In recent times, Property Developer’s have adopted a relaxed attitude toward the remittance of GST on sales of units in development sites. Unfortunately, this attitude is not shared by the Australian Taxation Office (“ATO”).
The failure of Property Developers to remit GST to the ATO may be attributable to the depressed property market where end value sales in developments are not achieving what was originally anticipated and as a consequence, the banks are diligently applying pressure for the return of funds they have advanced.
Developers seem to be optimistically hoping that they will eventually sell enough units in a development site to enable them to remit outstanding GST amounts on previous sales or to rectify their GST arrears. The all too common Australian way of “she’ll be right and we’ll fix that up later on!” is no longer being tolerated by the ATO as an acceptable solution or a compromise they are willing to accept!
In recent months there has been a noticeable increase in the number of property development companies being wound up by the Court on the petition of the ATO for unremitted GST amounts from the realisation of property in development sites.
Financiers, including mezzanine financiers, are placing pressure on development companies to remit all of the settlement proceeds to reduce their secured debt or those debts without security. This has the flow on effect of leaving little or no funds to pay the ATO in respect of the GST liability arising on the sale.
Financiers are closely monitoring, and in some instances managing, settlements and pressuring directors to remit all of the settlement proceeds, after incidentals such as Council rates, legal fees and adjustments for outstanding strata levies. In essence, approximately 98% of all settlement proceeds are paid to the financiers or secured creditors in respect of the sale.
The pressure being exerted by the financiers has resulted in developers adopting a mind set that only after a majority of the units are sold and the debts of the financiers discharged will they look to address the outstanding GST liabilities which have arisen on the sales. Directors invariably advise they had no choice as the financiers insisted they receive all of the funds from the settlement proceeds.
As the Vendor of the property, Property Developers or development companies do have a choice and do still control the allocation and distribution of the settlement proceeds. I often ask directors of development companies, “Why didn’t you tell the financiers you need to retain sufficient funds from settlement to pay the GST?”. Directors invariably respond with, “No! the financiers wanted all of the settlement proceeds!”.
Directors ought to be aware that the development company is the Vendor and as such, it retains control of the settlement process, unless the financiers have formally entered in possession of the property.
The ATO has become more proactive in the winding up of companies in recent months, particularly Property Developers for their failure to remit GST liabilities from the sale of properties. I have spoken with a number of Accountants who have tried to negotiate with the ATO on behalf of their Clients in this particular area. Unfortunately, the ATO was not prepared to negotiate the GST liability.
Although, the GST accrues on settlement, the company’s liability only crystallises when it lodges the Business Activity Statement (“BAS”) for the relevant period. After two successive BAS’ are lodged with significant GST liabilities from property sales, the company, or its Accountant, approach the ATO to negotiate a repayment arrangement. Alternatively, the ATO arranges for a GST audit. The ATO has made its position clear that it will not negotiate GST liabilities which arise from sales of development sites as the funds ought to have been set aside for the liability on settlement.
I recently encountered an example where a Secured Financier appointed a Receiver over a development site after numerous defaults by the Property Developer. After the sale of several units, the Secured Financier subsequently retired the Receiver after realising the Receiver, as Vendor, would be liable to remit GST on the property sales. The Secured Financier then insisted that the company’s director(s) continue to market and sell the remaining units in the development site and remit 98% of the settlement proceeds to it in reduction of its secured debt.
The GST liability continued to accrue against this company with the inevitable result of the ATO winding up the company for unremitted GST liabilities. The Secured Financier then promptly reappointed a Receiver to deal with the realisation of the remaining units.
If you have any queries in relation to property, construction or development sites, please do not hesitate to contact Associate, Darren Shone in our Newcastle office on (02) 4962 2688.
