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Authorisation Number: 1051235433641
Date of advice: 20 July 2017
Subject: GST and security deposit
In relation to your proposed off the plan sale contract that will be entered into for the sale of new residential premises to be constructed at a specified address in a relevant State or Territory will the deposit set at 20% of the sale price received from foreign purchasers be a security deposit for the purposes of Division 99 of the GST Act?
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
Note: C Pty Ltd atf C Trust and the expression 'you’ refer to the same entity.
The Trustee for C Trust is registered for GST.
Three landowners being A Pty Ltd, B Pty Ltd atf B Trust and C Pty Ltd atf C Trust (the Landowners/the Vendors) currently own land at the specified address in a relevant State or Territory (the Property/the Land). New residential and commercial premises are currently being constructed on the Land and intend to include:
● a number of buildings that are residential, and
● a retail component
The three Landowners will be participants in an arrangement to develop the Property. You do not require the Commissioner to rule on whether the parties are partners in a partnership or joint venture participants.
You have provided a copy of the proposed 'Contract for the sale and purchase of land 2016 edition’ including the draft of Special Conditions (the Sale Contract/the Contract).
The Sale Contract includes explanations on the land ownership details:
● The Contract contains the whole agreement between the Landowner and the purchaser in connection with the purchase of the Property and any other thing in relation to the Property.
● At the date of the Contract the Landowners (or anyone or more of them) may not be the registered owner of the land comprising the development site but will be the registered owner of the stratum lot prior to settlement.
● On the execution page, the Contract indicates the Landowner to be the three landowners and the vendor to be D Pty Limited.
● Before completion, the ownership of the development site may change as between the entities comprising the Landowner in which event the form of transfer provided to the purchaser at completion will be signed by one or more of the Landowner entities.
● The registered owner of the stratum lot may not include all the entities named as Landowner on the front page of the Contract. Whichever of the entities named as Landowner that are a registered owner of the stratum lot at the time of registration of the strata plan will perform the Landowners’ obligation.
● Prior to completion (by transfer of land by corporate reconstruction or otherwise) the portions of the development site owned by some or all of the entities comprising the Landowner may transfer to one entity, and whichever entity or entities are the registered owner of the stratum lot at the time of registration of the strata plan will be the Landowner and will perform the Landowners’ obligation.
It is contemplated that the Vendors will collect a 10% deposit from some purchasers and a 20% deposit from those who are perceived to pose a greater risk of non-completion of the sale contract.
The Contract provides further details on payment of an additional deposit by Foreign Persons at clause 76:
(a) If the purchaser is a Foreign Person, the deposit payable under this contract will be a total of 20% of the price, which will be payable in two tranches, as follows:
(i) 10% of the price on the date of this contract; and
(ii) 10% of the price to be paid by a specified date, time being of the essence.
(b) If the purchaser does not pay the deposit strictly in accordance with this clause, the vendor will be entitled to terminate this contract forthwith and without notice to the purchaser.
(c) If the circumstances arise which entitle the vendor to keep or recover the deposit, the purchaser must immediately pay to the vendor any unpaid portion of the deposit. The vendor is entitled to recover from the purchaser the unpaid portion of the deposit as a debt. The purchaser must not and is not entitled to make any claim or set-off against the vendor in relation to the unpaid portion of the deposit.
'Foreign Person’ has the same meaning as in the Foreign Acquisitions and Takeovers Act 1975 (the FIRB Act), which is:
(a) an individual not ordinarily resident in Australia; or
(b) a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
(c) a corporation in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or
(d) the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
(e) the trustee of a trust in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or
(f) a foreign government; or
(g) any other person, or any other person that meets the conditions, prescribed by the regulations.
Note: In certain circumstances, an associate of a foreign person may be taken to be a foreign person even if the associate is not a foreign person (see subsection 54(7)).
The purchaser must pay the deposit to the deposit holder as stakeholder. If the purchaser does not comply with the Sale Contract, the vendor can terminate by serving a notice. After the termination the vendor can keep or recover the deposit (including interest earned on it).
If the contract completes on or before the completion date, the deposit is applied as part of the consideration for the sale price of the property.
