Edited version of your private ruling

Authorisation Number: 1012518404150

Ruling

Subject: GST and contract terminated by mutual consent

Question 1

Does the termination prior to settlement of the contract of sale (Contract) attract GST on the amount of the deposit paid (and subsequently refunded)?

Answer

No.

Relevant facts and circumstances

The Purchaser entered into the Contract with you to purchase the Property and paid a deposit. Settlement is not yet due. Due to the Purchaser's situation you are considering a request to terminate the Contract by mutual consent.

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 Division 99

Reasons for decision

Summary

No taxable supply has been made as the termination of the Contract by mutual consent has relieved you and the Purchaser of their obligations under the Contract.

Detailed reasoning

The supply that was intended to be made under the Contract when it was executed was one of real property. Failure to complete a contract under which a deposit was paid is a situation that is contemplated by the GST legislation.

Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) notes that GST does not apply to the taking of a deposit of security for the performance of an obligation unless the deposit is forfeited or it is applied as consideration. GST is not attributable prior to the forfeiture.

The Commissioner considers that forfeiture of a deposit is consideration for a supply despite the nexus between the payment of a security deposit and the originally arranged or intended underlying supply being broken by whatever event it was that led to forfeiture. The supply in question is different to the intended supply, the term 'supply' is defined broadly in subsection 9-10(1)of the GST Act to mean 'any form of supply whatsoever'.

In Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd [2008] HCA 22; (2008) 2008 ATC 20-028; (2008) 68 ATR 158 (Reliance Carpet) the High Court endorsed comments made earlier by the Administrative Appeals Tribunal in Reliance Carpet Company Pty Ltd v. Federal Commissioner of Taxation [2006] AATA 486; (2006) 2006 ATC 2206; (2006) 63 ATR 1001 that there is a supply made by a vendor upon entering into a contract for the sale of land. The Court said at paragraph 37:

The AAT correctly applied that definition to the Contract as follows:

In the circumstances it may fairly be said that upon execution of the contract the applicant made a supply in that, in terms of s9-10(2)(g) of [the Act], it 'entered into an obligation' to do the things it was bound to do under the contract...

The High Court reasoned that the payment of the deposit by the purchaser was in connection with the supply made by the vendor. The High Court said at paragraph 33:

The payment of the deposit by the purchaser to the taxpayer was 'in connection with' a supply by the taxpayer, within the meaning of the definition of 'consideration' in s9-15(1)(a) of the Act...the payment of the deposit obliged the parties to enter into the mutual legal relations with the executory obligations and rights laid out in the Contract. Those legal relations were directed to the completion of the Contract by conveyance of the property to the purchaser by the taxpayer upon payment by the purchaser...

The Commissioner notes in GSTR 2006/2 'Goods and services tax: deposits held as security for the performance of an obligation' that the intention of Division 99 of the GST Act is in part; to ensure that forfeited deposits are treated where appropriate as subject to GST when the forfeiture occurs. This interpretation is supported by the words of paragraph 99-5(1)(a) of the GST Act which states that a deposit is not to be treated as consideration for a supply unless it is forfeited. This means that a deposit must be treated as consideration for a supply upon forfeiture.

However, to reach the point of forfeiture, it follows that there must be an act of default or a failure to complete by one party; normally the other party/ies to the contract seeks remedy for the breach. In situations where a contract is mutually abandoned or discharged by agreement the point of forfeiture is not necessarily reached.

Where each party abandons the contract, the contract is rendered void ab initio. This may be viewed as rescission or discharged by implied agreement as it was in Summers v The Commonwealth [1918] HCA 33, (1918) 25 CLR 144. In such circumstances the parties are restored to their pre-contractual positions which would include the deposit being repaid to the purchaser. Depending on the circumstances surrounding the arrangement, if the parties to a contract genuinely expressly agree to its discharge (as opposed abandoning the contract), the effect is the same; the parties are restored to their pre-contractual positions.

Where the parties are taken back to their pre-contractual footing by way of abandoning or mutually expressly agreeing to discharge the contract, a supply cannot be made under the provisions of the discarded contract.

This outcome is analogous to your situation:

· settlement on the Property is not yet due, so the point of forfeiture is yet to occur;

· you are not seeking reparation or remedy; and

· we consider that given the Purchaser's declared situation, you and the Purchaser have genuinely expressly agreed to discharge the Contract.

As such no supplies have been made under the Contract, the termination of the Contract by mutual consent does not attract GST on the amount of the deposit paid (and subsequently refunded).