Property developers and their extended family will face a significant change in the taxation of their developments. In particular the tax treatment of the goods and services tax remitted by purchasers of new residential premises will mean that Perth tax accountants will be called upon to help families doing the development.
The tax changes will come into force from 1 July 2018. And it requires that ALL purchasers of new residential premises remit 1/11th of the sale price, otherwise payable to the purchaser, direct to the Australian Tax Office.
Why? Some developers were selling the properties and receiving the cash on say, 1 April, and then arranging for their property development companies to be liquidated before the first BAS is due (28 July). And typically we are looking at a sledgehammer approach by the ATO to crack a small minority of people doing the wrong thing.
As a property developer you will need to give each purchaser the following:
1. The name and ABN of the entity that has sold the property;
2. The amount of GST that is required to be paid to the Tax Office and;
3. When the GST is payable.
While this appears to be a timing issue the business issues need to be considered properly.
Firstly some developers (wrongly) took the view that once the properties are sold, some debt is repaid and the cash starts to roll they can then lodge all of their BAS and get their tax obligations up to date. This was often done on the mistaken assumption that because the GST inputs on the full construction will equal the GST payable that nothing really of significance will occur – the net GST paid comes out the same. The current policy position taken by the Tax Office has, luckily, proved these people correct.
The GST cost will now be a direct payment to the ATO. So the delay in getting the BAS into the ATO, coupled with the margin scheme, will mean that a very large cash drain will occur to developers who are tardy with their tax obligations.
So how does it work? Let’s do an example
On 3 December 2018, Jack enters into a contract for the purchase of a new apartment with Perth Property Development Pty Ltd for $700,000.
The contract of sale included the correct information so Jack could withhold and remit the correct amount of GST payable to the Tax Office at settlement.
Settlement occurs on 6 June 2019. Jack’s lawyer tells Jack that he will be required to make a payment to the ATO on or before 6 June 2019. The lawyer, as part of the settlement, makes a payment as his agent to the ATO at settlement of $63,636 (being the GST component of the purchase).
Because Jack has paid $63,636 to the ATO, he does not have to provide this amount to Perth Property Development Pty Ltd, even though the contract price states that the consideration includes the $63,636.
Perth Property Development Pty Ltd receives a credit for this amount in their June BAS, and does not then have to make a payment of the amount when paying their net amount for the period.
Most developers will see the instant tax outcome of the above. Most new residential developments are sold using the GST margin scheme. So it is very rare that the sale price of the apartment to Jack will include $63,636 of GST.
The use of the margin scheme, together with the new law, will create a cash drain to Perth Property Development Pty Ltd. So the very quick lodgement of the BAS will be an integral part of the cash flow management strategy for any family undertaking a property development.
It is also important to note that the above law will apply to all new residential premises – not just off the plan apartments. So if you sell a turnkey house and land package, or if you sell a substantially renovated home you will also be caught by the operation of the new law.
Contracts for new homes will also need to be changed. In particular the GST will need to be carefully structured with instalment contracts otherwise the deposit will effectively be remitted to the Tax Office in GST.
Craig Seddon enters into a contract for a large home and land package with Perth Real Estate Pty Ltd, a developer, for $10m on 24 July 2019.
Craig Seddon and Perth Real Estate Pty Ltd agreed to pay a 10% deposit, and then two equal instalments of $4.5m each. The first instalment is payable on 24 July 2020, and the second instalment is payable on 1 January 2021.
Craig is required to make a payment to the ATO of $909,090 on the first instalment on 24 July 2020 (with is 1/11th of the whole contract price). Craig notifies the ATO five days before the payment is due, and then pays this amount on 24 July 2020. Craig then pays the balance of the first instalment payment to Jean Construction Co.
Because Craig has paid the amount directly to the ATO, he does not need to pay the balance of the first instalment to Jean Construction Co at the time the first payment is made.
Craig then pays the full second instalment of $4.5m on 1 January 2021.
Further, any property developer will need to give clear and direct tax advice to any potential purchaser to ensure that the timing of the GST remitted to the Tax Office is agreed upon. If the developer was lax with the process they could find that a purchaser of a new residential premises will take the safe option and pay all of the GST upfront to the Tax Office.
The implications also go beyond the family undertaking a property development. A settlement agent and finance broker involved in the transaction will also need to call in the expertise of a property tax accountant to make sure they do not breach their obligations – either in Perth or in the rest of Australia.
It is also important to note that these GST changes are in addition to the changes which require purchases of residential property in excess of $750,000 from foreign vendors to withhold tax.
What can be seen is that the government it increasingly attempting to tax at source their revenue stream from property transactions. This increased focus on families undertaking property development will require more considered tax planning and cash flow planning from a property tax savvy business advisor.
At Westcourt FBA we have significant skills in assisting family owned property developers and using various balance points within the tax law to allow a family to enjoy the most value from their property development.