and new subdivisions to remit GST to the ATO at the time of settlement
5.129 This option directly addresses the core problem of the growing number of businesses in the property development sector failing to meet their GST obligations. By requiring purchasers to remit GST at settlement, it removes the opportunity for vendors to fail to remit GST through phoenixing or inadequate budgeting. This option also strengthens existing GST payment arrangements to ensure streamlined compliance processes that do not impact on the wider economic or business activities of the industry. The proposal does not alter the fundamentals of the GST system, nor the rate or amount of GST legally required to be paid. It will reduce unnecessary and additional intervention through ATO enforcement to bring GST compliance in line with the rest of the business community. In this way, this option will have no indirect or secondary effects on this market.
5.130 Some key strengths of this option include:
- Incorporating a withholding mechanism backed by penalties for non-compliance, which is likely to increase compliance with the GST system. This directly addresses the problem of the growing number of vendors failing to pay GST through intentional phoenixing or inadequate budgeting;
- Leveraging existing settlement processes minimises compliance costs and education for relevant stakeholders. The compliance level of other government taxes collected using the existing settlement process is approximately 98%; and
- Minimising the opportunity for significant GST shortfalls (and late payments) in relation to the sale of new residential property and land. The correct amount payable under the legislation will be collected and this is estimated to result in additional transfers to the States and Territories.
5.131 Avoiding the consequences of poor budgeting by vendors who might be unable to meet their obligation to pay GST to the ATO when it's due.
5.132 Removing the incentive for vendors to phoenix to avoid their GST obligations, as they no longer have access to those funds.
5.133 Utilising a withholding mechanism, which is familiar to industry as an effective tax collection model, this option has the benefit of being easily understood and applied by industry.
5.134 Applying the option to all vendors without exemptions, which reduces complexity and regulatory burden for industry, reduces administration costs and complexity for the ATO, and avoids the perception that the system favours some groups of tax payers over others.
5.135 Furthermore, the administrative costs in ensuring compliance with the law would be materially reduced. The net ongoing saving from a reduction in staffing levels is estimated to be $9.2 million over the forward estimates period.
Costs for taxpayers and purchasers
5.136 This option has some impacts on purchasers, vendors and conveyancers.
5.137 Purchasers would need to comply with the withholding requirement. However, as this option is not linked to title transfer but leverages the settlement system that currently exists, this impact should be minimised. Therefore, this policy is easily integrated into the current system. As most purchasers use conveyancing services to complete their property transaction, this impact is further minimised.
5.138 While it is difficult to quantify the price impacts of this option for purchasers as a result of added conveyancing tasks, it is unlikely to significantly increase conveyancing costs. This is because this option is integrated into the conveyancing process and can be streamlined through the use of online forms to simplify requirements on purchasers. Over the next few years, the rollout of electronic conveyancing for all property transactions also provides further opportunity for the efficient and timely management of this process, further reducing any additional costs for purchasers.
5.139 Withholding and payment of the GST directly to the ATO on behalf of the vendors would be a relatively minor additional cost during this process.
Service providers (e.g. conveyancers)
5.140 The average annual regulatory costs are summarised in Table 2.1 below. The compliance costs of this option are equivalent to a net increase in regulatory burden of about $4 million per year on an annualised basis over 10 years.
5.141 These impacts are expected to fall on vendors, conveyancers and other legal professionals involved in the settlement process. This represents about 40,000 businesses out of a business population of about 3 million entities.
5.142 It is expected that these businesses would need time to implement the new arrangement; to learn and understand what is required, and adapt processes and forms appropriately to deal with the changes to withholding GST.
5.143 Conveyancers and solicitors will need to adapt standard contracts and other documentation to include the withholding and payment of GST to the ATO. This process is likely to be more streamlined by using PEXA.
5.144 Developers will no longer enjoy the cash-flow benefit that they currently gain from holding onto the GST from the sale until remittance to the ATO. Currently, at settlement, developers collect GST on behalf of the ATO and are able to retain that amount in their account until it becomes payable through their Business Activity Statement (BAS). Larger businesses with turnover greater than $20 million are required to lodge their BAS monthly, while smaller and medium-sized businesses can lodge quarterly. This creates a temporary cash-flow benefit that increases the risk that these businesses would phoenix to retain the GST that was paid to them.
5.145 In consultation, finance representatives noted that removing this cash-flow benefit is unlikely to affect the ability for developers to secure finance, as banks exclude the GST component of a developer's account when making lending decisions.
