What is a 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 new buildings replacing demolished buildings on the same land.
Potential residential land is land where a residence is allowed to be built, including land zoned for a mix of commercial and residential use.
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 accepted a purchase price at settlement that included GST, but dissolved their company before passing on 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.
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 entities for less than the GST inclusive market value).
If there is non-monetary consideration in the contract, (e.g. a land swap), the amount is calculated as a proportion of the payment (incl. GST) plus the market value (incl GST) of the non-monetary consideration.
Margin scheme
The margin scheme provides GST relief for people who sell property as part of their business and who owned that property before the introduction of GST in 2000. It does this by eliminating the increase in the value of land between its acquisition date and 2000. The amount of GST payable is based on the difference between the amount paid for the property and its value when the seller registered for GST (the “margin”).
Both parties to the sale must agree before settlement in writing that the scheme is to apply.
How is the residential withholding payment made?
The seller must give the buyer written notice as to 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, the ATO provides a lodgement reference number and a payment reference number. Form 2 must be lodged after settlement for the payment to be processed.
The due date is either:
- 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 or by mail. On receipt of payment, the ATO sends a confirmation email.
Compliance and penalties
There are penalties if the payment is not made, and interest may apply.
Seller
If a seller fails to give the buyer the required written notice, a fine of 100 penalty units ($22,000) applies. As the breach can be considered a strict liability offence, the seller could be prosecuted by a court or be liable to pay an administrative penalty. A seller will not be penalised if they reasonably believed they did not need to notify the buyer or made an honest and reasonable mistake about how the notice requirements applied.
Buyer
If a buyer fails to withhold or pay a required amount, the administrative penalty is the amount they are required to pay. A buyer will not be penalised if they were relying on notification from the seller or if they gave the seller a bank cheque for the withholding amount payable to the Commissioner of Taxation.
If a buyer fails to lodge the required forms with the ATO, they can be penalised one penalty unit ($222) for each 28-day period to a maximum of five penalty units. Higher penalties can apply based on turnover.
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