Property Transactions – New GST Withholding Rules

On 1 July 2018, the Australian Taxation Office (“ATO”) introduced new GST withholding rules for certain property transactions, to deal with the significant loss of revenue that had occurred as a result “phoenix activities” in which GST was collected by some sellers from buyers in property transactions but was not remitted to the ATO.

So, whom does it affect?

The new GST rules are applicable to settlements occurring from 1 July 2018 and apply to buyers and sellers of property transactions relating to the following residential land:

– “Potential residential land” – being land permissible for residential purposes but not yet containing buildings of a residential nature. But does not apply to properties used for commercial purposes; and
– “New residential premises” – being new residential premises that have not previously been sold as residential premises or premises which result from the construction of a new building to replace a demolished building on the same land. But does not apply to commercial residential premises or those that have been substantially renovated.

Importantly, the new rules do not affect contracts entered into before 1 July 2018, unless settlement of the contract takes place on or after 1 July 2020.

An exception also exists in circumstances where the buyer is registered for GST and acquires the property for a ‘”creditable purpose”.

How does it work?

All sellers of residential property or residential land are required to give specific notice to buyers as to whether the purchase of the property is subject to GST withholding.

If GST withholding does not apply, then sellers are merely required to notify buyers of that fact.

However, if the purchase is subject to GST withholding then the seller is required to provide the buyer with written notice of:

– the seller’s name and ABN;
– the amount to be withheld by the buyer; and
– when the buyer is required to pay the withheld amount.

How much GST is required to be withheld?

The amount of GST to be withheld will ordinarily be 1/11th of the contract price. Alternatively, it will be 7% of the contract price in circumstances where the parties have agreed that a margin scheme applies.

What are the penalties for non-compliance?

Strict liability penalties for non-compliance with the new rules exist for both buyers and sellers.

Sellers are required to identify if GST will need to be withheld and if so to give notice to buyers. Failure of a seller to provide notification to a buyer regarding GST withholding can result in penalties of up to $105,000 for companies and up to $21,000 for individuals.

Buyers are required to the withheld GST to the ATO on or before settlement. Failure of a buyer to withhold the GST and to pay the ATO the amount the buyer was supposed to withhold can result in an administrative penalty equal to 100% of the amount that should have been withheld.

Credits for GST withholding tax

Sellers may be entitled to include the GST in their BAS and to receive a credit for the GST that has been withheld.

However, the credit is only available in circumstances where the buyer has actually paid the withheld amount to the ATO.

Therefore, given the GST withholding requirements now provide for the GST liability to be at settlement and that sellers will not be provided with the credit until their BAS is lodged, from a commercial perspective it is important for sellers to effectively manage their cash flow.

Sellers should also give consideration to protecting themselves against buyers failing to remit the withheld GST to the ATO as required.

How can we help?

Contracts of sale in all states and territories need to be updated to incorporate the new GST withholding and notification obligations. Given the strict penalties that apply for non-compliance it is important for both buyers and sellers to seek independent legal and/or taxation advice before entering into a contract.

If you need any assistance on property transactions and your legal obligations, please do not hesitate to contact MKP Property Lawyers on 1300 695 397.

The above article is not intended to be a substitute for legal advice.

Michelle Kelly, Associate

How to sign a deed, and why it’s important

Deeds are regularly signed incorrectly by individuals, companies and powers of attorney on behalf of parties. A failure to sign a deed correctly can, as its worst consequence, result in the deed being unenforceable. It can also result in things like:

a) lenders refusing to fund;
b) further documentation being required;
c) tax consequences;
d) difficulty in opening things like bank accounts; and
e) litigation.

I am sure we would all agree that the above is all best avoided where possible. It is time consuming, stressful, and costly: potentially extremely so.

  1. Signing a deed as an individual

When signing a deed as an individual, you will usually see the words “signed, sealed and delivered” next to where you are required to sign.[1] This is really an old fashioned statement which means the document has been executed (signed), in front of a witness (sealed) and there is another party to the deed to whom you are producing it (delivered).

It is important, though, that these matters are complied with.

When executing a deed, you must sign in front of an independent adult person who also then executes as your witness. An independent person can be anyone independent of the deed, unlike some other documents which require authorised witnesses such as lawyers or justices of the peace.

It is very important that said person is definitely independent: otherwise their execution as a witness, and the enforceability of the deed itself, can be called into question.

These rules apply when you are signing as an individual partner on behalf of a partnership as well.

  1. Signing a deed as a company

A company does not require a witness when signing: the property law legislation in each state requires that companies sign deeds in accordance with section 127 of the Corporations Act 2001 (Cth).

Here, it is important to be aware of who can sign on behalf of your company.

a) If there is a sole director and no company secretary: the sole director must sign as sole director and confirm there is no company secretary;[2] 
b) If there is a sole director who is also the company secretary: that person must sign and note that they are the sole director who is also the sole company secretary;
c) If there is more than one director and/or company secretary: two of those people must sign to bind the company.

Regularly, clients of ours are not aware that when their company was set up, their husband/wife was added as a director/company secretary and attempt to sign deeds as sole directors. It is very important that you know who is a director and a company secretary of your company: for executing deeds and more generally for running your company.

The above rules apply when you are signing as a company partner on behalf of a partnership as well.

  1. Signing a deed as directed

Finally, companies may, by resolution of the board of directors, direct that someone to sign for the company,[3] or, a party may sign a deed appointing a power of attorney. There is some question as to whether a deed is enforceable where signed pursuant to a resolution only, so we recommend you seek advice about that direction prior to executing a deed.

There are several important factors around signing on behalf of an individual or a company when you are a power of attorney. This includes, where signing as a power of attorney for an individual, such execution being in the best interest of that individual.

We recommend you simply seek advice about your appointment prior to execution of any documentation as an attorney.

If you are unsure how to sign a deed or whether your deed has been signed correctly, please contact JHK Legal on 07 3859 4500.  The above article is not intended to be a substitute for legal advice.

[1] This varies from state to state, but broadly this applies.

[2] Importantly: this is not covered by section 127 of the Corporations Act 2001 (Cth), and therefore it is always best practice to have a company secretary to your company in Australia.

[3] A resolution of the board in and of itself may not be enough to appoint a power of attorney: it is important that you speak to a solicitor to assist you with any appointment.

Joint Tenants or Tenants in Common?

“Are you buying the property as joint tenants or tenants in common?” A question often followed by a furrowed brow and the response “what’s the difference?”

When two or more people purchase a property, they need to decide whether they will hold the property as joint tenants or tenants in common.

Joint Tenants

Joint tenants each own the whole property jointly with the other owners. Upon the death of one of the joint tenants their share automatically goes to the other joint tenants regardless of what the deceased has said in their will. This legal process is called survivorship.

For married or de facto couples who want their share to go to their partner on death, this is usually the tenancy of choice.

Tenants in Common

Tenants in common own their share of the property individually, usually in proportion to the percentage of money they have contributed to the purchase price. The share of a tenant in common who dies will be distributed in accordance with their will. In the absence of a will, their share will be dealt with in accordance with the rules that apply upon intestacy.

Each tenant in common, regardless of the size of their share, has an equal right to possession of the whole property, but not the exclusive right to possession of any part of it.

If you have any questions about this article, please contact Patrick on 1300 MyKeysPlease or patrick@mykeysplease.com.au for further information.

These comments on the subject matter are for general information only and do not constitute advice. Professional legal advice should always be taken before and decision is made.