GST on Forfeited Deposits by Paul Anderson | August 2007 Area of Expertise | Business and Property
The Federal Court of Australia has handed down a decision dealing with the question of whether or not a forfeited deposit lodged in connection with the sale of real estate is liable for GST. The case is Reliance Carpet Co Pty Limited v Commissioner of Taxation.
Facts Simpliﬁed slightly, the facts were relatively straight forward. Early in 2002 the Vendor (Reliance Carpet Co Pty Limited) exchanged a contract with 699 Burke Road Pty Limited (the Purchaser involved) for the sale of a property at 699 Burke Road, Camberwell, Victoria for the sum of $2,975,000.00 plus GST. A deposit of $297,500.00 was paid. The settlement date was originally to be 10 January 2003 but the Purchaser exercised a right to extend the settlement by 6 months to 10 July 2003. When the Purchaser did not settle on that date, the Vendor issued a 14 day rescission notice but the Purchaser still failed to complete. On 26 July 2003, the contract was rescinded and the deposit was forfeited to the Applicant. The Commissioner of Taxation then assessed the Vendor/Applicant as being liable to pay GST in respect of the forfeited deposit. The Applicant objected to the assessment and the Commissioner disallowed the objection. The Administrative Appeals Tribunal then approved the Commissioner’s decision.
Legislation Under Section 7 – 1 of the A New Tax System (Goods & Services Tax) Act 1999 (the GST Act) GST is payable on a taxable supply. “Supply” is very broadly deﬁned and in appropriate circumstances can certainly include the sale of real estate. Under Section 9 – 5 one of the conditions for a “taxable supply” is the need to have a supply for consideration. Division 29 of the GST Act provides rules for the attribution of the GST payable on a taxable supply to a tax period. Under the general rule in section 29 – 5, the supplier becomes liable to pay GST on the earlier of the supplier receiving any of the consideration for the taxable supply and the supplier issuing an invoice relating to the supply. Division 99 of the GST Act provides special rules for dealing with deposits: “99 – 5 Giving a deposit as security does not constitute consideration 1.
A deposit held as security for the performance of an obligation is not treated as consideration for a supply, unless the deposit
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(a) is forfeited because of a failure to perform the obligation: or (b) is applied as all or part of the consideration for a supply. 2.
This section has effect despite section 9 – 15 (which is about consideration).
99 – 10 Attributing the GST relating to deposits that are forfeited etc. 1.
The GST payable by you on a taxable supply for which the consideration is a deposit that was held as security for the performance of an obligation is attributable to the tax period during which the deposit: (a) is forfeited because of a failure to perform the obligation: or (b) is applied as all or part of the consideration for a supply.
This section has effect despite section 29 – 5 (which is about attributing GST for taxable supplies).”
Explanatory Memorandum The Court comprising Heerey, Stone and Edmonds, JJ also referred to the Explanatory Memorandum to the Bill which became the GST Act. The Explanatory Memorandum set out that the legislative purpose was to subject to GST only those forfeited deposits which related to a transaction that would have been a taxable supply if the contract had been completed. In this case, the sale, if completed, was subject to GST and, therefore, the Commissioner argued that the Explanatory Memorandum supported the submission that the forfeited deposit should be liable for GST. However, the Court posed the question: “does the language of Section 99 – 5 permit a construction which accommodates that result?” The Court’s answer was “no” with the result that the forfeited deposit was not liable for GST.
Analysis The Court accepted the Applicant’s primary submission that on completion of the contract for sale there was a single “supply” within the meaning of Section 9 – 10 of the GST Act, namely the supply of the real property. Once the contract was terminated,“the supply for which the forfeited deposit can then be treated as consideration is not apparent”. In fact, no supply could be identiﬁed with the result that the forfeited deposit was not liable to GST. The Court rejected submissions by the Commissioner that there was a supply of the Applicant’s rights and/or obligations under the contract prior to its rescission (“interim obligations”) or a supply of the Applicant’s rights and/or obligations arising from the rescission of the contract (“rescission supplies”). The Commissioner’s main submission was that Division 99 of the GST Act clearly intended that forfeited deposits be treated as consideration for a supply and in effect the Division itself deemed that there was a taxable supply. The Court’s response was that the language of the Section was not clear enough to achieve the result claimed. The
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Court summed up its decision in the following words: “In conclusion then, we are unable to identify a supply upon the rescission of the contract for sale for which payment of the forfeited deposit may be treated as consideration, nor do we think s 99 – 5 operates so as to deem there to be a supply in such circumstances….” The result was that the appeal was allowed with costs.
Comment There can be little doubt that the decision would have come as a major surprise to the Commissioner. Although the amount of money involved is unlikely to be signiﬁcant because few deposits are forfeited, the Commissioner may well take the view that there is a matter of principle involved. It will be interesting to see whether an appeal is lodged to the High Court or whether legislation is introduced to amend Section 99 – 5 to ensure that a forfeited deposit is liable for GST in circumstances where the completed transaction would have been liable for GST.
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