Changes to GST on Property Transactions

From 1 July 2018 there will be changes to how GST is paid on the settlement of 'new residential premises' or 'potential residential land subdivisions'. Where these laws apply, the purchaser will be liable to the ATO for the GST component of the purchase price, so it's important you understand when the law applies and what your obligations are.

What is changing?

Purchasers of 'new residential premises' or 'potential residential land' included in a 'property subdivision plan' will be liable to the ATO for the GST component of the purchase price. 

GST is already included in the purchase price for these types of transactions, so this will not increase the price of property or land. Simply put, rather than the purchaser paying the whole purchase price to the seller and the seller paying the GST component to the ATO, the buyer will now pay the GST component directly to the ATO and pay the balance purchase price to the seller.

When does it take effect?

For most transactions, the changes take effect on contracts entered into on or after 1 July 2018. 

What transactions are affected?

The changes affect purchasers of 'new residential premises' and 'potential residential land' included in a 'property subdivision plan'. 

New Residential Premises are defined as "residential premises that have not been previously sold as residential premises". Think completed homes built buy a developer for sale.

Potential Residential Land included in a Property Subdivision Plan (think, off-the-plan) is land that:

• is permissible to use for residential purposes, but that does not contain any buildings that are residential premises. It applies even if the land use and planning laws permit a number of uses for the land, one of which is residential use; and
• is identified or described in a plan for the division of real property that is registered under an Australian Law

When does the GST have to be paid?

The purchaser must pay the GST amount to the ATO on or before the day on which any of the consideration is first provided, other than a 'genuine deposit'.

In English that means on or before settlement. Generally, a purchaser doesn't pay any amounts to the seller, other than a deposit, until settlement so this will be when the purchaser 'first provides consideration'. A deposit is a 'genuine deposit' until it is forfeited or applied as part of the purchase price at settlement.

How much GST is to be paid?

The vendor must provide the purchaser with a written notice before entering into the contract outlining how much GST is to be paid. However, even if the vendor fails to provide this notice, the purchaser is still obliged to make the GST payment. Generally the amount will be 1/11th of the contract price. So a contract for the purchase of of a $500,000 property will have a GST component of $45,454.54 ($500,000 / 11). So at settlement the purchaser would pay the ATO $45,454.54 and the seller $454,545.46.

The calculation differs in other circumstances (e.g. the GST component is 7% of the purchase price if the margin scheme applies to the supply), so it's important you consult your lawyer on the amount to be paid. A helpful table is provided by the ATO here. 

Wrapping up

As always, this is only a brief overview of a very technical area. We love to help, so if you have any questions regarding any of these changes, get in contact with us.