In an update on their website last week, law firm Dentons explained that the recently announced federal budget includes a “radical” plan to shift the responsibility of accounting for GST from property developers to purchasers.
According to the law firm, the new proposal also has ramifications for lenders. Notably, the full proceeds of sales usually required by lenders will be reduced by the GST deduction.
“By shifting the GST obligation to purchasers, the amount of GST remitted on sales by the purchasers may exceed the forecasted GST liability for the development. Apart from the potential impact this may have on the developer’s ‘bottom line’, it may affect the lender’s security in several ways,” Dentons explained.
For example, if the GST payable by the purchaser to the ATO is non-final, the GST amount paid to the ATO at settlement may “substantially exceed” the developer’s final GST liability.
“In those circumstances, we would expect the developer to be able to claw back the difference as a refund but the refund would normally be paid to the developer following its next BAS, which will be after settlement and after the lender’s security has been discharged,” Dentons said.
Secondly, if the GST payable by the purchaser is a final tax where the purchase price includes GST, the purchaser is likely to adopt the most conservative method of calculating the GST to ensure that he or she meets his or her obligation.
“That may result in the purchaser overpaying GST which may in turn reduce the net sale proceeds available to the vendor, including a receiver or mortgagee in possession.”
Dentons noted that at this stage it is not clear how the new rules will apply to:
a. existing off-the-plan contracts where settlement will occur after 1 July 2018; and
b. contracts exchanged between 9 May 2017 to 1 July 2018 where settlement will be after 1 July 2018.
The proposal is currently scheduled to commence on 1 July 2018.