The GST withholding regime came into effect on 1 July 2018 and requires purchasers of new residential premises and potential residential land to withhold and pay directly to the ATO 1/11th of the contract price (if the margin scheme does not apply); or 7% of the contract price (if the margin scheme does apply).
It has become apparent that the drafting of the regime (an amendment to the Tax Administration Act 1953 (Act) via the Treasury Laws Amendment (2018 Measures No. 1, Act 2018) leaves a lot to be desired and poses a number of problems for purchasers.
The purchaser is required to pay the GST withholding amount to the ATO unless the purchaser relies on notice from the vendor advising that the GST withholding is not required and there is nothing in the contract or the surrounding circumstances to make it unreasonable for the purchaser to rely on the notice. Commonly, vendors will provide notice advising that no withholding is required but without any supporting information. It can be very difficult for the purchaser to determine whether the vendor’s notice is correct. If the ATO forms the view that vendor’s notice is incorrect and the surrounding circumstances mean that the purchaser is not entitled to rely on the vendor’s notice, the purchasers may be liable to a penalty equivalent to the amount of GST payable.
Section 16-20 of the Act discharges the purchaser’s liability to pay an amount to the vendor if that amount is paid to the ATO as required by Division 14. If the purchaser is wrong about the need to withhold the GST and pay the relevant amount of the purchase price to the ATO, the purchaser cannot rely on the discharge of liability under section 16-20 of the Act and could be liable to the vendor for that amount.
If the purchaser is required to make the withholding payment to the ATO but the vendor asserts that it is not required to be registered for GST, the parties will be in a stalemate. This will be as a result of the purchaser not being issued a payment reference number (PRN) to ensure the payment is credited to the correct account with the ATO.
Ultimately it would be preferable if the legislation is amended to:
- require the vendor to provide information as to the supplier entity including, whether or not the entity is registered or required to be registered for GST;
- extend the discharge of liability under section 16-20 of the Act to protect the purchaser where the purchaser acts reasonably in making the withholding payment even if it is ultimately determined that the payment is not required; and
- allow for a payment reference number to be generated even if the vendor is not registered for GST.
Pending such amendment to the legislation, purchasers should look to include suitable special conditions in their contracts of sale to deal with these issues.
If you or your clients require any assistance in the drafting of such clauses, please contact our team at Morrows Legal to schedule a meeting.