An increasing number of businesses (particularly within the residential premises development sector) have used a practice known as ‘phoenixing’ to avoid their GST obligations, resulting in a significant loss of Government revenue.
In this context, phoenixing involves the intentional dissolution of a business prior to lodging a BAS. A business can avoid paying GST by phoenixing, as it is able to receive the full sale proceeds (typically at settlement) and dissolve prior to reporting the GST liability to the ATO (in a BAS). Although a legal obligation remains with the business to pay GST, it is generally difficult for the ATO, being an unsecured creditor, to recover the debt.
To discourage phoenixing, the GST withholding rules were introduced in Subdivision 14-E of Schedule 1 to provide a mechanism for the ATO to collect GST upfront. These rules apply to the supply of new residential premises and potential residential land (subject to certain exclusions), for which consideration for the supply (other than consideration provided as a deposit) is first provided on or after 1 July 2018 (with transitional rules for contracts entered into before this date– refer below).
Where GST withholding applies to a transaction, a property buyer is broadly required to withhold:
- 1/11 of the contract price (for supplies not made under the margin scheme);
- 7% of the contract price (for supplies under the margin scheme); or
- 10% of the GST exclusive market value of the supply (for supplies between associates for consideration less than the GST inclusive market value).