Practitioners are no doubt aware of the GST
withholding rules applicable to transactions after 1 July 2018. The rules
effectively mean that purchasers need to be the new GST police to ensure that
sellers are doing the right thing.
What’s different now?
GST has traditionally been an imposition on the
seller. Other than in limited situations (such as margin schemes), purchasers
have generally not paid too much attention to how the seller treats the transaction
for GST purposes.
The new GST withholding rules mean purchasers
now need to pay utmost attention to this matter. Why?
Firstly, the new rules require purchasers to
withhold an amount for GST in respect of certain transactions – such as the
sale of new residential premises. The purchaser is subject to a penalty if it
fails to withhold.
Secondly, the new rules require sellers to give
the purchaser a written notice stating whether the purchaser is required to
withhold and the amount of the withholding.
However, if the notice says no withholding is
required, simply relying on this notice may not be enough for the purchaser.
Why can’t I simply rely on the seller’s GST notice?
If the notice is wrong and the purchaser is in
fact required to withhold, it is only a defence to penalties for the purchaser if
there was also nothing in the contract or in any other circumstances relating
to the transaction that made it unreasonable for the purchaser to believe that
the notice was correct.
The explanatory memorandum to the new rules
states that there is no obligation on the purchaser to make additional inquiries.
Rather, purchasers need to ask themselves – what
do I already know about the circumstances of the seller?
Alarm bells should ring if, for example, the
seller’s notice states that the premises are not new residential premises.
However, the purchaser is buying off the plan and knows it is a new home.
Alternatively, the seller states that it is not carrying on an enterprise.
However, the circumstances of the development indicate to the purchaser that
the tax authority may take a different view.
Don’t leave it too late
These tricky questions often come to the fore as
transactions get very close to settlement. If they are not addressed well ahead
of time, the refusal of the purchaser to settle without a GST withholding being
made may lead the seller to issue a notice of default. To prevent the seller from
terminating the contract and retaining the deposit, purchaser may then need to
consider whether urgent interlocutory relief in the courts is required.
To prevent things from getting nasty very
quickly at the end, purchasers should be comfortable with the GST position well
ahead of settlement. If in doubt, specialist tax advice should be sought.
This article was written by
Matthew Meng, Barrister. If you require more information on how GST withholding works, what is the amount of GST withholding, or whether your property purchase is subject to these regulations, please get in touch.