The 20% deposit will be sought from a Foreign Person for the following reasons:
(a) In the current economic climate, a 20% deposit is required to act as an effective earnest to bind the contract, particularly where the long delay between entry into an off the plan contract and settlement gives rise to a higher likelihood of a change in circumstances on the part of the purchaser;
(b) Only purchasers that are truly committed to the off the plan purchase will exchange contracts, as evidenced by their ability and willingness to fund a 20% deposit;
(c) The 20% deposit is appropriate in order to act as an earnest to bind the contract in circumstances where the purchaser is a non-resident as, in the event of a default, it would be difficult to enforce any judgment for damages in respect of non-residents;
(d) It has been the Vendors’ recent experience that the default rate for foreign resident purchasers is significantly higher than that of the market generally. In respect of recent development known as XYZ undertaken by entities related to the Vendors, the default rate for foreign resident purchasers was 10% as compared to what is understood to be the market average of 1-2%.
(e) Australian banks are enforcing stricter requirements in relation to presales to foreign residents in moderating the growth of investment lending in accordance with Australian Prudential Regulation Authority (APRA) regulations.
(f) The amount of deposit is consistent with the fact that most banks require purchasers buying off the plan to have 20% deposit before they will fund the balance of the purchase price.
(g) The property sold off the plan will be customised in some respects according to the wishes of the purchaser, for example, colour scheme and the Vendors consequently wish to ensure that the purchasers are fully committed to the purchase.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Division 99
A New Tax System (Goods and Services Tax) Act 1999 Subsection 99-5(1)
Income Tax Assessment Act 1997 Subsection 995-1(1)
Reasons for decision
You state that the three Landowners will be participants in a non-entity joint venture arrangement in the development of the Land as a part of your factual scheme and you do not require the Commissioner to rule on whether the parties are partners in a partnership or joint venture participants.
Accordingly, this ruling does not consider the relationship of the Landowners or confirm the Commissioner’s satisfaction that the three Landowners are in a non-entity joint venture arrangement.
Division 99 of the GST Act sets out the special rules on deposits as security. Subsection 99-5(1) provides that a deposit held as security for the performance of an obligation is not treated as consideration for a supply, unless 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.
Characteristics of a security deposit
To fall within the provisions of Division 99, the amount received by the supplier must be a 'deposit’. The term 'deposit’ is not defined in the GST Act. However, judicial decisions have indicated that the term 'deposit’ has a particular meaning in a commercial context.
Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation (GSTR 2006/2) discusses security deposits, and states:
19A. In Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd  HCA 22; 2008 ATC 20-028; 68 ATR 158 (Reliance Carpet) the High Court noted at paragraphs 22 to 27 of the decision that the term 'deposit’ had several aspects. These aspects include that a deposit: could be counted towards the payment of the purchase price; be brought into account in assessment of damages; be a token provided by the purchaser as 'an earnest to bind the bargain’; and provide a form of security for performance by the purchaser.
20. For a payment to be considered a 'security deposit’ for the purposes of Division 99, it should have the following characteristics:
● be held as a security for the performance of an obligation: see paragraphs 21 to 30;
● the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit: see paragraphs 31 to 50;
● be at risk of forfeiture upon failure to perform the obligation: see paragraphs 51 to 64; and
● be a reasonable amount:8 see paragraphs 65 to 108.
Held as a security for the performance of an obligation
A deposit is 'held’ when it is paid to a person in the capacity of stakeholder. Normally, in commercial situations, the supplier will be the holder of the security deposit. It makes no difference who holds the deposit, provided it is 'held’ for the benefit of the supplier to secure the recipient’s obligations.
Contract, conduct and intent of the parties
The fact that a certain payment is labelled a 'deposit’ does not make it a security deposit at law. Whether a particular payment is a security deposit is a question of fact, determined by looking at the terms of the contract and the intention of the parties to the contract.
A security deposit is held to secure, or to act as an earnest to guarantee the performance of the recipient’s obligations under a contract. The nature of the obligations is usually dependent upon the intentions of the parties, as evidenced by the terms and conditions (express or implied) of a contract and the conduct of the parties.
