Edited version of your private ruling

Authorisation Number: 1012594938820

Ruling

Subject: GST and an incapacitated entity

Question 1

Is the deposit paid under a sale contract before your appointment as Receivers and Managers, but forfeited after, consideration for a supply, the making of which was within your scope of responsibility or authority for managing the incapacitated entity's affairs?

Answer

No. The deposit, when forfeited, became consideration for a supply made by the entity before your appointment as the Receivers and Managers. That supply was not within your scope of responsibility or authority for managing the incapacitated entity's affairs.

Please see 'Reasons for Decision'.

Question 2

If the answer to Question 1 is 'No", are you as the appointed Receivers and Managers required to remit GST on this forfeited deposit?

Answer

No. Please see 'Reasons for Decision'

Question 3

In relation to all other sales of land contracts, entered into by the entity prior to your appointment as the Receivers and Managers, where the relevant terms and conditions are identical or substantially the same as the Pre-Appointment Contract and the associated facts and circumstances are materially the same, will the Commissioner's decision in relation to the Pre-Appointment Contract also apply?

Relevant facts and circumstances

• The receivers and managers of the entity (Receivers and Managers appointed) ('you'), is registered for goods and services tax (GST).

• The entity, prior to appointment of the receivers and managers, was the legal owner of properties.

• The entity entered into sale contracts in respect of the sale of the properties. You provided a table listing these contracts.

• In 20XX, people were appointed as receivers and managers of the entity (the Receivers and Managers).

• A number of purchasers defaulted on their obligations to pay the balance of the purchase price under the contracts. As a result, the Receivers and Managers served notices on the purchasers for the default and rescinded the sale contracts. As a result, the deposits were forfeited by the purchaser and retained by you.

• You provided an example:

• The entity entered into a sale contract. This contract was for the sale of a property (the Pre-Appointment Contract). A deposit was paid at the time the Pre-Appointment Contract was entered into. The purchaser failed to pay the purchase price on settlement as required. Accordingly, the Pre-Appointment Contract was rescinded pursuant to a Notice of Rescission issued by the Receivers and Managers (the Notice of Rescission)

• You have provided a copy of the Notice of Rescission for the above example, along with the other notices.

• The deposit, which was paid by the Purchaser upon entry into the contract, was consequently forfeited and received by you.

• You provided copies of the deed of your appointment and the security documents.

Relevant legislative provisions

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

Division 99

Section 58-10

Section 195-1

Reasons for decision

Question 1

Summary

Although the deposit was forfeited during the course of your appointment as Receivers and Managers, the relevant supply to which the forfeited deposit relates, was made prior to your appointment by the entity. Therefore, the deposit held by you which acquired the status of consideration as a result of forfeiture by the purchaser, was in relation to a supply made prior to your appointment.

Detailed reasoning

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Deposit held as security

To fall within the provisions of Division 99, the amount received by the supplier must be a 'deposit'.

The term 'deposit' is not defined in the GST Act. However, judicial decisions have indicated that the term 'deposit' has a particular meaning in a commercial context.

In Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd [2008] HCA 22 (Reliance Carpet) the High Court noted that the term 'deposit' had several aspects. These aspects include that a deposit: could be counted towards the payment of the purchase price; be brought into account in assessment of damages (however, the forfeiture of a deposit held as security is not a payment in the nature of damages or liquidated damages); be a token provided by the purchaser as 'an earnest to bind the bargain'; and provide a form of security for performance by the purchaser.

Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation (GSTR 2006/2) discusses deposits held as security. This ruling has been amended in parts to reflect the decision made in Reliance Carpet. Paragraph 20 of GSTR 2006/2 provides that for a payment to be considered a 'security deposit' for the purposes of Division 99, it should have the following characteristics:

n be held as a security for the performance of an obligation

n the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit

n be at risk of forfeiture upon failure to perform the obligation

n be a reasonable amount.

In your example, the purchaser was required to make a payment of a deposit under the contract of sale entered into with the entity. This payment is considered to be a reasonable amount as it is X% of the selling price. The deposit was to be held by a stakeholder as security for the performance of the obligations under the contract, and is subject to forfeiture as the standard commercial conditions of the contract provide that the deposit is at risk of forfeiture if the purchaser defaults.

Therefore, we accept that the deposit in this case has the characteristics of a deposit held as security for GST purposes and in particular, Division 99.

