GST Withholding on Property Transactions
If you are buying or selling residential property, you need to know about the GST Withholding rules.
From 1 July 2018, purchasers of new residential premises or land are required to withhold a GST amount on settlement and pay it directly to the ATO on behalf of the vendor. These changes have been put in place to improve the integrity of the GST system on certain property transactions.
Not only does this result in additional record keeping requirements, but it may affect your cashflow, lending commitments, and the ability to settle a property due to the shortfall in proceeds.
Note: This GST withholding is separate from Foreign Resident CGT Withholding which we have discussed in a previous article.
When is GST payable on the sale of a property?
Any sale or long term lease of new residential premises, or residential land on a property subdivision plan is covered by the withholding obligation. A premises will cease to be new if it was rented for at least five years since it was constructed.
Excluded from withholding are:
- new commercial residential premises (e.g. hotels and motels)
- residential premises that have been substantially renovated
- land that is currently in use for a commercial purpose
- residential land sold to a purchaser registered for GST, for use in their business.
If I am selling new residential property, what do I do?
If you are the vendor, you have a requirement to notify the purchaser in writing of the following:
- your name and ABN
- the type of withholding which is applicable
- the amount they must withhold, and
- when that amount is due to be paid to the ATO.
The amount the purchaser must withhold and pay to the ATO is generally either:
- 1/11th of the contract price (for fully taxable supplies), or
- 7% of the contract price (for margin scheme supplies).
If you are selling to a related party, withholding is 10% of GST exclusive market value of the supply.
It is important to ensure that you report the property sale on the correct BAS corresponding to settlement. If the sale is reported in the incorrect quarter or month the ATO will not credit you the GST withheld at purchase.
If I am buying new residential property, what do I do?
The supplier must provide you with notice in writing before selling any residential premises or potential residential land stating:
- whether you need to withhold or not
- the amount that must be withheld
- when the amount is due to be paid to the ATO.
This notice may either be in the contract for sale, or in a separate document.
Note that the withheld amount is not an additional payment on top of the agreed purchase price. The purchaser is taken to have paid the supplier the amount that they withhold.
As part of the purchase process, you will need to lodge two forms with the ATO:
- Form 1: GST property settlement withholding notification online form
- Form 2: GST property settlement date confirmation online form
Form 1 is required to be lodged with the ATO at any time after the contract is signed and up until settlement. Form 2 is lodged on or before the settlement date.
These forms include payment reference numbers which will ensure the GST withheld and paid to the ATO is attributed to Vendor’s GST obligation. The ATO will then notify the Vendor by email following settlement that there is a GST credit available.
Your conveyancer may take care of this process for you.
It is important to note that the obligation to withhold lies with the purchaser. A failure by the supplier to provide correct notice does not remove your obligation to withhold. It is therefore imperative that you are aware of the requirements and ensure that you, your conveyancer, and your accountant are compliant with the legislation.
How can we help?
If you are unsure as to whether your property is classed as “new residential premises”, or if it has been used for some form of commercial purpose, or if for any other reason you are unsure of its GST status, then it is essential that you obtain tax advice from an accountant with expertise in these matters.
If the property you are selling is held by a trust, or is owned by a company, it is even more important that you obtain advice from your accountant as other tax implications may arise.
Assistance for buyers:
Marsh & Partners can review and verify the GST terms of your contract to ensure the withholding obligation is not missed.
Assistance for sellers:
- determining the correct method to report GST (Fully Taxable or Margin Scheme)
- calculating the GST payable under the sale
- ensuring the correct disclosures are made to the purchaser
- correctly recording the sale and withholding transactions in your accounting system
- taking care of the record keeping requirements in relation to the sale
- verification of GST withheld from property settlements
- preparation of your BAS.
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