Michelle Bennett, KPMG Indirect Tax Partner, said of the draft measures released by the government on 7 November. “These well-intentioned measures – aimed at the real and costly practice of 'phoenixing' in the construction industry, where companies go bust after receiving GST payments from customers – will have the effect of turning first-time buyers into unpaid tax collectors, assuming more risk and adding to the already daunting task of navigating the property market.”
It is right that action is taken on this practice, which the government’s Explanatory Memorandum estimates cost Australia $2bn between 2011-15. The EM defines phoenixing as ‘where developers collect GST on the purchase price of a supply but dissolve their business before their next Business Activity Statement (BAS) lodgement to avoid remitting the GST’. Compliance measures are noted to be expensive and time-consuming and have ‘proven to be inadequate, as the problem usually emerges well after the property transaction has occurred.’
Unfortunately the proposed solution reinforces purchasers’ unwitting position as the ATO’s first line of defence against fraud by property developers. Already many buyers are required to guard against foreign vendors (with the requirement for buyers to obtain clearance certificates). Now purchasers of new residential premises and home lots will be asked to hold back 1/11th of the purchase price and pay it to the ATO as an instalment against the developer’s liability for GST on the sale.
The government has stated that buyers should experience only ‘minimal impact’ from the change in law. However this new obligation imposed on purchasers will increase the complexity and risk of buying and financing new property so it is likely that the buyers’ costs will also increase. Honest developers will also be effectively penalised. One of the explicit benefits to the government is not just protecting the revenue, but getting better cash-flow at the expense of developers who do comply and pay their GST in accordance with their standard BAS lodgement timelines.
A developer’s current ‘windfall’ in holding cash for up to 3 months before their BAS is due is highlighted – but the corresponding delay for when developers can claim credits during the project life is not acknowledged. Both are a function of the design of the tax system.
In addition, where the GST margin scheme applies, the developers will have to wait up to three months or make a separate application to recover amounts withheld which exceed their actual GST liability. It is easy to imagine these incursions on developer’s margins will feed into higher prices.
To further aggravate the impact on developers, the amount to be withheld by purchasers will frequently exceed the amount that the vendor is liable to pay (due to the GST ‘margin scheme’ concession) further exacerbating the developers’ funding cost. The purchaser will also bear the risk of non-compliance, so banks and conveyancers will need to implement measure to manage their risk and facilitate compliance.
All of this is, ironically, likely to increase the cost of new housing and the transactions costs incurred by home buyers.”
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