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Ruling

Subject: GST and Deed of Rescission

Question

Is goods and services tax (GST) payable when you receive the payment from the vendor under the Deed of Rescission?

Answer

No. GST is not payable when you receive the payment from the vendor under the Deed of Rescission.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

· You are carrying on an enterprise and are registered for goods services tax (GST).

· You signed a contract to purchase a property and you paid a deposit to the vendor. You also put your current house for sale.

· You intended to build a new house on the vacant land and carry on your enterprise via internet from the new residential property.

· The intention of buying the farmland was to use part of the farmland for hobby farming activities and to enjoy the beautiful surroundings of the area. You appreciated the peace and quiet of the area for your family's lifestyle.

· After signing the above contract and prior to the settlement of the above property both you and the vendor agreed to rescind the contract to sell the property and the vendor agreed to pay you an agreed amount.

· Both parties signed a Deed of Rescission.

· You advised us that the vendor has refunded the deposit paid by you in relation to the purchase of the property.

· The vendor has increased the payment to include the GST amount and a clause has been included in the Deed of Rescission that you will refund the GST amount to the vendor if this payment is not subject to GST.

· The Deed of Rescission states that from the Rescission Date both parties are released from the performance of the contract and payment of all damages and expenses incurred or to be incurred in relation to the performance of the contract.

· The Deed of Rescission states that any deposit paid under the contract for sale of the property will be refunded to the buyer within three business days after the Rescission Date.

· You advised us that you decided the amount to rescind the contract considering the expenses already incurred in purchasing the property and the expected cost in rescinding the contract.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999, paragraph 9-10(2)(g)

Reasons for decision

You are liable to remit GST on any taxable supplies you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) ACT 1999 (GST Act) provides that you make a taxable supply if you make the supply for consideration; and the supply is made in the course or furtherance of an enterprise that you carry on; the supply is connected with Australia and 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.

In your case, firstly, we need to determine whether you have made a taxable supply under section 9-5 of the GST Act when you received the payment from the vendor of the property under the Deed of Rescission.

The meaning of supply is provided in section 9-10 of the GST Act. Subsection 9-10(1) of the GST Act provides that a supply is any form of supply whatsoever. Specifically, paragraph 9-10(2)(g) of the GST Act includes the following as supplies:

An entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

Essentially, a supply is something which passes from one entity to another. The supply may be one of particular goods, services or something else.

Goods and Services Tax Ruling GSTR 2001/4 analyses, amongst other things, the types of supplies that can occur in contractual arrangements. Paragraph 54 of GSTR 2001/4 explains that entering into an obligation to refrain from further legal action or releasing another party from further obligations in relation to a dispute can be considered as supplies under paragraph 9-10(2)(g) of the GST Act.

You received the payment under the Deed of Rescission in relation to a contract with the vendor to purchase a property. You advised us that after signing the contract to purchase the property the vendor made a request to rescind the contract for payment of an agreed amount.

Based on the information provided, we consider that there is no dispute between you and the vendor as both parties agreed to rescind the contract. Furthermore, there is no breach of the contract by you or by the vendor as the settlement of the property was not completed and the vendor has refunded the deposit paid by you. Therefore, the payment by the vendor is not considered as payment for any damages or loss in relation to the contract.

By entering into the Deed of Rescission you agreed to release the vendor from the performance of the contract. It is considered that by agreeing to rescind the contract, you have made a supply categorised as entering into an obligation to refrain from taking legal action against the vendor. It is also considered that by entering into the Deed of Rescission you agreed to give up your legal right to pursue present and future claims, actions and causes of action against the vendor.

Therefore, you are making a supply under paragraph 9-10(2)(g) of the GST Act when you enter into the arrangement to rescind the contract.

Subsection 9-15(1) of the GST Act states that consideration includes:

(i) any payment, or any act or forbearance, in connection with a supply of anything; and

(ii) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

GSTR 2001/4 also explains the concept of supply and the nexus that must exist between payment and supply in order to establish the relationship of a supply for consideration.

Paragraphs 75 and 76 of GSTR 2001/4 state:

75. Section 9-15 further provides that a payment will be consideration for a supply if the payment is 'in connection with 'a supply and 'in response to' or 'for the inducement' of a supply. Thus, there must be a sufficient nexus between a particular supply and a particular payment, which is provided for that supply, for there to be a supply for consideration.

76. It follows that there are two elements to the definition of consideration. The first is the payment by one entity to another. The second element is the nexus that must be established between the payment and a supply.

Based on the information provided, there is sufficient nexus between the payment you received from the vendor and the supply you have made to the vendor under the Deed of Rescission. Therefore, the payment and the supply under the Deed of Rescission satisfy both elements of the definition of consideration as per paragraph 76 of the GSTR 2001/4.

However, the supply of not taking any action against the vendor does not satisfy all of the requirements of a taxable supply under section 9-5 of the GST Act. As explained above, you are making a supply for consideration as both the supply and the payment have sufficient nexus. The supply is connected with Australia and you are registered for GST. However, the issue of whether you made the supply in the course or furtherance of your enterprise that you carry on needs to be considered.

You advised us that you intended to purchase the farmland to build a new residential property to live on the farmland and to carry on your enterprise via the internet. Although you intended to carry on your enterprise from home, the farmland and the new residential property would have been used as residential property for you and your family to live on.

Based on the information provided, it is considered that the acquisition of the property was not made in the course or furtherance of carrying on your enterprise. Therefore, the supply of not taking legal action in relation to the acquisition of the property under the Deed of Rescission will also not be made in the course or furtherance of carrying on your enterprise.

Therefore, the supply that you have made is not a taxable supply. As such, GST is not payable and you are not liable to remit GST on this supply.

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