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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012308791015

Ruling

Subject: goods and services tax (GST) and security deposits

Question 1

Will the (certain percentage) deposit (which all purchasers will pay) and a '(something)' received by you from non-resident purchasers in the circumstances described below be security deposits for the purposes of Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The (certain percentage) deposit (which all purchasers will pay) would be a security deposit for the purposes of Division 99 of the GST Act.

The (something) payment would not be a security deposit for the purposes of Division 99 of the GST Act.

Question 2

Will the (certain percentage) deposit (which all purchasers will pay) and a '(something) ' received by you from some Australian resident purchasers in the circumstances described below be security deposits for the purposes of Division 99 of the GST Act?

Answer

The (certain percentage) deposit (which all purchasers will pay) would be a security deposit for the purposes of Division 99 of the GST Act.

The (something) payment would not be a security deposit for the purposes of Division 99 of the GST Act.

Relevant facts and circumstances

You are currently developing residential units in Australia, which will be marketed "off the plan".

It is currently contemplated that you will collect a (certain percentage) deposit from purchasers to secure the purchasers' contractual obligations under the sale contract.

It is further contemplated by you that you will collect a further '(something)' (capped at a certain percentage) from some purchasers to secure the purchaser's contractual obligations under the contract.

You will use your discretion to determine if you will seek to collect the '(something)' amount from the respective resident and non-resident purchasers. In all circumstances, the decision will be based on which purchasers pose the greater settlement risk to you and in those cases if is proposed that you will ask for both a certain percentage deposit and a '(something)' amount collectively referred to as a certain percentage deposit.

It is anticipated that the (certain percentage) deposit will be required where the purchasers are foreign persons as defined in the contract.

You will ask for a (certain percentage) deposit and a '(something)' payment in some exceptional cases where the purchasers are Australian residents.

The commercial drivers behind requiring a (certain percentage) deposit and a '(something)' payment from some potential purchasers include the following:

The sale contract provides that if the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can keep or recover the deposit (to a maximum of a certain percentage of the price) and hold any other money paid by the purchaser under this contract as security for anything recoverable under this clause for a certain period after the termination; or if the vendor commences proceedings under this clause within a certain period, until those proceedings are concluded.

The sale contract provides that the purchaser has requested the vendor to enter into this contract with the purchaser and the vendor does so in consideration of the payment of the extra security by the purchaser as security for the performance of the purchaser's obligations to the vendor and all losses, damages, costs and expenses incurred by the vendor as a result of termination of this contract in accordance with a certain condition set out in the sale contract.

The sale contract provides that if the contract is properly terminated by the vendor:

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1)

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)

Reasons for decisions

Questions 1 and 2

Summary

The (certain percentage) deposit that all purchasers will pay will be a security deposit for the purposes of Division 99 of the GST Act because:

The (something) payment will not be a security deposit for the purposes of Division 99 of the GST Act. This is because the sale contract does not evidence a clear understanding between the vendor and purchaser at the time of commencement of the sale contract that the payment may be forfeited if the purchaser fails to perform their contractual obligations.

Detailed reasoning

Subsection 99-5(1) of the GST Act states:

Paragraph 19A of Goods and Services Tax Ruling GSTR 2006/2 discusses the meaning of deposit. It states:

GSTR 2006/2 sets out the features of a security deposit for the purposes of Division 99 of the GST Act. It states:

Held as security

Paragraph 22 of GSTR 2006/2 discusses the concept of holding a deposit as security. It states

Performance of an obligation

Paragraphs 27 to 29 of GSTR 2006/2 discuss holding a deposit as security for performance of an obligation. They state:

Subject to forfeiture

Paragraphs 51 and 52 of GSTR 2006/2 discuss the deposit subject to forfeiture requirement. They state:

Reasonable amount

Paragraphs 72 and 77 to 79 of GSTR 2006/2 discuss the reasonable amount requirement. They state:

Paragraph 110 of GSTR 2006/2 states:

The (certain percentage) deposit (which all purchasers will pay)

The sale contract provides that if the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can keep or recover the deposit (to a maximum of a certain percentage of the price).

Therefore, the (certain percentage) deposit (which all purchasers will pay) will be held as a security for the performance of the purchaser's obligation to purchase the property (etc) and it is at risk of forfeiture upon failure to perform these obligations. The contract is not inconsistent with the (certain percentage) deposit being a security deposit. There is no evidence that the conduct and intent of the parties to the contract is inconsistent with the payment being a security deposit. A (certain percentage) deposit is reasonable. Therefore, the (certain percentage) deposit is a security deposit under Division 99 of the GST Act.

The (something) payment

The sale contract provides that if the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can keep or recover the deposit (to a maximum of a certain percentage of the price) and hold any other money paid by the purchaser under this contract as security for anything recoverable under this clause for a certain period after the termination; or if the vendor commences proceedings under this clause within a certain period, until those proceedings are concluded.

The sale contract provides that the purchaser has requested the vendor to enter into this contract with the purchaser and the vendor does so in consideration of the payment of the (something) by the purchaser as security for the performance of the purchaser's obligations to the vendor and all losses, damages, costs and expenses incurred by the vendor as a result of termination of this contract in accordance with a certain condition set out in the sale contract.

The sale contract provides that if the contract is properly terminated by the vendor:

Based on certain clauses of the sale contract, if the purchaser defaults on its obligation to purchase the property (etc), the (something) payment will be released to you and you will retain the (something) payment, but only for a temporary period. The clauses of the sale contract do not indicate that the (something) payment is at risk of being permanently lost by the purchaser.

Therefore, the sale contract does not evidence a clear understanding between the vendor and purchaser at the time of commencement of the sale contract that the payment may be forfeited if the purchaser fails to perform their contractual obligations.

Instead, there is a clear understanding between the parties at the time of entering into the contract that these monies will be set aside if the purchaser defaults and may be utilised to settle a future damages order of a court. Where the (something) monies are utilised in this way, your liability to repay the (something) monies to the purchaser would be offset against the purchaser's liability to pay you damages.

Furthermore, a payment of damages cannot constitute forfeiture of a deposit (in accordance with paragraph 110 of GSTR 2006/2) and where you make such an offset, the offset would be akin to payment of damages.

Hence, the requirements of a security deposit set out in paragraphs 51 and 52 of GSTR 2006/2 are not met.

We consider that a deposit of a certain percentage in your case would be reasonable given the higher risk of you making significant losses where you enter into a contract with the sorts of purchasers who pay the certain percentage deposit, based on the circumstances you have set out in your submission.

However, as the sale contract does not evidence a clear understanding between the vendor and purchaser at the time of commencement of the sale contract that the (something) payment may be forfeited if the purchaser fails to perform their contractual obligations it will not be a security deposit under Division 99 of the GST Act.

Additional information

The (something) payment will constitute part consideration for your sale of the property when you receive it, in accordance with subsection 9-15(1) of the GST Act, as the payment will have a sufficient nexus with your sale of the property.


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