GST Payable on Forfeited Deposits

Author: Samantha Ellis

Publish Date: July 10, 2008

In the recent decision of Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22 the High Court of Australia altered the position of GST payable on forfeited deposits in relation to commercial property transactions.

The Facts

The purchaser entered into an agreement with the vendor to purchase the vendor’s commercial property. Contracts were exchanged with an option for the purchaser to defer for six months. The purchaser opted to defer however failed to complete by the due date and the vendor rescinded the contract and forfeited the deposit.

The Commissioner of Taxation decided that the vendor was liable for GST on the forfeited deposit.  The vendor appealed to the AAT with no success. On appeal, the full court of the Federal Court held that the deposit was not taxable supply because the contract was rescinded.  However, the High Court unanimously agreed with the Commissioner of Taxation that the amount was taxable supply and is subject to GST.

The Outcome

The decision was made based on A New Tax System (Goods and Services Tax) Act 1999 (Cth), which states GST is payable by the taxpayer (vendor) on a *taxable supply for which the *consideration is a deposit that was held as security for the performance of an obligation. 

The payment of the deposit by the purchaser and exchange of contracts is deemed to be a taxable supply as it creates an obligation for the vendor to maintain the property and an "ultimate obligation to transfer title to the purchaser".

If the sale had have gone to completion the GST would have been payable by the vendor on completion, for the transfer of title and in consideration of those interim obligations.   

In the case of termination due to the purchaser’s breach it is the act of forfeiture that brings about the GST event due to the vendor performing those interim obligations.  GST relating to deposits that are forfeited become payable by the vendor during the tax period in which the deposit is forfeited and not during the period of supply. 

What this means for you?

Vendors registered or required to be registered for GST may consider negotiating a deposit for security which is 10% of the purchase price plus GST or at least be aware that if the sale is terminated due to the purchasers default that it will be liable for GST on the deposit.

The Commissioner of Taxation has taken a broad view of the decision and has stated that the decision in Reliance “is equally applicable to cases involving the forfeiture of deposits on contracts for the provision of goods and services generally.” 

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