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Ruling

Subject: GST and forfeited deposits

Question

Are you entitled to a refund of the GST paid on the receipt of a forfeited deposit?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You entered into a sales contract (Contract) with a buyer to sell real property (Property).

The buyer was required to pay you a deposit.

The buyer failed to complete the purchase and the Contract was rescinded.

The buyer forfeited their deposit to you and as a consequence, you paid to the ATO a GST amount.

You have requested that the Commissioner of Taxation amend your activity statement to enable you to obtain a refund of this GST.

You have made this request in light of the recent Federal Court case, Qantas Airways Ltd v Commissioner of Taxation [2011] FCAFC 113 (Qantas decision).

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-10

Section 9-15

Section 99-5

Reasons for decision

Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) details special rules that apply to deposits held as security and includes section 99-5 of the GST Act, which states:

(1) A deposit held as security for the performance of an obligation is not treated as *consideration for a supply, unless the deposit:

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

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

(1) This section has effect despite section 9-15 [GST Act] (which is about consideration).

Please note that the asterisks denote a defined term in the GST Act.

Sale of the Property

When the buyer entered into the Contract, there was an obligation created requiring the buyer to purchase the Property by paying the contracted purchase price. The buyer did not fulfil this obligation and as a consequence, the Contract was rescinded and the buyer forfeited their deposit to you.

Implicit in the Contract was the conveyance of the Property (the supply). When the buyer failed to complete the Contract, the question then became whether there was any alternative supply that could be considered as a taxable supply under section 9-5 of the GST Act for which the forfeited deposit was consideration.

The Qantas decision made the judgement that another supply cannot be created unless there are legislative provisions allowing that alternative supply. This is the view given at paragraph 42 of the judgement:

Statutory mandate aside, the task of identifying, in a given case, the "taxable supply" among consecutive acts of supply cannot be a function of, or dependent upon, the failure of an outcome which, if it had not failed, would have been the "taxable supply"….

Paragraph 43 of the judgement also confirms that without the necessary legislative provisions, no other supply can exist:

"... upon the proper construction of the Act no question of two 'taxable supplies' arises. ... The deposit is not treated as consideration for a supply (and therefore there is no taxable supply) unless, in the case of a sale that proceeds from contract to completion, it is applied (as normally it is on completion) as all or (more usually) part of the purchase price. If and when it happens that the deposit is applied as part (or all) of the consideration for the transfer of the land then the GST is attributable to the tax period during which that occurs, and there is only one taxable supply."

In your case, it is the presence of Division 99 of the GST Act, in particular section 99-5 of the GST Act, that allows the making of the Contract to be considered as the alternative taxable supply and the forfeited deposit the consideration for this supply. Without this division there would be no other supply. This is the view given at paragraph 43 of the judgement:

"[34] As noted earlier in these reasons, in this case the payment by the purchaser of the deposit was to be treated as 'consideration' for a 'supply' only if and when the deposit was forfeited because of the failure by the purchaser to perform its obligation to complete the Contract. That conclusion follows from the application of s 99-5 [GST Act].

[40] Upon forfeiture to the taxpayer of the deposit, by reason of the failure by the purchaser to complete the Contract, the 'supply' represented by the making of the Contract became 'a taxable supply'. (Emphasis added.)"

Hence, in accordance with the judgement, upon the forfeiture of the deposit, the forfeited deposit becomes consideration for a supply, the supply being the making of the Contract between you and the buyer.

Qantas decision

In the Qantas decision, the supply was the flight, paid for in full, contemplated by the contract. When the contemplated flight failed to occur, there was no taxable supply and no legislative provisions that would allow an alternative supply to be considered as the taxable supply. Consequently, no GST liability exists as there is no taxable supply being made.

Given these judgements, the Qantas decision does not prevent the forfeited deposit being the consideration for a taxable supply, in this case the making of the Contract between you and the buyer that created the obligation requiring the buyer to purchase the Property. Hence, GST remains payable on the forfeited deposit.