Edited version of your written advice

Authorisation Number: 1013094673687

Date of advice: 28 October 2016

Ruling

Subject: GST and application of Division 142 on security deposits

Question 1

Have you incorrectly reported the GST on deposits for the services you supply in your activity statements in the tax periods you received the payment of the deposits?

Answer

Yes. The terms and conditions for the deposits indicate that they are security deposits for the purposes of Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). They should only be included in your activity statements in the tax periods when they are forfeited or when they are applied to the consideration for the services.

Question 2

If yes to question one, are you entitled to a refund of excess GST relating to the security deposits you have incorrectly reported in your activity statements?

Answer

Yes. You are entitled to a refund of the excess GST you have incorrectly reported in your activity statements as Division 142 of the GST Act does not apply to restrict the refund of GST that is incorrectly attributed to an earlier tax period.

You will need to account for the GST on the security deposits when they have been forfeited or applied to the consideration for the services. They are considered to have been applied to consideration on the due date of the remaining consideration or when the next payment for the service is made notwithstanding this payment is made prior to its due date

Question 3

Have you correctly reported the payments paid in advance in instalments (prepayments) for services you provide prior to the due date for these payments in your activity statements?

Answer

Yes. You need to attribute the GST on the instalment as well as the remaining consideration (including the security deposit), in the tax period in which the first instalment is received. However if you issued an invoice prior to the payment of the first instalment or prepayment, you will need to attribute the GST on the supply in the tax period when the invoice was issued.

Question 4

If you report all the GST on first instalment payment, what happens if the provision of the service is cancelled?

Answer

You will have a decreasing adjustment and you report the adjustment in the tax period when you became aware of the adjustment. This will be generally when you cancel the service.

Relevant facts and circumstances

● You are registered for GST.

● You supply services that are taxable supplies.

● You account on a non-cash basis for GST purposes.

● You received deposits and prepayments for services that you are yet to provide.

● You reported the GST on the deposits and prepayments in the tax periods you received payment for the tax periods commencing on or after the relevant date.

Deposits

● The terms and conditions for the deposits include:

● a deposit is payable 7 days after a customer makes a booking for the service;

● the deposits are non-refundable or non-transferable;

● a sliding scale for forfeiture on the consideration applies if the supply of the service is cancelled by the customer and forfeiture is higher closer to the date of supply;

● final payments are due XX days before the supply of the service and failure to provide final payment will mean the cancellation of the booking and forfeiture of the deposit; and

● the deposit represents approximately XX% of the total consideration of the service.

● The deposits are received 12 months or more in advance before the supply of the services.

● According to the terms and conditions for the supply of the services, you may cancel the supply of the service due to a number of circumstances. If you cancel the supply of the service where the customer has paid a deposit or full or part consideration, you will offer the nearest possible alternative or refund the full or portion of the consideration you think is appropriate.

Prepayments

● Some of your customers have an arrangement to prepay the cost of the service in instalments on a regular basis prior to the amounts being due.

● These prepayments are made following the payment of the initial deposit.

● These prepayments do not include the deposit that is required 7 days to confirm the booking of the service.

● These arrangements are ad hoc and no formal agreements are entered into with your customers.

● If you cancel the supply of the service for any reason, these prepayments are refunded to the customers.

● If the purchaser cancels their booking, the prepayments are refunded or forfeited as per the terms and conditions.

● You contend that Goods and Services Tax GSTR 2000/12 Goods and services tax: attributing GST payable and input tax credits for supplies and acquisitions under lay-by sale agreements provides that the monies received should not be accounted as income until the supply of the service has been made.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) 1999 Division 99

A New Tax System (Goods and Services Tax) 1999 Division 142

A New Tax System (Goods and Services Tax) 1999 Division 156

Reasons for decision

Question 1: Deposits

Division 99 provides that GST does not apply to the taking of a deposit as security for the performance of an obligation until the deposit is forfeited or is applied as consideration. In effect, Division 99 delays the attribution of the GST until the security deposit is forfeited or applied as consideration.

Goods and Services Tax GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation sets out our view on what are the characteristics of security deposits for the purposes of Division 99:

● be held as a security for the performance of an obligation;

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

● be at risk of forfeiture upon failure to perform the obligation; and

● be a reasonable amount.

The terms and conditions for the supply of the service clearly show that the deposits paid in advance are held as security for the performance of an obligation. That is, for the customer to complete the contract by paying the remaining consideration to the due date for the remaining consideration. The terms and conditions state that the deposit are non-refundable and non-transferable, and therefore at risk of forfeiture upon the customer failing to pay the remaining consideration before the due date. The amount of the deposit is approximately XX% or less for the total price of the service and represents a reasonable amount.

As such, you need to account for the GST on the deposits in the tax periods which the deposits are forfeited because of the failure to perform the obligation or when they are applied as all or part of the consideration for the supply (see section 99-10). They are applied to consideration on the due date of the remaining consideration (60 days before the travel date) or when the next payment for the service is made notwithstanding the payment is made prior to its due date.

Division 99 will not apply to full payments required for bookings made less than 60 days before provision of the service. These amounts are actual payments for the consideration for the service.

Question 2: Division 142

Division 142 applies to tax periods starting on or after the relevant date and operates to ensure that overpaid or excess GST is not refunded if this would give an entity a windfall gain. Under Division 142, a supplier is not entitled to a refund of an amount of excess GST where the supplier has passed on the GST to another entity (the recipient), and has not reimbursed that other entity for the passed-on GST. However section 142-5 provides that excess GST does not include GST that is payable but correctly attributable to a different tax period. As Division 99 delays the attribution of security deposits, Division 142 does not apply to restrict the refund of the GST on security deposits.

