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Authorisation Number: 1051268221966
Date of advice: 21 August 2017
Subject: GST and forfeited deposits
Was the forfeited deposit paid to Entity A, in respect of the sale of property, consideration for a right to a supply that would be GST-free under subsection 9-30(1) of the of the A New Tax System (Goods and Services Tax) 1999 (GST Act), if at the time of forfeiture, actions had not taken place that were required to make the supply a GST-free sale of going a concern?
Was the forfeited deposit paid to Entity B, in respect of the sale of a business, consideration for a right to a supply that would be GST-free under subsection 9-30(1) of the of the GST Act, if at the time of forfeiture, actions had not taken place that were required to make the supply a GST-free sale of going a concern?
Relevant facts and circumstances
Entity A is registered for GST.
Entity B is registered for GST.
Entity A owns a property (the Property).
Entity B carried on a business (the Business) from the Property. There was no formal, written lease between Entity A and Entity B and no rent is paid by Entity B to Entity A.
Entity A entered into a property contract to sell a purported leasing enterprise. A deposit was paid by the Purchaser in relation to the property contract.
Entity B entered into a business contract to sell the Business enterprise. A deposit was paid by the Purchaser in relation to the business contract.
The contracts contemplate the sales to be GST-free supplies of going concerns.
The property contract includes contractual clauses that Entity A will grant Entity B a lease of the Property commencing no later than the day prior to settlement.
The business contract includes contractual clauses that Entity A will supply all items necessary for the operation of the enterprise including plant and equipment, inventory and a licence.
Entity A and Entity B declared the deposits forfeited when the Purchaser could not meet their financing requirements and therefore failed to fulfil their obligations under the property and business contracts.
At the time of forfeiture certain clauses under the contract had not yet been fulfilled.
These include the purchaser not being registered nor required to be registered for GST and no lease in place that was capable of being transferred.
Note: The ATO has not sought confirmation from the Purchaser that they have agreed to the deposits paid being forfeited.
You have provided the following documentation in support of your ruling application:
1. Property contract entered into between Entity A and the Purchaser
2. Property contract - replacement pages
3. Business contract entered into between Entity B and the Purchaser
4. Business contract - replacement pages
Relevant legislative provisions
A New Tax System (Goods and Services Tax) 1999 subsection 9-30(1)
A New Tax System (Goods and Services Tax) 1999 section 38-325
A New Tax System (Goods and Services Tax) 1999 Division 99
Reasons for decision
Note: In this reasoning, unless otherwise stated,
● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au.
Paragraphs 7-9 of Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation discusses payments treated as consideration for a supply. For GST purposes, a payment is treated as consideration for a supply if it is in connection with, in response to, or for the inducement of the supply. If the payment is consideration for a taxable supply, receipt of the consideration in a particular tax period requires attribution of the GST payable to that tax period.
The payment of a deposit may constitute part of the consideration for a supply.
However, when an amount is paid as a security deposit, the special rules set out in Division 99 apply.
Section 99-5 provides that a deposit held as security for the performance of an obligation is not treated as consideration for a supply, unless the deposit is forfeited because of a failure to perform the obligation or is applied as all or part of the consideration for a supply.
To fall within the provisions of Division 99, the amount received by the supplier must be a deposit held as security.
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.
Paragraph 20 of GSTR 2006/2 provides that 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
● the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit
● be at risk of forfeiture upon failure to perform the obligation
● be a reasonable amount.
In this case, the deposits paid for the property and business are reasonable amounts. The deposits were held as security for the performance of the obligations under the contracts and were subject to forfeiture. Therefore, the deposits paid have the characteristics of a security deposit for GST purposes.
A deposit is consideration for a supply of the right to a further supply. This was confirmed in Commissioner of Taxation v Qantas Airways Ltd (Qantas Airways). The Decision Impact Statement on Qantas Airways states:
In cases where a payment is made on entry into a contract which secures rights (whether conditional or not) to a further supply, the Commissioner considers that the payment will be consideration for a supply consisting at least of the provision of those rights (and entry into corresponding obligations), even if the further contemplated supply is not ultimately made.
The High Court in Reliance Carpet Company Pty Ltd v Federal Commissioner of Taxation at paragraph 39 stated:
… the payment of the deposit obliged the parties to enter into the mutual legal relations with the executory obligations and rights laid out in the contract. Those legal relations were directed to the completion of the Contract by conveyance of the property to the purchaser by the taxpayer upon payment by the purchaser…
GSTR 2006/2 details the treatment of forfeited deposits under Division 99. Paragraph 126A states:
126A. A supply contemplated to be made under a contract may meet the description of a supply that is GST-free or input taxed. A security deposit may be paid in relation to the contract. If the deposit is forfeited, it is consideration for a supply the supplier makes when it enters into a contract consisting of the obligations it undertakes and the consequent rights it grants. The Commissioner considers that paragraphs 9-30(1)(b) and 9-30(2)(b) would be applicable in a case where a security deposit is forfeited in relation to a contract where the contemplated supply would have been GST-free or input taxed. Broadly those provisions state that a supply consisting of a right to receive another supply that would be GST-free or input taxed is also GST-free or input taxed, as the case requires.
The meaning of 'would be’
Subsection 9-30(1) states:
A supply is GST-free if:
(a) it is GST-free under Division 38 or under a provision of another Act; or
(b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a) [emphasis added].
A supply of a going concern is a supply under an arrangement under which the supplier supplies the recipient all of the things that are necessary for the continued operation of an enterprise and the supplier carries on the enterprise until the day of the supply.
Section 38-325 provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is registered or required to be registered for GST and the supplier and recipient have agreed in writing that the supply is of a going concern.
Hill J in HP Mercantile Pty Ltd v Federal Commissioner of Taxation considered the meaning of paragraph 11-15(2)(a), 'making supplies that would be input taxed’. Relevantly, at paragraph 41 of his judgement, his Honour noted:
It is true that the word "would" could suggest futurity just as the word might suggest conditionality. Indeed, it could suggest both. But to say that is not to solve the construction issue, merely to suggest that more than one alternative is open. It suffices to say that one meaning of the word "would" is conditionality. While the 42nd meaning in the Oxford English Dictionary quoted by the tribunal refers to conditionality, the Macquarie Dictionary (3rd ed), gives as its first meaning (used to form conditional).
In this case, Entity A and Entity B have entered into contracts for the contemplated sale of the purported leasing enterprise and business as GST-free supplies of going concerns. In this case, the contemplated sales would have been GST-free supplies of going concerns had the contracts been completed. The contractual clauses provide sufficient evidence that the contemplated supplies fall under section 38-325 and meet the conditionality requirement of 'would be’.
The forfeited deposits, paid by the Purchaser to Entity A and Entity B in respect of the respective contracts, are consideration for a right to supplies that would be GST-free where the contracted supplies would be GST-free. This is the case despite not all actions being completed at the time of forfeiture.