GST Withholding Tax and Real Estate Contracts

The government in its wisdom has set a scheme where buyers will deduct GST from the Sale proceeds and pay it direct to the ATO. The CGT scheme for deducting money on sales by foreign residents over $749,999 has been such a success for the government they have now extended it to Developer sales.

In essence where land or a new dwelling (house or unit) is sold and the Seller is registered for GST then the amount of GST is deducted by the Buyer and paid to the ATO. 
For the scheme to apply:
  1. It has to be a new dwelling or vacant land which is capable of having a residence constructed on it. The Zoning has to allow residential use, even though you may have to make an application for a material change of use. So for example, rural land is caught but land zoned commercial is not. Also substantially renovated dwellings are not considered new dwellings.
  2. The Seller has to be registered for GST. For example if a plumber who is registered for GST builds a house and sells it he won’t be caught (because it is not part of his business) but a builder or land developer will be caught.
  3. The Buyer will deduct and pay 1/11 of the purchase price (settlement adjustments like rates are not taken into account) or 7% if the margin scheme is used, to the ATO.
Sounds simple but in practice there is a bit more to it and here is what you need to know when preparing contracts.

If the property you are selling is a new dwelling or residential land you need to ask the seller if they are registered for GST. If yes, ask the seller if they will be using the margin scheme. When you know the answer, tick the appropriate box. If they are using the margin scheme make sure a special condition is inserted.

Be careful with dwellings sold by builders or developers. These are classified as new dwellings until they have been sold or rented for 5 years.

Vacant land means land without any buildings on it, so land with commercial sheds will be exempt.

The REIQ contract is set up so that the Buyer will have a cheque made out to ATO which will be given to the Seller at Settlement. There are a number of forms that need to be submitted but this will be handled by the buyer’s solicitor.

Just to confuse things there are a few exemptions. If the Buyer is registered for GST and is buying land for the purpose of building a residential dwelling in the course of their business then you don’t deduct GST. This is the first question in the GST Withholding Section of the REIQ Contract. So tick this box if a builder is buying the land to build a house to sell. If you are not sure then leave this section blank.

We haven’t covered every situation you will come across so if are not sure please call us to discuss your situation.