After several failed attempts to prevent illegal ‘phoenixing’ regarding GST in the property development industry, the ATO has settled on a broad-brush legislative solution that will affect all suppliers and purchasers of new residential property and, to a lesser extent, existing residential property.
As we described previously, ‘phoenixing’ (registering a new company to take over the failed or insolvent business of a predecessor) remains a legitimate form of business rescue. It becomes fraudulent when it is carried out to intentionally avoid paying creditors by stripping the old company of assets leaving it insolvent.
The July 1st changes address the fraudulent ‘phoenixing’ of GST liabilities. This occurred where GST was paid to the supplier of new residential premises or land on settlement then the supplier’s business was liquidated before the GST was declared to the ATO.
In the five years to 2017, fraudulent ‘phoenixing’ cost the public purse $ 1.8 billion in GST. Reports to the 2015 Senate Inquiry “Insolvency in the Australian construction industry”, described how ‘phoenixing’ developers, who tender ‘net of tax’ with full intention of avoiding tax liabilities, unfairly disadvantage and outcompete compliant operators.
To curb the illegal practice, new legislation will be applied from July 1 making purchasers responsible for remittance of GST to the ATO.
The changes apply to supply of new residential premises (premises not previously sold as residential premises) and potential residential land (land zoned for mixed or residential use but does not currently contain residential buildings).
The measures do not apply to commercial residential premises such as hotels and motels, new residential premises created by substantial renovations, potential residential land that contains a commercial building currently in use for a commercial purpose, or taxable supplies of potential residential land between GST registered entities where the property is acquired for creditable purposes.
Suppliers of all residential property will be liable for the GST and are required to notify the purchaser if GST applies to the transaction. Where GST does not apply, only a simple notice to the purchaser is required. If GST does apply, notification to the purchaser will need to be more comprehensive and penalties apply for failure to provide correct information.
The purchaser is obliged to remit the GST to the ATO on or before settlement.
Purchasers who do not make payment will be penalised and liable for general interest charges unless they did not receive notice. Purchasers are not obliged to confirm, or otherwise, the accuracy of the information they have received from the supplier unless other information contradicts or challenges the validity of the supplier notification. As it is early days, purchasers’ capacity to determine the merit of conflicting information is yet to be tested.
Purchasers will not be penalised by the ATO for mistakenly remitting GST. However, they may not be protected from contractual claims by suppliers for damages that ensue from reduced cash flow. It is possible that purchasers may seek contractual indemnity against potential claims in the future.
Several commentators have suggested that developers will want certainty that GST has been paid and cleared before handing over title, and that PEXA may provide this. However, the recent hacking of a conveyancer’s email account and theft of over $100,000 on its way to PEXA may shake purchaser confidence in the platform.
Other complexities around implementation of the new system are bound to arise. As Shaw Gidley strives to meet our obligations to report suspected fraudulent ‘phoenixing’, it will be interesting to see if the new instrument will simply disrupt cash flow and increase administrative burdens for compliant suppliers but be worked around yet again by non-compliant operators. Watch this space.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.