There are certain specific GST laws with which property developers and other vendors of Australian real estate must comply when they sell residential property and/or land that has the potential to become residential land to purchasers; and this article has a focus on the effect of the Australian “GST at Settlement” laws on property developers and the feasibility of their developments. For legal or tax advice about these laws, we recommend that you consult the Australian Taxation Office (ATO) website or a relevant professional.

Australia's 2018 “GST at Settlement” laws require, among other things, that a purchaser of “new residential property” and/or “potential residential land” from a developer, under any contract for the sale and purchase of such property that is executed on or after the 1 July 2018, to withhold payment of any GST payable for the transaction from the developer and remit that GST-payable amount to the Australian Taxation Office (ATO) at the settlement of the purchase, unless:

  1. the purchase price is paid in instalments, in which case any relevant GST payable must be paid on or before the first instalment (following the payment of a relevant deposit) is made; or
  2. the purchaser is registered for GST and is making the purchase for a “creditable purpose”, in which case the purchaser’s withholding obligation does not apply.

Under the current GST laws, “new residential property” includes new residential premises (such as new houses and new apartments), and “potential residential land” includes vacant residential land that is permitted for residential use by the relevant local government.

In the case of a purchaser, who buys new residential property or potential residential land for monetary consideration and is not an associate of the vendor, the GST payable at settlement is 7% of the purchase price of that property if the margin scheme applies to the transaction, or one-eleventh of the GST that applies to the purchase price of that property if the full taxation method of GST applies to the transaction. (If the purchaser and the vendor are associates and the purchase price is less than the GST-inclusive market value of the property, 10% of GST-exclusive market value of the property is the GST payable by the purchaser.)

In the case of “new residential property” or “potential residential land” being sold under the margin scheme, if 7% of the value of such real estate items is too high or too low for the purposes of the overall amount of GST that needs to be remitted to the ATO for that scheme, appropriate GST credit or debit adjustments should be made at relevant Business Activity Statement intervals by the vendor.

The “GST at Settlement” laws were considered necessary because a significant minority of businesspeople were evading the payment of GST payable to the ATO by dissolving their businesses that had sold and settled their assets without remitting the relevant GST payable for the sale of these assets to the ATO or paying other debts. The evading businesspeople would then start a new business entity to do the same type of evasion again. This type of illegal mode of business operation is called “pheonixing” because, like the fabled phoenix bird, these businesspeople ‘rose again from the ashes’ (of their dissolved business entities).

Relative to the effect of the GST laws that preceded the “GST at Settlement” laws, the main financial effect of the current laws on tax-compliant property developers’ cashflows, has been to increase their interest costs on debts owed to external financiers that provide development finance for these developers’ “new residential property” developments. The principal reason for this increase in interest costs is that developers, who used to receive the GST component of settled sales of their newly developed residential properties, were able to help (at least temporarily) pay down their debts on development loans and thereby reduce interest costs before remitting GST on such properties; but now developers are prohibited from receiving the GST component of the sale price of these new properties except when “b” mentioned above applies. To see how interest costs for the developer are increased, consider this example:

Say five of ten newly developed residential apartments were sold “off-the-plan” by a developer in 2021 for a total of $5,500,000 (inclusive of $500,000 GST) and then settled soon after new certificates of title were issued for those apartments in 2022. If the outstanding debt on the development finance loan for the development at the time of settlement of these development sales was greater than $5.5 million, the developer’s BAS was submitted monthly, and the interest cost on the debt is 10% per annum, then the increased interest cost caused by the “GST at settlement” laws, relative to the older GST laws, for the month is probably greater than $4,167. The reason for this is that one-eleventh or $500,000 of the $5,500,000 purchase price of the apartments (the GST payable for the supply) is remitted directly by the purchasers of the apartments to the ATO, however, under the old GST laws, the developer received the whole purchase price and had an opportunity to temporarily pay down the level of the development’s debt for at least a month before remitting the $500,000 GST payable to the ATO in a month’s time or somewhat later.

Under the GST at Settlement laws, a vendor of residential premises (whether or not the premises are new) or potential residential land is required to provide a specific written note to the relevant purchaser prior to settlement that contains information on:

  1. whether or not the purchaser is required to withhold GST payment to the vendor;
  2. the amount to be withheld and the due date of payment of that amount to the ATO in the case where there is a withholding obligation; and
  3. certain other particulars as described in the relevant laws.

It is recommended that the vendor of residential properties and/or potential residential lands makes reasonable endeavours to obtain evidence that the purchasers of those properties have, where applicable, complied with their obligations to withhold GST and have in fact remitted the withheld GST to the ATO. This practice helps the vendor to not become liable for non-compliance.

The calculations that our software, Feastudy Professional, uses to deal with GST at Settlement are set out in some detail as follows:

In accord with the Australian “GST at Settlement” laws enacted in 2018, Feastudy assumes that, at the settlement of each purchase of a “new Residential property” from a GST-registered developer, the purchaser must remit to the Australian Taxation Office (ATO) either: seven percent (7%) of the purchase price of that property if the Margin Scheme (MS) applies to the transaction; or all of the GST that applies to the purchase price of that property if the Full Taxation (FT) method of GST applies to the transaction.

For the purposes of Feastudy, it is assumed that:

  1. "GST at Settlement” can only apply to Development files.
  2. ”New Residential property” is: one or more new residences and/or new one or more new residential allotments.
  3. When “the MS is to be applied” and "no Sell-On Income is MS taxed” are effectively entered in the GST Settings window, all Sell-On Income items for the file are for “new Residential property” for which “GST at Settlement” applies.
  4. “GST at Settlement” also applies to a Sell-On Income item for which a check is entered in the check box for the question, “Is this item for new Residential property?”, in the data entry window for that Sell-On Income item.

In the case of MS-taxed Sell-On Income items for “new Residential property” (as defined in Feastudy), if 7% of the value of such items is too high or too low for the purposes of the overall amount of GST that needs to be remitted to the ATO for the MS-taxed Sell-On Income, the program makes appropriate credit or debit adjustments at the relevant Business Activity Statement intervals. (The 2018 Australian “GST at Settlement” laws do not actually require a change in the overall [net] amount of GST that should be paid for a development’s GST-taxed development sales but they do require a change in the timing of the payment of GST cashflows that are relevant to “new Residential property.”)

(The detailed discussion of Feastudy’s “GST at Settlement” calculations ends here.)

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Mark Andrews
Managing Director
Devfeas Pty Ltd