In a purchase contract, the supplier ordinarily seeks to secure, by way of a security deposit, the recipient’s obligations to complete the contract and pay the contracted purchase price. Upon the recipient performing its obligations, the supplier is obliged either to apply the deposit for the recipient’s benefit, usually by applying it towards the total purchase price of the supply, or by returning it to the recipient.
A fundamental requirement of a security deposit is that the parties to a contract clearly understand at its commencement, either through an express term, or by implication, that the deposit may be forfeited if the recipient fails to perform the secured contractual obligations. It is necessary to examine the terms and conditions of the contract, in particular, the forfeiture clause, and the intention of the parties at the time of entering into the contract, to determine whether the deposit is subject to forfeiture.
GSTR 2006/2 explains:
65. For a deposit to be a security deposit for the purposes of Division 99, the amount of the deposit must be reasonable. If the amount is set too high, the courts exercising equitable jurisdiction will not regard the amount paid as a deposit.
It is the Commissioner’s view that the principles applied by the courts under the rules of equity are equally applicable to determine what is reasonable under a purchase contract for a deposit to be a security deposit for the purposes of Division 99. In Reid Motors Ltd v. Wood and Another (Reid), Coates J made the following observation:
In the normal course of business, a deposit as security for completion of the transaction is usually in the vicinity of 10 percent of the total price…
What constitutes a reasonable amount for a deposit under a purchase contract depends upon the degree of risk to the supplier upon a breach or termination of contract by the recipient. If the supplier seeks a large security deposit, then that supplier needs to demonstrate that special circumstances exist. Paragraph 77 of GSTR 2006/2 notes:
The Commissioner considers that cases such as Coates and Hoobin are exceptional. It is the Commissioner’s view that for a deposit that exceeds 10% in a purchase contract to be accepted as a security deposit to which Division 99 applies, suppliers must be able to show that they are at a higher risk of significant losses in the event of default. In Coates and Hoobin, the major risks turned upon the length of time of the contract and the loss in value of the asset faced by the supplier in the event of mismanagement of an associated enterprise, neglect, breach of law and other allied factors.
For a purchase contract the Commissioner considers that a factor that may be taken into account in determining the reasonableness of an amount paid as a security deposit include duration of the contract and the time over which payment is to occur, as this may increase the risk of loss or devaluation of the asset by neglect, illegal act, mismanagement or adverse conditions during that period.
Factors are not exhaustive. The reasonableness of any deposit is to be determined on the facts and circumstances of each case at the time that the contract is entered into. It is also relevant to take into consideration industry practices and norms, although this should be balanced against the supplier’s capacity to impose an unreasonable deposit upon the recipient. Paragraph 71 of GSTR 2006/2 has reference.
In this case, we have considered the relevant factors, including:
● The purchaser must pay the deposit to the deposit holder as stakeholder. If the purchaser does not comply with the Sale Contract, the vendor can terminate by serving a notice. After the termination the vendor can keep or recover the deposit.
● If the contract completes on or before the completion date, the deposit is applied as part of the consideration for the sale price of the property.
● Deposit is generally set at 10% of the sale price for purchasers. However, a higher rate at 20% of the sale price is set for those who are perceived to pose a greater risk of non-completion of the Sale Contract. Foreign purchasers fall into this higher risk group and therefore you have set the deposit at 20% of the sale price for foreign buyers. This is to act as an effective earnest to bind the Contract, especially since the sales are off the plan. The long delay between entry into the Contract and settlement would give rise to the higher likelihood to a change in the circumstances of on the part of the purchaser. Additional reasons are:
● in the event of a default, it would be difficult to enforce judgment for damages in respect of non- residents.
● it has been your experience that the default rate for foreign resident purchasers is significantly higher than that of the market generally.
● Australian Banks are enforcing stricter requirements in relation to presales to foreign residents. This may impact on their ability to obtain funds to complete the Contract.
The Commissioner considers the above factors display the characteristics of a security deposit for the purposes of Division 99 as set out in paragraph 20 of GSTR 2006/2 and that where the contract completes the deposit will be applied as part of the consideration for the sale of the apartment units. Accordingly, the requirements specified in subsection 99-5(1) are satisfied and the 20% deposit to be received from foreign purchasers will be a security deposit for the purposes of Division 99 of the GST Act.