Government targeting Phoenix developers with new GST Withholding Regime

In our latest blog, we focus on the implementation of the new GST Withholding Regime.

The Government has lost $1.8 billion in GST revenue between 2012-2017 from phoenixing. This occurs when developers complete residential developments and collect their GST at Settlement, however then declare the company insolvent without remitting the required GST to the ATO from their sales.

According to the ATO, phoenixing is one of the main forms of non-compliance and over $2 billion in GST debt has been written off.

In order to address the risks associated with this practice, the Government has introduced a GST Withholding Regime which comes into effect on 1 July 2018.  The changes will affect both buyers and sellers of “new residential premises” eg. new residential vacant land, subdivisions, newly constructed units/townhouses or newly constructed house and land packages.

What must the Buyer do?

The Buyer must withhold the GST, by either:-

  1. paying the GST amount to the ATO on or before settlement, or
  2. providing a bank cheque drawn to the ATO to the Seller on settlement.

What must the Seller do?

The Seller must provide notice to the Buyer if the property being sold is captured by the GST Withholding Regime.  It is an offence not to provide the relevant notice.

Time Frames

The GST Withholding Regime will apply to all contracts entered into on or after 1 July 2018.

Contracts entered into prior to 1 July 2018 which do not settle until on or after 1 July 2020 are also captured by the new provisions.

The ATO has created a short video which explains the upcoming changes.

Moving Forward

We will provide further updates to you when they become available.  As with most changes to property or taxation legislation, we anticipate that changes to the standard REIQ contract and Disclosure Statements will be necessary.  In addition, an approved Form may become available for use by sellers in complying with their notice obligations.

The inevitable impact of the proposed amendments is the loss of cash flow to developers who will lose the benefit of holding GST payments made at settlement for up to three months before their next Business Activity Statement is due. Additionally, financiers and developers will be impacted by a reduction in the funds available to pay down debt at settlement caused by the delayed mechanism for applying the margin scheme.

Developers may need to speak with financiers about the likely short-term cash flow impacts, and arrangements between property development partners may need to be revisited to the extent distribution or ‘waterfall’ payment arrangements include payment to compensate for one party’s GST liability.

If you have any questions regarding the new GST Withholding Regime or require conveyancing services, please contact our experienced conveyancers and property lawyers on (07) 3870 8244 (Toowong conveyancing) or (07) 3264 7692 (Albany Creek conveyancing).

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