5.146 Developer representatives also noted that most developers manage their cash flows so that financial decisions are not reliant on GST flows to meet their financial obligations. For those that are unable to manage finances effectively, this option ensures these businesses are compliant with their GST obligations. This option will also reduce the risk to the system from phoenixing as the GST that was paid is not lost.
5.147 Furthermore, this option evens the playing field for compliant developers because developers that did not remit the GST to the ATO received an unfair advantage due to retaining that amount of money.
5.148 Developers will also need to update their systems, contracts and practices to build the withholding mechanism into their transaction processes.
5.149 This option includes a transitional arrangement, so as to minimise transitional costs on existing contracts for purchasers, service providers and property developers. Contracts signed before 1 July 2018 can continue under existing arrangements so long as they settle before 1 July 2020. This will allow most existing contracts to wash through (e.g. off the plan apartment purchases that often take 1-2 years between contract and settlement), whilst preventing potential mischief from long dated contracts being signed and ensuring all new residential property contracts come under the withholding regime by 2020.
5.150 There may be small costs for service providers in the short term who will be required to apply both systems for a period of two years. This cost is expected to be small compared to the reduction in costs for conveyancers and developers in no longer needing to change contracts signed before 1 July 2018.
|Average annual regulatory costs (from business as usual)|
|Change in costs ($ million)||Businesses||Community organisations||Non-business individuals||Total change in costs|
|Total, by sector||$4||$0||$0||$4|
Note: Estimated average annual regulatory costs have been rounded.
5.151 Compliance cost impacts were assessed using a standardised compliance cost assessment methodology. The assessment provides many of the parameters that are used in the quantitative component that models the likely impact based on estimates drawn from the ATO General Compliance Cost Model.
5.152 To implement the changes, conveyancers and property developers would need to learn and understand the changes. It was anticipated that most would be familiar with GST processing and the preparation of the Business Activity Statement. The impact of this change was considered to be low.
5.153 It is possible that some conveyancers will pass on the additional compliance activity by increasing fees payable by purchasers. However, the impact of the change is considered minor and is occurring at a time when a range of disbursements are occurring as part of the transfer of property. For property developers it was considered that once they have learned and understood the changes there will be little or no on-going compliance cost impacts on top of their existing GST compliance processing.
5.154 For quantification purposes, aggregate impacts included conveyancers and property developers and these were placed with market segments of Large, Small and Medium and Micro businesses and totalled about 4,000 conveyancers and 36,500 developers and involved about 80,000 transactions. This produced aggregate potential compliance cost impacts of just under $4 million per year and this equated to an average cost of about $90 per year for each affected business or entity.
Option 2: Expand the ATO compliance function
5.155 This option would expand the compliance activities the ATO undertakes to address the risks in the property industry.
5.156 As this option retains the current settlement and GST remittance processes, it has a limited benefit in that vendors and others in the property transfer process would not need to alter their procedures and processes.
Costs for taxpayers and purchasers
5.157 Depending on the scale of this option, the costs could be in the millions for the ATO.
5.158 However, this is anticipated only to lead to a relatively minor increase in GST liabilities - and is unlikely to adequately address the GST risk in the industry. There would continue to be a significant cost in revenue foregone as non-compliance continues.
5.159 This is because this issue arises due to regulatory failure, and merely increasing regulatory activities will not address the opportunity to commit, and the incidence of, the mischief in any meaningful way. Crucially, increasing compliance activities does not address the time-lag between the collection and remittance of GST which provides the benefit in phoenixing. Additional compliance would only provide "after-the-fact" remedies that often fail as the business in question has no remaining assets (and often has ceased to exist) to meet their GST obligations.
5.160 This option is very resource intensive, and all of the risks that are known in the industry are unchanged. ATO compliance/enforcement action in relation to a property vendor can be severely impeded by a lack of 'real-time' information; and after finalising an audit/investigation there is a real risk of not collecting taxes owed because the taxpayer goes into liquidation. Compliance activities to date have proven to be rather ineffectual despite the resources applied and the penalties available.
5.161 The use of Special Purpose Vehicles (SPVs) that is most commonly used in the property industry makes it difficult to collect the GST as there is no compliance history or linkage to persons running the company as each new SPV has different Directors.
5.162 Investment in infrastructure and reporting to provide real-time information would be expensive for the ATO and industry and would require legislative change.
