In any property transaction, buyer and seller should understand the applicable tax laws. If you are purchasing a new residential property and land for living in the state of Victoria, there is a specific tax obligation known as the GST (Goods and Services Tax) withholding obligation. This is the tax obligation that causes a lot of confusion among buyers and sellers and understanding it is very crucial to avoid any unexpected costs after property settlement. In this blog we explain all you need to know about this tax, including who it applies to, under what condition it applies, and how to fulfill this tax obligation. Consulting a conveyancing lawyer in Melbourne can help navigate these complexities and ensure a smooth transaction.
What is the GST Withholding Obligation?
GST Withholding Obligation was introduced by the Australian Taxation Office (ATO) and it means that Goods and Services Tax (GST) needs to be paid during the settlement of your property and not later. The ATO has come up with this tax obligation in order to ensure that the tax collection process is smooth and to also reduce the risk of non-payment of GST later. For property buyers, it is very important to understand this obligation and to understand if it applies to them. Failing to understand or failing to oblige may result in penalties and will cause unnecessary issues with the settlement of your property. Here is a TLDR of this tax
When is it applicable: This obligation is specifically applicable in cases where the property being sold is a new residential property, vacant land for residential development, or certain other properties subject to GST.
What is my obligation: The GST withholding obligation requires the buyer to withhold a portion of the sale price at settlement and remit this directly to the ATO.
How is it calculated: The withheld amount is typically 1/11th of the sale price or 7% which is the margin scheme, representing the GST payable on the sale.
GST Withholding Obligation, When is it applicable?
GST withholding applicability is dependent on multiple factors. However, in general, it applies to a buyer when buying a new residential property or when buying vacant land intended for residential use. In addition, GST is only applicable when the seller is a GST-registered entity. In most cases, this means the seller is a business that builds and sells real estate residential properties.
GST is only applicable on brand new properties and does not apply to second hand properties. It is also applicable in case of land if the land is a residential land that has not been developed. GST obligations do not apply for commercial properties.
GST Obligations, what is your responsibility:
TLDR, to ensure compliance, the seller must provide the buyer with a notification statement confirming whether the sale is subject to GST and whether GST withholding applies. The buyer needs to withhold the correct amount and pay to ATO.
Buyer’s Responsibilities:
The buyer must ensure that they withhold the correct amount (usually 1/11th of the sale price) and pay it to the ATO at settlement. Failure to do so can lead to significant penalties. The buyer must also keep records of the payment, including the seller’s notification statement, for tax purposes.
Seller’s Responsibilities:
The seller’s role is to inform the buyer about the GST status of the property, including whether the sale is subject to GST. This is typically done through a notification statement provided to the buyer 14 days before settlement. If the seller fails to provide this information, it can complicate the transaction and potentially delay settlement.
GST Obligations, how is it calculated?
In Australia GST is 1/11 of the sale price. Sale of real estate where GST is applicable also 1/11 of the sale price. It is the buyer’s responsibility to calculate this amount correctly and transfer it to ATO. A receipt is issued by ATO and the buyer must keep this receipt as a record of payment.
Conclusion:
The GST withholding obligation is an essential part of property transactions in Victoria, particularly for new residential properties or land for development. Buyers must be aware of this obligation, calculate the withholding correctly, and ensure timely payment to the ATO to avoid penalties. Sellers, on the other hand, must provide the buyer with the necessary documentation to confirm the GST status of the sale.
To ensure full compliance and avoid complications, both buyers and sellers should seek professional advice from a conveyancer or tax expert when engaging in property transactions that involve GST withholding. Working with an expert in property transfer conveyancing in Melbourne will help navigate the legal requirements and avoid potential complications in your property transaction.