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Edited version of your written advice

Authorisation Number: 1051259916656

Date of advice: 27 July 2017

Ruling

Subject: GST and bank guarantee and security deposit

Question 1

Will section 99-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to a security payment made by a foreign purchaser to the Australian entity in accordance with the Contract?

Advice

Yes. Section 99-5 of the GST Act will apply to the security payment made by the foreign purchaser to the Australian entity in accordance with the Contract.

Question 2

Under the provision of a bank guarantee as Additional Security to the Australian entity, has the Australian entity made a taxable supply?

Advice

Based on the facts given, under the provision of a bank guarantee as Additional Security to the Australian entity, the Australian entity has not made a taxable supply under section 9-5 of the GST Act.

Relevant fact

You are an Australian entity and registered for the goods and services tax (GST).

You hold a development site comprising of several lots of land in Australia. A multi-storey mixed-use development will be constructed on the development site.

The development will include residential apartments (Apartments), which you intend to commence marketing for sale 'off-the-plan' as new residential premises.

It is anticipated that a portion of purchasers of the Apartments will be foreign residents.

The purchase price will be expressed as a GST-inclusive amount.

Unless the purchaser negotiates special terms, the Contract will provide for a deposit of 10%.

Where the purchaser requires approval (Foreign Investment Review Board Approval) under the Foreign Acquisitions and Takeovers Act 1975 (Cth) to purchase an Apartment (ie, because the purchaser is a foreign resident), the purchaser will be required to provide an additional 10% under the Contract.

The additional security for foreign purchasers is in addition to the standard requirement for the payment of a 10% deposit. That means foreign purchasers may be required to provide security of 20% of the price, being:

On completion you must return the Security Payment or Additional Security to the purchaser. But, if directed to do so by the purchaser, the Security Payment may be offset towards the purchaser's obligation to pay the balance of the price. However, if the additional 10% is provided by way of bank guarantee, it will be returned to the purchaser at completion and the purchaser will be required to provide the balance of the price by way of bank cheque.

The bank guarantee is an unconditional undertaking by the bank to make good the obligation of the purchaser to pay the security payment. No money is paid by the bank to the vendor unless a call is made on the bank guarantee (which only occurs in limited circumstances such as default by the foreign purchaser).

If the contract is terminated due to a default by the purchaser, the Security Payment or Additional Amount will be paid to and held by you, and you are entitled to deduct from the Security Payment and call on the Additional Security any loss recoverable by you as a consequence of the purchaser's default. However, you must account to the purchaser for any balance.

You consider the security payment of 10% in addition to the deposit of 10% from the foreign purchaser is reasonable as:

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 section 99-5

Detailed reasoning

Question 1

Subsection 99-5(1) of the 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:

Goods and Services Tax Ruling GSTR 2006/2 discusses the characteristics of security deposits for GST purposes and Goods and Services Tax Ruling GSTR 2000/28 discusses the application of Division 99 of the GST Act in regard to a deposit held under a standard land contract.

According to paragraph 20 of GSTR 2006/2, for a payment to be considered a 'security deposit’ for the purposes of Division 99 of the GST Act, it should have the following characteristics:

We will now apply the facts to the above.

1. Be held as a security for the performance of an obligation;

Paragraphs 22 to 23 and 27 to 29 in GSTR 2006/2 state:

The proposed contract for sale of land provides that the foreign purchaser must pay the full deposit of 10% of the price on contract date and a security payment of 10% of the price on the date following the contract to secure performance of its obligations under the contract to the vendor.

The first requirement is satisfied as it is accepted that the security payment is being held to secure the foreign purchaser’s obligations to complete the contract and pay the contracted purchase price.

2. The contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit;

According to paragraph 37 in GSTR 2006/2, 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.

Paragraph 34 in GSTR 2006/2 further states that a payment that is not intended to act as an earnest to ensure the contract is completed is not a security deposit

The security payment is to secure the foreign purchaser’s obligations to complete the contract and pay the contracted purchase price. The security payment will be retained until completion of the contract or earlier termination of the contract. Where the contract goes through to completion, the security payment will be returned to the purchaser or offset against the purchase at the request of the purchaser. Where the purchaser defaults, the vendor can hold the security payment for twelve months after completion, use the payment to deduct any loss recoverable and may start proceeding to sue the purchaser.

It is accepted that the second requirement is satisfied as the purpose of the security payment is to bind the foreign purchaser to the contract entered with the vendor.

3. Be at risk of forfeiture upon failure to perform the obligation

In regard to forfeiture the following paragraphs in GSTR 2006/2 state:

The sale contract provides that where the contract is terminated due to a default by the purchaser the vendor can hold the security payment for twelve months after completion and use the payment to deduct any loss recoverable and may start proceeding to sue the purchaser.

It is accepted that the third requirement is satisfied since there is a clear understanding between the vendor and purchaser that the vendor is allowed to keep the security payment where there is a failure by the purchaser to perform the obligation under the sale contract.

4. Be a reasonable amount.

According to paragraph 72 of GSTR 2006/2, 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

Paragraphs 78 and 79 of GSTR 2006/2 state:

You consider the security payment of 10% in addition to the deposit of 10% from the foreign purchaser is reasonable as:

Having regards to the duration of the 'off-the-plan’ contract for apartments not yet constructed, the degree of risk of making supplies to foreign purchasers, the 10% security payment in addition to the deposit of 10%, is considered to be a reasonable amount in this circumstance.

It is therefore accepted that the fourth requirement is satisfied.

Summary

Accordingly, the 10% security payment is considered to be a security deposit for the purposes of Division 99 as the four characteristics for a security deposit are satisfied.

Question 2

GST is payable on a taxable supply. A supply is a taxable under section 9-5 of the GST Act if:

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

All of the above must be satisfied for the supply to be a taxable under section 9-5 of the GST Act.

Supply for consideration

A bank guarantee is an agreement under which the bank agrees to be liable for the obligations of the purchaser if the purchaser defaults. When you enter into a guarantee contract with the bank you have acquired a further asset being the contractual rights under the guarantee (that is a right to call on the bank for payment).

Goods and Services Tax Ruling GSTR 2006/1 explains how guarantees are treated under the GST legislation.

According to paragraphs 63 and 64 in GSTR 2006/1, when you enter into a bank guarantee with the bank, the bank will make a supply of an interest to you and the supply made by the bank will be a financial supply where the other conditions in subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST regulations) are met.

Further, when you acquire the interest from the bank you will also make a financial supply where the other conditions of subregulation 40-5.09(1) of the GST regulations are met.

Subregulation 40-5.09(1) of the GST Regulation provides that the provision or disposal of an interest mention in subregulation (3) or (4) is a financial supply if:

From the facts given you will not receive any payment when the bank guarantee is entered into. In this instance there is no financial supply being made by you and the bank since there is no consideration for the provision and acquisition of the interest under the bank guarantee.

In this instance you have not made any supply to the bank since under the bank guarantee you have made an acquisition and not a supply.

Accordingly, the provision of the bank guarantee as additional security is not consideration for a taxable supply since there is no supply being made by you to the bank.


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