Therefore you are entitled to claim refunds of excess GST relating to security deposits. You can claim the refunds of the excess GST by amending your activity statements for the relevant tax periods. Alternatively, you may want to include the credit errors in your next activity statement if you satisfy the requirements under the Correcting GST Errors Guide. For more information, refer to the guide at ato.gov.au.

Question 3: Prepayments

Division 29 sets out the basic rules for the attribution of GST and input tax credits (basic attribution rules). That is, it provides when you must report GST on the sales you make and claim GST credits for acquisitions you acquire.

Subsection 29-5(1) provides that if you account for GST on an accrual basis, you attribute all the GST payable on a taxable supply to the earlier of the tax period in which:

● any of the consideration for the supply is received; or

● an invoice for the supply is issued.

An invoice is a document notifying an obligation to make a payment. An invoice does not necessarily contain all the information required for it to be a tax invoice.

Special attribution rules

Division 156 alters the application of the basic attributions rules in circumstances where the supply or acquisition and the consideration occur periodically or progressively. It does this by treating each periodic component of the supply or acquisition as a separate supply or acquisition (subsection 156-5(1)). Division 156 (other than section 156-15) applies only to entities that account for GST on a basis other than cash.

Subsection 156-5(1) applies where a taxable supply is made for a period or on a progressive basis and in either case, consideration is made on a progressive basis or on a periodic basic. Both conditions need to be satisfied for subsection 156-5(1) of the GST Act to apply to the taxable supply.

Goods and Services Tax GSTR 2000/35 Goods and services tax: Division 156 - supplies and acquisitions made on a progressive or periodic basis (available at www.ato.gov.au) provides guidelines on the specific circumstances in which Division 156 applies. The following information has been extracted from the GST ruling:

When is a supply or acquisition made for a period?

25. A supply or acquisition you make is for a period when it is made over a specified length of time or for a time with an identifiable end point. This may be stated in your contract, agreement or other similar document. However, a supply will not be for a period merely because there is a stipulated completion date.

26. If a contract for a supply of goods or services provides that they are to be delivered or completed by a specific date, that will not be a supply for a period. A supply for a period will be one which is made on a continuous basis until the stipulated end point occurs, or the period expires. An example of a supply or acquisition for a period is a contract for the supply of maintenance services for a period of 12 months.

When is a supply or acquisition made on a progressive basis?

27. 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 your case, the prepayments are not made in relation to a progressive (that is, on an ongoing basis) or periodic (that is, on a continuous basis) supply. Division 156 does not apply to the prepayments.

As you account for GST on an accruals basis you will be required to apply the basic attribution rules to the prepayments for the service in accordance with subsection 29-5(1). This means, you will attribute the GST payable on the service to the earlier of the tax period in which:

● any of the consideration for the supply is received; or

● an invoice for the supply is issued.

GSTR 2006/2 explains the attribution of instalment payments subsequent to an initial security deposit:

144. If the initial payment made in an instalment contract qualifies as a security deposit for the purposes of Division 99, then Division 99 defers attribution of the GST payable.

145. However, an instalment payment made after the initial security deposit means that the GST payable on the supply becomes attributable under the basic attribution rules in Division 29.

146. Taxpayers who account on a non-cash basis attribute GST on all of the consideration for the taxable supply, in the tax period in which this instalment is received. The GST payable for that tax period includes the GST payable on the security deposit.⁶⁴

For services where your customers make prepayments, you will need to report the total GST payable in relation to the supply of the service in the tax period which you receive the first instalment payment after the initial security deposit.

You contended that GSTR 2000/12 provides that the monies received should not be accounted as income until the service has been provided. However GSTR 2000/12 relates to “lay-by sale agreements” which refer to agreements on goods and not services. It therefore has no application to your circumstances.

Question 4: Decreasing adjustments

You may have to make an adjustment if an 'adjustment event' occurs and this event results in a change to the amount of GST you must pay or GST credit you can claim. An adjustment event may occur on a sale or purchase that you made.

Division 19 set out adjustment events and includes when you cancel a supply. The adjustment amount is the difference between the GST you either:

● paid, or were liable to pay, on the original sale in an earlier tax period (the attributed GST amount), and

● would have been liable to pay on the original sale if you had taken the adjustment event into account (the corrected GST amount).

Section 29-20 provides that you attribute the adjustment in the tax period you become aware of the adjustment. This will be generally in the tax period which you cancel the service.

Similar to the requirement to hold a tax invoice, you will need to hold an adjustment note to attribute the adjustment (section 29-20). As a supplier, you have an obligation to issue an adjustment note within 28 days of the earlier of:

● receiving a request by the recipient of the supply; or

● becoming aware of the adjustment (where you have issued, or was requested to issue, a tax invoice).

This is unless the adjustment is $75 or less.

You will need to retain or hold a copy of the adjustment note for reporting purposes to attribute the decreasing adjustment. For more information on how to make adjustments, please refer to Making Adjustments on your activity statements on ato.gov.au or Goods and Services Tax GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events on ato.gov.au.

Note: Division 142 may apply to restrict the refund of GST if you do not reimburse or refund the GST paid on the supplies to your customers for the cancelled supplies.