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Ruling

Subject: GST and forfeited deposit

Question

Is the forfeited deposit received by you in accordance with the contract for the sale of the property consideration for a taxable supply?

Answer

No, the forfeited deposit received by you in accordance with the contract for the sale of the property is not consideration for a taxable supply but only to the extent of the deposit attributed to the property.

Relevant facts and circumstances

You own the property as joint tenants.

You lease the property to another entity which operates a business from the property.

You are not registered or required to be registered for GST as your GST turnover from leasing the property is below the registration turnover threshold of $75,000.

You and the other entity entered into a contract with a purchaser to sell the property and the motel business together as a going concern.

The contract specified that you are selling the property subject to existing lease.

Clause 26 of the Special Conditions states:

26. In the event that the Purchaser herein pays less than 10% of the purchase price as a deposit and if the Purchaser commits any default hereunder the whole amount representing such 10% deposit shall become due and payable notwithstanding that this Contract is not completed and the Vendors shall be entitled to sue for recovery of so much of the 10% deposit that remains outstanding as a debt due by the Purchaser to the Vendors.

The purchaser paid a deposit in accordance with the contract. However, the purchaser failed to complete the contract; thus the purchaser forfeited the deposit.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 section 9-30,

A New Tax System (Goods and Services Tax) Act 1999 section 38-325,

A New Tax System (Goods and Services Tax) Act 1999 section 99-5 and

A New Tax System (Goods and Services Tax) Act 1999 section 188-25.

Reasons for decision

Subsection 99-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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:

a) forfeited because of a failure to perform the obligation; or

b) is applied as all or part of the consideration for a supply.

In this case, the purchaser forfeited the deposit as the purchaser failed to complete the contract. Therefore, the deposit is treated as consideration for a supply.

Goods and Services Tax Ruling GSTR 2006/2 explains the operation of Division 99 of the GST Act in relation to a deposit held as security for the performance of an obligation.

Is the forfeited deposit consideration for a taxable supply?

Section 9-5 of the GST Act states:

You make a taxable supply if:

a) you make the supply for *consideration; and

b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

c) the supply is *connected with Australia; and

d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

The supply, for which the forfeited deposit is consideration, is a taxable supply if it meets the requirements in paragraph 9-5(b) to 9-5(d) of the GST Act and is not otherwise GST-free or input taxed.

According to paragraph 126A of GSTR 2006/2, 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 consequential rights it grants. If a security deposit is forfeited in relation to a contract where the contemplated supply would have been GST-free or input taxed, the supply of a right to receive such supply is also GST-free or input taxed, as the case may be.

In this case, therefore, we must first determine whether the sale of the property, being the contemplated supply, would have been a taxable supply. If the sale would have satisfied the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act, we must further determine if the sale would have been GST-free or input taxed.

The sale of the property would have satisfied the requirements in paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act as the supply would be for consideration and made in the course of your leasing enterprise. Furthermore, the supply would be connected with Australia.

You advised that you are not registered for GST and are not required to be registered as your GST turnover is below the registration turnover threshold.

According to paragraph 188-25(a) of the GST Act, any supply by way of transfer of ownership of a capital asset is disregarded in working out an entity's projected GST turnover. As the property is a capital asset in your leasing enterprise, the proceeds of the sale would not have increased your GST turnover. Thus, you would not be required to be registered for GST had you sold the property.

As the requirement in paragraph 9-5(d) of the GST Act would not be satisfied, the sale of the property would not have been a taxable supply. Therefore, the supply of right to receive the supply of the property would not have been a taxable supply. Accordingly, the forfeited deposit is not consideration for a taxable supply. It is no longer necessary to determine if the sale of the property would have been a GST-free supply of a going concern.

Note that the single price stipulated in the contract was for two supplies made by two entities namely:

· your supply of your enterprise of leasing the property (sale of the property together with the lease), and

· the supply of the other entity of its business.

The stipulated price must be apportioned to determine the extent of the forfeited deposit attributable to your supply.

This ruling does not confirm that the sale of the business would not have been taxable supply (for example, it would have been a GST-free supply of a going concern) so that the extent of the forfeited deposit attributable to the sale of the business is also not consideration for a taxable supply.

The other entity can apply for a private ruling to confirm that the contemplated supply of the business would have been a GST-free supply of a going concern. A supply will only be a GST-free supply of a going concern if all the requirements in section 38-325 of the GST Act are satisfied. These requirements are explained in Goods and Services Tax Ruling GSTR 2002/5 (available from www.ato.gov.au). When the trust applies for a private ruling, it must provide detailed information on how these requirements are met.

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