Deposits held as security under standard land contracts

A deposit held as security paid at the time of execution of a standard land contract is not treated as consideration for a supply unless it is forfeited or applied as part of the consideration for a supply. In the case of your example of the contract, the deposit held as security was forfeited 14 days after the serving of the Notice of Rescission as the purchaser did not satisfy the original contract nor the conditions of the rescission notice. Upon forfeiture, the deposit held as security is treated as consideration for a supply in accordance with Division 99.

In Reliance Carpet the High Court considered a case where a contemplated supply did not proceed to completion. In this case, a contract for the sale of land was entered into and a deposit was paid by the purchaser to the vendor. The facts in Reliance Carpets are different to your circumstances in that the parties entered into an Option Agreement with consideration of an option fee of $25,000 paid by the purchaser which granted the purchaser the option to purchase the property by written notice together with a payment of $297,500 being the deposit payable under the contract. By the operation of Clause 5 of that Option Agreement the parties became bound by the terms and conditions set out in the contract.

The High Court, at paragraph 33, reasoned that the payment of the deposit by the purchaser was in connection with the supply made by the vendor, within the definition of 'consideration' in paragraph 9-15(1)(a). The High Court further reasoned that by force of the Option Agreement, 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 vendor upon payment by the purchaser. There are no equivalent Option Agreements in the contracts covered under this ruling and outlined in Question 3.

The High Court, at paragraph 28, reasoned that a characteristic of the deposit was that it operated as a security for the performance of the obligation of the purchaser to complete the contact and was liable to forfeiture on that failure. We consider this reasoning applies to your particular circumstances.

Within the scope of responsibility or authority

A representative is defined in section 195-1 to include a receiver (paragraph (c)) and a person appointed, or authorised under an Australian law to manage the affairs of an entity because it is unable to pay all its debts as and when they become due and payable (i.e. a 'manager') (paragraph (e)).

Therefore we consider that the Receivers and Managers are a 'representative' for the purposes of Division 58.

Section 58-10 sets out the circumstances in which a representative of an incapacitated entity will be liable for GST on a taxable supply. In particular, subsection 58-10(1) provides that a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would, but for this section, be liable to pay on a taxable supply. This subsection applies retrospectively from 1 July 2000.

A condition in subsection 58-10(1) that, in relation to a representative of an incapacitated entity, Section 58-10 applies only to the extent that the making of the supply, to which the GST, relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

The deposit held as security in your particular circumstances was paid before the representative was appointed, but it did not become consideration for any supply until afterwards when the representative took the deliberative action which resulted in forfeiture. The forfeiture of the deposit held as security occurred after your appointment. It is not doubted that the action taken in this respect (the issuing of the Notice of Rescission in the above example of the sale was within the 'scope of the representative's responsibility or authority for managing the incapacitated entity's affairs'. In these circumstances the issuing of the Notice of Rescission is not considered to be a new supply made in relation to the forfeited amount.

The supply, for which the deposit when forfeited became consideration by reason of your action, was made under the contract by the entity before the appointment took effect. It is accepted in these circumstances that the 'making of the supply' for which the forfeited deposit became consideration was to no extent within the 'scope of the representative's responsibility or authority for managing the incapacitated entity's affairs'.

Question 2

Detailed reasoning

The condition in subsection 58-10(1) provides that section 58-10 applies only to the extent that the making of the supply, to which the GST, relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

It is accepted in these circumstances that the 'making of the supply', for which the forfeited deposit became consideration, was wholly not within the 'scope of the representative's responsibility or authority for managing the incapacitated entity's affairs'. Under the condition in section 58-10, there is no extent that the making of the supply, in relation to the forfeiture of the deposit on the example discussed to which the GST relates, was within the scope of the representative's responsibility or authority for managing the affairs of the entity (Receivers and Managers appointed).

Accordingly, you are not required to remit the GST on the forfeited deposit received by you in relation to the contract of sale by the entity.

Question 3

Detailed reasoning

In relation to all other sales of land contracts entered into by the entity prior to the appointment of the Receivers and Managers, where the relevant terms and conditions are identical or substantially the same as the Pre-Appointment Contract and the associated facts and circumstances are materially the same as that of the example, as submitted, the Commissioner's decision in relation to Questions 1 and 2 regarding the example will also apply.