Sam Mohammad, KPMG Indirect Tax Director, comments on the GST Bill introduced into Parliament this week:
Given that the operators of ‘phoenix’ companies have cost Australian taxpayers nearly $2bn in the last 5 years, then it is right for the Government to take decisive action to counter this practice. But KPMG warns that the measures proposed in the GST Bill will also affect honest developers and ‘mum and dad’ buyers – who will be turned into unpaid tax collectors.
The Government describes the practice of ‘phoenixing’ as “developers selling properties for a purchase price that reflects their GST obligations but dissolving their business before their next BAS lodgement to avoid remitting the GST”. Typically, a developer will obtain a cash flow benefit in holding the settlement proceeds for up to 3 months before their BAS and GST payment is due.
The Government believes that this timing and cash flow benefit – which is simply a function of the tax system – is the main enabler of phoenixing. But its counter-measures will now remove that cash flow benefit for all developers – and not just the unscrupulous ones.
Under the proposals, the developer will be obliged to notify the buyer whether – in the developer’s view – the buyer is required to withhold up to 1/11th of the contract price, and then pay that to the ATO. This puts the purchaser in the position as the ATO’s first line of defence against potential fraud by property developers.
What should get the attention of developers is the Government’s ‘stick’ approach to enforcement. Should a developer fail to notify the buyer of their obligation to withhold, or issue a notice which falsely represents that no withholding applies, the developer will have committed a strict liability offence. Under the proposals, developers face criminal penalties of up to $105,000 (for corporations) and $21,000 (for individuals) for the non-issue of a required notice or the issuance of a notice which misrepresents the transaction as not subject to withholding.
While the Government believes such strong disincentives are warranted, the threat of these onerous penalty provisions may push developers to take the cash flow hit and require the GST to be withheld, even where no withholding obligation exists.
There are a number of carve outs from the withholding regime, including supplies of ‘old’ residential premises, commercial properties and those premises which have been substantially renovated. However, with the threat of criminal and administrative penalties, developers are now being asked to classify with certainty whether a property falls in or out of the withholding regime and taking the downside risk if they are incorrect.
On the flipside, mum and dad buyers will also face significant penalties if they fail to withhold the GST when issued with a notice from the developer. There is also an ability for a buyer to take the conservative option and voluntarily withhold the GST, even where a developer is entitled not to issue a notice. This creates the potential for a commercial dispute between the parties, particularly where the property sits on the borderline of being residential premises or commercial residential premises.
This Bill is the result of public consultation undertaken late last year and the Government is to be commended for taking on board and addressing many of the issues and concerns raised by stakeholders. Nevertheless, in effect, these measures will require developers to be very clear and confident on the GST treatment of their supplies and for mum and dad buyers to act as the Government’s tax collectors. Somewhat ironically, in the hope of protecting the revenue, these measures will drive up the costs for any transaction involving residential property.
Associate Director, KPMG
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