5.163 Under this model, policy nudges will have little effect due to the very high financial rewards of failing to withhold. Higher penalties are also unlikely to deter this behaviour as they often fall on individuals that are placed as directors who have no financial assets, with the controlling mind being legally separated from the dealings.
|Average annual regulatory costs (from business as usual)|
|Change in costs ($ million)||Businesses||Community organisations||Non-business individuals||Total change in costs|
|Total, by sector||$0||$0||$0||$0|
Option 3 - No change
5.164 Under this option, no change in the GST law would be required and no change in the reporting and payment arrangements by vendors. However, under this option the problem of non-collection would persist.
5.165 Vendors and others in the property transfer process would not need to alter their procedures and the processes they currently use.
5.166 There would be a cost in revenue foregone as non-compliance continued, as the risk cannot be mitigated under the current law. Continued management of the risk would be evaluated and prioritised against other GST risk areas and those that emerge in the future. Phoenixing in the property construction industry will continue because of the time delay between receiving the GST, being required to pay the GST to the ATO, and consequently detecting the pattern of non-payment and undertaking reasonable enquiries to satisfy the nature and extent of non-compliance and taking corrective action.
5.167 Vendors complying with the existing law would continue to be at a GST/taxation disadvantage in comparison with vendors not complying with the law. As well, there is potential for an increase in dissatisfaction in the industry and the wider community as the GST is being paid by the purchaser to the vendor to gain title to the property but is not being paid by the vendor to the Government.
5.168 No regulatory burden or cost offset estimate table has been provided for this option as there is no change to current administrative and compliance arrangements.
5. Who has been consulted about these options?
5.169 The ATO undertook initial consultations in late 2015 with a range of stakeholders, including the property development sector, lawyers, conveyancers, financiers and State and Territory Governments. These consultations canvassed a number of potential solutions.
5.170 Of the options canvassed, all stakeholders at the time agreed that the option involving a withholding model not linked to the transfer of title would be the most effective solution that would have minimal impacts on vendors, purchasers and the sector generally.
5.171 Targeted consultation took place since the announcement of this measure in the 2017-18 Budget. This confirmed the industry's preference for a withholding model as discussed earlier and these consultations further refined their preferred approach to include a transitional arrangement.
5.172 Some stakeholders raised the possibility of introducing carve-outs for certain cohorts of developers perceived to be more compliant with the policy. While this was considered in that context, it was recognised there were costs and complexities in applying carve-outs, particularly on certain groups of developers and on purchasers and service providers who would face additional compliance burdens.
5.173 Consultations in this phase included a range of affected stakeholders from the legal, accounting, financial and the property development sector, such as:
- Property developers;
- Law Societies (various);
- Housing associations;
- Banking, Accounting and Taxation Bodies.
5.174 Consultation sessions were held via phone conference and face-to-face meetings. One-on-one feedback was also obtained.
5.175 Public Consultations also took place on exposure draft legislation between 6 November 2017 and 20 November 2017. These consultations involved a combination of face-to-face meetings, phone conferences and emails with key industry stakeholders, and provided an opportunity for industry and the public to provide written submissions on the exposure draft legislation for consideration.
6. What is the best option from those considered?
5.176 Option 1 is recommended, it has the highest net benefit.
5.177 Option 1 imposes low regulatory costs and a process that is straight-forward, easy to apply and fits within existing conveyancing processes. A withholding mechanism is:
- well understood by the development industry,
- fits with existing conveyancing processes,
- is simple for purchasers who would not need to register for GST to apply a withholding payment,
- leverages the existing disbursement process,
- can be backed by penalties; and
- is likely to lead to greater compliance with the law flowing through to higher GST collections.
5.178 A key advantage is that it fits within the existing business processes for transferring property ownership but applies to all vendors - keeping it simpler and more straight-forward and removing from purchasers the need to make inquiries about the status of the vendor.
5.179 Option 2 and 3 either retain the status quo or do not address the tax compliance risks in any systematic manner.
7. How will the proposal be implemented and evaluated?
5.180 Changes to legislation will be required, but these are anticipated to be relatively straightforward.
5.181 The ATO would be responsible for administering the new arrangements. The ATO has considerable experience with this area of GST law and the problems that have occurred, as well as the operation of withholding systems across the taxation system. It will provide guidance and advice to stakeholders to support their implementation efforts.