EDITED VERSION OF GST PRIVATE RULING

Authorisation Number: 34391

SUBJECT:

GST and deposit/part payments

QUESTIONS AT ISSUE:

1. Is the deposit payment received at the beginning of the transaction a deposit under Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) purposes?

2. Should you attribute the goods and services tax (GST) on the deposit when you receive the first part payment?

3. When should you attribute GST on the rest of the part payments received in four instalments?

FACTS:

· You are registered for Goods and Services Tax (GST).

· You are proposing to supply a large quantity of goods to a customer. The goods will be ordered immediately and take some time to produce.

· You propose the following payment plan to be laid out in the agreement:

- deposit payment; and

- progressive payments.

· You accounts on a non-cash basis.

· The recipient in this particular transaction also accounts on a non-cash basis. You believe all recipients for similar transactions would be on non-cash, due to the size of the contract and the monies involved.

Other conditions set out in the agreement between the parties are as follows:

· If the order is cancelled after production has commenced, there is provision for forfeiture of the deposit, which is the deposit made at the time of signing the agreement.

· A tax invoice is not issued by the supplier until the final payment is made and the goods are supplied.

· Further conditions to secure payments provide:

- That the purchaser should put in place bank guarantees for a total amount to secure payment of the balance purchase price to the vendor.

- If the above condition is not satisfied within a particular period of time, then the purchaser's deposit is forfeited; and the vendor shall commence proceedings in court to recover damages (including interest) for breach of contract.

DECISION:

1. Yes. The deposit payment received at the beginning of the transaction is a deposit for the purposes of Division 99 of the GST Act.

2. No. You don't need to attribute GST on the deposit when you receive the first payment.

3. The GST payable on the balance of the total consideration for the entire transaction (excluding the deposit payment) is attributed to the first tax period after you receive the 1^st part payment.

REASONS FOR DECISION:

Questions 1 and 2

Subsection 29-5(1) of the GST Act provides that GST on a taxable supply is attributable to:

(a) the tax period in which any of the consideration is received for the supply; or

(b) if, before the consideration is received, an invoice is issued in relation to the supply, then during the tax period in which the invoice is issued.

Division 99 of the GST Act operates to modify the normal attribution rules contained in section 29-5 of the GST Act when a payment is classified as being a deposit. Section 99-5 of the GST Act provides that a deposit, when held as security for the performance of an obligation, is not treated as consideration for a supply, unless the deposit:

· is forfeited because of failure to perform the obligation; or

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

Section 99-10 further provides that any GST payable on the deposit is attributable to a tax period when the deposit:

· is forfeited because of the failure to perform the obligation; or

· is applied as all or part of consideration of the supply.

GST is not attributable on such a deposit until such time as it is forfeited or is applied as consideration. Goods and Services Tax Determination GSTD 2000/1 confirms this position.

Further Goods and Services Tax Ruling GSTR 2000/35 at paragraph 115 states:

When a payment which is part of a series of payments is described as a deposit and it is made at the start of the arrangement, its treatment for attribution purposes will depend on whether it is a deposit to which Division 99 applies.

Paragraph 118 of GSTR 2000/35 further confirms that where Division 99 of the GST Act is applicable, the deposit will be attributed to the tax period in which it is forfeited or applied as consideration for the supply.

To fall within the operation of Division 99 of the GST Act the deposit must be a genuine deposit and not a part payment. To be a genuine deposit it must be subject to forfeiture and the sum of the deposit must in the circumstances be reasonable (see: Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd (1993) AC 573 (Dojap's case) and Reid Motors Ltd v Wood and Another (1978) (1 NZLR 319) (Reid's case).

In Reid's case it was considered that a 50% deposit was not reasonable to act as an earnest or guarantee and was therefore for another purpose. A similar finding was made in Dojap's case in relation to a 25% deposit paid under a sale of land contract. Generally a 10% deposit is considered reasonable to act as earnest money, though each case needs to be decided on the merits of its particular facts.

In this instance, it is clearly intended between the parties that the first payment of the deposit is subject to forfeiture where there is breach of contract. It is evident from the facts that you are entering into a long dated contract for the supply of significant number of goods. In these particular circumstances, it is considered that the security deposit is reasonable. Hence the payment of the deposit at the commencement of the agreement is a deposit for the purposes of Division 99 of the GST Act. GST payable will be attributed to the tax period when the deposit is forfeited or applied as consideration for the supply.

Question 3

As already explained under Reasons for Decision above, attribution rules under section 29-5 of the GST Act provides where you account on non-cash basis, GST should be attributed during the tax period where you receive any consideration or if prior to that when an invoice is issued.

Section 156 of the GST Act provides that supplies and acquisitions made for a period or on a progressive basis are treated as separate supplies or acquisitions for GST purposes. GSTR 2000/35 at paragraph 12 states:

However, where you make a supply for a period or on a progressive basis and for consideration that is to be provided on a progressive or periodic basis, you attribute the GST payable as if each progressive or periodic component of the supply that you make were a separate supply. Subsection 156-5(1) requires you to attribute the GST payable on each notional separate supply in accordance with the basic attribution rules (subsection 29-5(1))

To satisfy Division 156 of the GST Act, the supplier must provide his services on a progressive basis. Paragraph 27 of the said ruling clarifies when a supply or acquisition is made on a progressive basis.

A supply or acquisition you make is on a progressive basis when the contract or agreement provides for stages of the supply during the course of the supply. A supply may also be a progressive supply where, under a contract, goods or services are to be supplied on an ongoing basis. An example of a supply or acquisition on a progressive basis is a contract for supply of property management services by a real estate agent.

In this particular instance the agreement between the parties does not indicate stages of the supply during the course of the supply. The recipient has ordered a large number of goods, which takes some time to produce. The goods will not be supplied until 2005. The parties have agreed on a payment arrangement starting from a deposit payment from the time of contract. Therefore, given the above facts it is concluded that Division 156 of the GST Act does not apply to this transaction. Hence the first instalment paid will trigger attribution for the total consideration (excluding the deposit amount) under section 29-5 of the GST Act.

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