Treasury has issued an Exposure Draft to amend Treasury Laws Amendment (2017 Measures No. 9) Bill 2017 (“Bill”) to introduce a GST withholding regime.
The GST withholding regime was first flagged in the 2017-18 Federal Budget and is aimed at preventing property developers from engaging in phoenix activity, that is:
- claiming input tax credits on property development costs;
- collecting but not remitting GST on sales;
- disbursing the relevant GST amounts;
- liquidating the special purpose entity (“SPE”); and
- starting afresh with a new SPE on the next project.
Phoenix activity is said to cost the Australian economy billions of dollars in lost revenue.
If passed in its current form, the GST withholding regime will be a game-changer in terms of the Commissioner’s administration of the GST system in relation to property developers and has the potential to significantly affect cash flow.
What is it?
The GST withholding regime will require:
- property developers to provide written notice (“Notice”) to purchasers at least 14 days prior to making a taxable supply (i.e. generally 14 days prior to settlement) outlining:
- whether the purchaser is required to make a payment under the GST withholding regime;
- if the purchaser is required to withhold:
- the property developer’s name and ABN
- the amount that the purchaser is required to pay;
- when the purchaser is required to pay;
- if the purchaser is paying for the property with an asset (or a mixture of cash and assets) – the GST-inclusive market value of that asset; and
- purchasers to withhold and remit a full 1/11th of the price for the supply.
Penalties for non-compliance
If a property developer fails to provide a Notice to purchasers they are subject to a penalty of 100 penalty units (currently 1 penalty unit = $210 such that the fine equates to $21,000).
This is generally a strict liability offence, although there is an exception where the property developer reasonably believes that the property was not new residential premises.
Getting your money back (overpaid GST amounts)
As purchasers are required to withhold a full 1/11th of the price, in circumstances where the margin scheme applies, this may represent a significant overpayment of the ultimate GST liability.
In order to minimise the negative cash flow implications of the above, the GST withholding regime provides that a property developer may apply to the Commissioner in writing in the approved form for a refund of any amount if:
- a purchaser made a payment under the GST withholding regime; and
(a) the margin scheme applies and the property developer’s tax periods are not monthly;
(b) the payment (or part of the payment) was made in error.
The Commissioner must refund the relevant amount if he is satisfied that there has been an overpayment (either under the margin scheme or an account of an error) and it would be fair and reasonable to refund the relevant amount having regard to the particular circumstances.
Based on the above, property developers on quarterly tax periods may apply for a refund of any excess amounts withheld, whereas monthly taxpayers must wait until the end of the relevant month.
The proposed GST withholding regime, if introduced in its current form, will generally apply to supplies (i.e. settlements) on or after 1 July 2018 (whether the contract was entered into before, on, or after that date).
Despite the general rules above, contracts entered into before 1 July 2018 may be subject to the new GST withholding regime where the first consideration for the supply (other than the initial deposit) is made on or after 1 July 2020.
As outlined above, the GST withholding regime is aimed at preventing phoenix activity in the property development space. However, it is not a targeted measure and applies to all developers alike.
In recognition of the cash flow implications of the proposed measures, Treasury has sought to minimise the period of time a property developer is out of pocket in circumstances where the margin scheme applies, however, serious questions remain as to:
- how quickly refund applications will be processed by the Commissioner; and
- the refund of overpayments in circumstances where the entity has other outstanding obligations to the Commissioner.
These issues may have a significant impact on the entity’s ability to meet repayment obligations to financiers and service providers on a timely basis.
Going forward, these issues should be carefully considered from the outset in negotiating terms with financiers and service providers to ensure that sufficient funds are available to meet expenses whilst anticipated overpaid GST amounts remain in the Commissioner’s coffers.
What do you need to do?
As property development often have significant lead times, the GST withholding regime will almost certainly have an impact on your existing pipeline of projects as well as all future projects.
Property developers should carefully consider their existing:
- finance arrangements – do they have to be amended to avoid breaches under the new GST withholding regime?
- joint venture or development documentation – do they have to be amended to account for changes?
In addition, you may need to speak to your financiers about the financing mechanics of transitioning from project to project. That is, if developers can no longer use the GST payable as a form of short-term financing to acquire new sites, additional financing will be required through either:
- an increase existing facilities; or
- an alternative funding mix (such as mezzanine finance, private lending etc).
If you have any questions about how the new regime could affect you, feel free to get in touch.