In addition to the commencement of the new restrictions on enforcement of “Ipso facto” clauses in documents (as mentioned in our previous Alert and Update), a number of other changes will also become effective on 1 July 2018.
In this Alert, we highlight some of these changes which will impact property transactions going forward.
- New GST Withholding tax regime to affect developer cash flows and settlement processes
- South Australian stamp duty regime to become Australia’s most wanted
- Australian Capital Territory to become more attractive
- Superannuation changes may release additional development sites.
NEW GST WITHHOLDING TAX REGIME TO AFFECT DEVELOPER CASHFLOWS AND SETTLEMENT PROCESSES
Purchasers to be responsible for paying GST to ATO
From I July 2018, purchasers of new residential premises (not being commercial residential premises or premises created as a result of substantial renovations) or potential residential land included in a property subdivision plan are required to pay the GST liability of the vendor/developer in respect of the sale.
In most cases, the amount must be paid to the ATO on or before settlement. The purchaser’s obligation may be satisfied by ensuring a bank cheque for the amount of the GST payable to the Commissioner of Taxation is given to the vendor/developer at settlement.
The rules apply not only to outright purchases but also the grant of long-term leases.
The amount to be paid will be either 1/11th of the sale price or if the sale is subject to the margin scheme, 7% of the sale price (or such other percentage as may be determined by the Minister from time to time). If the parties are associates, the amount to be paid is to be 10% of the GST exclusive market value.
What contracts do these rules affect?
The new rules apply to contracts entered into before, on or after 1 July 2018 where any consideration for the supply (other than the deposit) is paid on or after 1 July 2018. Happily, in respect of contracts entered into before 1 July 2018, the rules will not apply if the consideration (other than the deposit) is paid before 1 July 2020.
The rules also affect payment arrangements under development management agreements entered into before 1 July 2018.
What does this mean for vendors/developers?
The vendors/developers are entitled to a credit for the GST paid by the purchasers however their liability for GST is not affected.
Vendors/developers will be required to provide purchasers with written notice of whether GST is payable on the sale/supply as well as the amount and other information relating to the GST liability. Failure to provide such notice is a strict liability offence to which penalties apply.
Due to the GST payable on the supply having to be paid to the ATO on settlement, rather than when the vendor/developer submits its monthly or quarterly BAS, the vendor/developer’s cash flow will be adversely affected. This may create difficulties for vendors/developers in satisfying debts owing to third parties.
In addition, financiers expecting to receive the whole of the sale price (including GST) at settlement in reduction of the debt owing by the vendor/developer will now need additional sales to be settled before receiving all amounts owing.
The new regime places the ATO in a preferred position to secured creditors.
Contracts for sale and other documents under which the relevant supplies are made will need to be amended to deal with the new rules.
Obligations to comply with the new requirements will need to be included together with provisions dealing with the consequences of failure by either party to comply.
The need for vendors/developers to ensure the right amounts are notified to and paid by the purchasers (even if the actual payment is made by the vendor using the bank cheque mentioned above) may require the implementation of additional compliance systems.
SOUTH AUSTRALIAN STAMP DUTY REGIME TO BECOME AUSTRALIA’S MOST WANTED
Abolition of stamp duty on commercial property
From 1 July 2018, South Australia will no longer impose stamp duty on transfers of non- residential, non-primary production land. This change has been scheduled for the last 2 years with duty having been reduced by a third on each of 1 July 2016 and 1 July 2017.
This abolition of duty will apply irrespective of value. In addition, as the foreign purchaser stamp duty surcharge only applies to acquisitions of residential land, foreign investors will also be able to benefit from this change.
Vacant land may still be subject to duty but this will generally depend on its use or zoning.
Ad valorem registration fees will no longer apply to transfers of commercial property
Unlike NSW, in addition to stamp duty, a purchaser of land in South Australia is also required to pay the South Australian Land Titles Office ad valorem fees (calculated by reference to the value of the property) for registering the transfer. This can add up to hundreds of thousands of dollars on larger properties. As non-residential, non-primary production land will not be subject to stamp duty, these fees will not (based on the current practice of the Land Titles Office) apply, with only a fixed registration fee (currently $160) being payable.[i]
The above changes will make South Australia the least expensive Australian state to acquire commercial property (both from a tax perspective and most likely, in current market terms, a price perspective). Given this, the market in South Australia may be about to get a boost as investors take advantage of these matters (and take account of the fundamentally different circumstances which apply in the Eastern states).
AUSTRALIAN CAPITAL TERRITORY TO BECOME MORE ATTRACTIVE
From 1 July 2018, the Australian Capital Territory (ACT) will abolish stamp duty on transfers of commercial property (being property which is used wholly or partly for commercial purposes) valued at under $1.5m.
Despite the limit, this change may assist smaller developers to acquire commercial land for future developments thereby having a positive impact on the ACT market.
SUPERANNUATION CHANGES MAY RELEASE ADDITIONAL DEVELOPMENT SITES
As proposed by the 2017-2018 Federal Budget, from 1 July 2018, persons over the age of 65 who sell their family home (of 10 years or more) may each contribute up to $300,000 as an after-tax amount to their superannuation fund. The amount so contributed will not count towards the $1.6m contribution cap.
The significant benefit this can provide to the value of a senior’s superannuation fund may result in a large number of often large residential properties being placed on the market thereby presenting opportunities to developers.
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The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.
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[i] This should be checked with the South Australian Land Title Office on or about 1 July 2018