

18 May 2017
To close the gap on “phoenix operators” and property developers that do not remit GST to the ATO following the completion and sale of their property development, the Federal Government has announced that it will implement a measure which will require purchasers to pay GST directly to the ATO. Senior Associate, Adam Rinaldi looks at the issues associated with the implementation of this measure and summarises the potential impact that other measures announced in the Budget will likely have on property related transactions and the property industry.
Background
As part of the Government’s commitment to ensure the integrity of Australia’s tax system, the Government announced in the 2017 Budget that from 1 July 2018 purchasers of newly constructed residential properties or land in new subdivisions will be required to pay the goods and services tax under A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST) (presently set at 10%) directly to the ATO as part of the settlement. The policy has been announced to strengthen GST law, maintain the integrity of the Australian taxation system and to ensure property developers comply with their GST obligations and remit GST on their residential sales.
The measure will be primarily implemented to address ATO concerns in relation to “phoenix operators” that do not remit GST to the ATO following the sale of their residential property. The term “phoenix operator” refers to companies that deliberately liquidate to avoid paying creditors. The ATO’s concerns are mostly aimed at targeting developers that:
The measure is aimed at securing payment of GST to the ATO in full without the ATO having to initiate recovery action in cases of non-payment.
In addition to the above, the other policy driver for the implementation of the measure is cash and liquidity. The Government estimates the measure will increase GST revenue by $660 million and increase GST payments to the states by $1.6 billion over the forward estimates period. The Property Council of Australia has questioned these revenue estimates and raised concern about their impact:
“This seems an extraordinary figure and we will be seeking additional information from the ATO about how these changes will work. This will impact the cash flow of thousands of builders and we want to see more details from the ATO.” 1
The Government has enunciated that as most purchasers use conveyancing services to complete their purchase, they should experience minimal impact from these changes. However, the measure was unanticipated and gives rise to the following practical issues:
The measure is scheduled to commence on 1 July 2018 and the impact of the measure will depend on the final form of legislation. Contracts which are to settle after 1 July 2018 should be reviewed prior to exchange to address some of the issues contemplated above and to address the risks associated with any potential shift in liability for the payment of GST to the purchaser.
Other Measures Announced
The Government will also impose a 50 per cent cap on foreign ownership in new property developments. This measure is being implemented to ensure that new housing supply is available for the use of Australians and to increase the housing stock for Australian purchasers. This will not be welcomed by developers that specialise in overseas marketing to foreign investors and could adversely affect the level of activity in relation to apartment developments.
To bolster the integrity of the capital gains tax rules, the Government will:
Contracts which are to settle after 1 July 2018 should be reviewed prior to exchange to address the change in capital gains tax withholding threshold and withholding rate.
For further information on how these issues might affect you or any proposed development or transaction, please contact one of our specialist property lawyers.
1. K Morrison (Chief executive, Property Council of Australia) Budget—Chief Executive’s Response to individual initiatives, 9 May 2017.