Edited version of your written advice

Authorisation Number: 1012815934473

Ruling

Subject: GST and security deposits

Question

Is the payment of the deposit by a dealer to the distributor a security deposit for the purposes of Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 for the taxable supply made by the financier?

Answer

Yes, the deposit paid by the dealer is a security deposit in relation to the supply made by the financier.

Relevant facts and circumstances

The financier has entered into a financing arrangement with the distributor to provide finance to re-sellers (dealers) of goods.

When a dealer places an order with the distributor for the supply of goods, the dealer can elect to utilise the financing arrangement (bailment) offered by the financier.

Prior to releasing the goods to the dealer, the distributor requires a security deposit to be paid. The security deposit is a set amount depending on the item, but in all cases is less than 10% of the price of the goods.

Under the bailment arrangement, the equipment is sold by the distributor to the financier who then bails the goods to the dealer. The financier will only supply the goods to the dealer when the dealer has located a purchaser for the goods.

The distributor invoices the financier for the price of the goods and the financier pays the distributor the balance owing. That is, the price minus the amount of the security deposit paid by the dealer.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 99-5.

Reasons for decision

Section 99-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the payment of a security deposit is not treated as consideration for a supply unless the deposit is forfeited or is applied as all or part of the consideration for a supply.

Goods and Services Tax Ruling GSTR 2006 explains, at paragraph 20, that the characteristics of a security deposit are that:

• the deposit is held as security for the performance of an obligation; and

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

• the deposit is at risk of forfeiture upon failure to perform the obligation; and

• the deposit is a reasonable amount.

The payment made by a dealer to the distributor secures the release of the goods by the distributor for display by the dealer. However, under the bailment arrangement, the distributor sells the goods to the financier. Although it is expected that the financier will make a supply to the dealer - this is not certain at the time that the deposit is paid by the dealer and only becomes certain when the dealer subsequently obtains a customer for the sale. This is discussed at paragraphs 254 - 255 of GSTR 2006/2 (in the context of determining whether a supply occurred prior to 1 July 2000):

254. For the purposes of working out whether a supply of goods is made on or after 1 July 2000, the time of supply is taken to be the time when the goods are removed or made available to the recipient (if they are not to be removed). However, for supplies where the goods are removed before it is certain that a supply will be made, for example, for goods taken on approval, sale or return or similar terms, the supply is made when the supply is certain.

255. Under a floor plan arrangement, it is not certain that a supply of goods will be made to the dealer until the dealer secures a customer for the goods. This means that, if goods are passed from a supplier to a dealer under a floor plan arrangement before 1 July 2000, the supply of those goods will be subject to GST if the dealer does not buy the goods until on or after that date.

As such, payment by the dealer to the distributor cannot be part consideration for the potential supply to be made by the financier until such a time that there is certainty that the supply will occur.

In these specific circumstances, we accept that the deposit effectively transfers to the financier under this arrangement. This is demonstrated by the fact that the financier pays to the distributor, an amount less the deposit paid, for the goods purchased. The financier then holds the deposit as security for the obligations imposed on the dealer under the bailment arrangement.

When the financier eventually sells the goods to the dealer (who then on-sells them to the customer), the deposit paid becomes part of the consideration for the supply. That is, the dealer pays an amount to the financier less the deposit previously paid to the distributor.

Consequently, we accept that the deposit paid by the dealer is a security deposit effectively held by the financier for the performance of various obligations by the dealer under the bailment arrangement. As such, section 99-5 of the GST Act operates to treat that amount as not being consideration for the eventual supply by the financier to the dealer until such a time that the goods are sold (or the deposit is forfeited) by the dealer.