GST at property settlement is a tax that needs to be deducted at settlement. It continues to catch out Mum and Dad developers walking the cashflow-type rope. Many are not aware that they will only have effectively 90% of the sale at settlement to play with. This can cause pain as interest rates bite and property prices decline in some areas.
Since July 2018, you may need to pay GST at settlement if you are selling or buying new residential premises or potential residential land. How GST is paid for certain property transactions affects purchasers, suppliers, and their financiers. For those non-residents, there is a further hit of non-resident withholding tax.
What is remitted at gst at property settlement
In essence, the purchaser must remit 10% (being GST) or 7% withholding GST margin scheme to MR ATO at settlement. This is regardless of if there is a first mortgage on the property.
A reconciliation of the final GST is done in the vendor’s next BAS and any amount payable or refundable is collected then. This puts the ATO squarely in the front of the cash handouts and leaves the balance scrambling. Those who rely on making a deal with the ATO for a repayment plan are unable to do so, and potentially if things a tight, a vendor could come out short.
Some penalties will apply if the Vendor fails to provide the required Notice or fails to notify the Purchaser of the required details. If either occurs, a penalty of $21,000 would be payable. This assumes the Vendor is an individual and maybe five times that if a corporate entity is involved. The ATO can catch up with people using its data-matching systems.
There is no requirement for Purchasers to be registered for GST.
GST withholding notification.
Before the settlement of GST property settlement, a GST property settlement withholding notification needs to be completed. This needs to be lodged online to the ATO; a conveyancer or legal representative can do this on the Purchaser’s behalf. This Form needs to be completed as soon as possible, and the ATO will provide a unique payment reference number (PRN) and lodgement reference number (LRN).
Once settlement has occurred, the GST property settlement date confirmation. The form must be completed with the unique PRN and LRN provided by the ATO.
Don’t panic a purchaser does not have to pay a GST withholding amount at the time when they deliver a genuine deposit on the property paid or the deposit is forfeited.
GST complications
Should it be found that the deposit is not a genuine deposit, it will be treated as part of the consideration for the supply. This means the purchaser may be required to pay a GST withholding amount on or before paying the vendor’s deposit.
Some developers think we can avoid the 10% withholding regime. They try this using an instalment contract. Under this arrangement, when the purchaser pays the purchase price balance. Instalment contracts mean that the first payment under an instalment contract is the first day the purchaser pays any of the consideration for the supply. Therefore, the purchaser must pay the GST withholding amount on, or before, the day they provide this first instalment payment. GST withholding amount to be paid.
Again, if instalments extend over 12 months, the ATO gets their money well before full settlement.
Under these rules, the ATO gets paid first. If liquidation occurs, the Bank may be short of its loan as the ATO has snaffled the first 10%. Effectively, the Bank will argue that the ATO has received a preferred payment. Then the Bank will chase the 10% from the Vendor who, in most cases, guaranteed the loan. This is important to note if the development goes into liquidation. It also may delay settlement as the Bank will not release a clear title.
Be ready to remit gst at property settlement.
As a seller, get your ducks lined up early. This will ensure you can proceed smoothly toward settlement. Make sure you have enough money to clear the title. If not, consider delaying the settlement and finding the potential shortfall or consulting a professional insolvency expert for advice on your actions.