Residential Withholding Payment
A residential withholding payment is a Goods and Services Tax (GST) amount the buyer of a new residential premises or potential residential land must withhold from the contract price and pay to the Australian Tax Office (ATO) on settlement.
New residential premises are premises which have not been previously sold, or have been created via substantial renovations, or are new buildings that replace demolished buildings on the same land.
Potential residential land is land where a residence is allowed to be built. This includes land zoned for a mix of residential and commercial use.
How is the residential withholding payment calculated?
The amount to be withheld will depend on GST law but is generally either:
- 1/11th of the contract price; or
- 7% of the contract price (margin scheme); or
- 10% of the GST exclusive market value of the property (for sales between associated for consideration less than GST inclusive market value).
If there is non-monetary consideration in the contract, (such as a land swap), the amount is calculated as a proportion of the monetary consideration (including GST), plus the GST-inclusive market value of the non-monetary consideration.
The margin scheme provides GST relief for people who sell property as part of their business, and they owned that property before the GST was introduced in 2000. It does this by eliminating the increase in value of land from when it was acquired until 2000. Therefore the amount of GST payable is based on the “margin”, which is the difference between the amount paid for the property and the value of the property at the time the seller registered for GST.
Both parties to the sale must agree in writing before settlement that the scheme is to apply.
How is the residential withholding payment made?
The seller must give a written notification to the buyer about whether a residential withholding payment must be made.
The buyer must complete two online forms to make the residential withholding payment:
- Form 1: GST property settlement withholding notification
- Form 2: GST property settlement date confirmation
Once Form 1 is lodged, a lodgment reference number and payment reference number is provided. Form 2 must be lodged after settlement to ensure the payment is processed.
The due date is the day of settlement or the day the first instalment is paid under an instalment contract.
Payment can be made via e-conveyancing, BPAY, bank card, electronic transfer, at AusPost and by mail.
Once payment is received, the ATO sends a confirmation email.
Why was the residential withholding payment introduced?
The residential withholding payment was introduced in 2018 to prevent “phoenixing” in the building industry. Prior to the change, some developers had accepted a purchase price that included GST at settlement, but dissolved their company before handing the GST to the ATO and created another company for the next development. The change meant the ATO received the GST payment directly from buyers. It was legislated by the Treasury Laws Amendment (2018 Measures No. 1) Act 2018.
Compliance and penalties
There are penalties if the payment is not made, and interest may apply.
If a seller fails to supply the required notification to a buyer, they face a fine of 100 penalty units ($22,000). The breach can be considered a strict liability offence, which means the seller could be prosecuted by a court, or an administrative penalty. A seller will not be penalised if they reasonably believed they did not need to notify the buyer or made and honest and reasonable mistake about how the notice requirements applied.
If a buyer fails to withhold or pay an amount required, the administrative penalty is equal to the amount the buyer was required to pay. The buyer will not be penalised if they were relying on notification from the seller or if the buyer supplied to the seller a bank cheque payable to the Commissioner of Taxation for the withholding amount.
If a buyer fails to lodge with the ATO the required online forms, the buyer can be penalised one penalty unit ($222) for each 28-day period up to a maximum of five penalty units. Higher penalties can apply based on turnover.
For advice or representation in any legal matter, please contact Armstrong Legal.