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Edited version of your written advice
Authorisation Number: 1013140628927
Date of advice: 2 March 2017
Ruling
Subject: GST and Refund of a Security Deposit
Question
Does a contract of sale for the supply of real property that is subsequently cancelled by mutual consent between the parties prior to settlement of the sale, attract GST on the amount of the deposit paid (and subsequently refunded) pursuant to the contract of sale?
Answer
No
Relevant facts and circumstances
A is a property developer and is in the process of constructing a mixed use development which consists of a number of residential apartments, townhouses and retail premises (“the Development”).
A is registered for GST.
A has sold (or is in the process of selling) the Lots in the Development “off the plan” to various purchasers, including the purchasers that are the subject of this ruling (“the Purchasers”). Settlement of such sales is yet to commence and are estimated to settle in mid 201X.
The Purchasers entered into a contract of sale with A (“the Contract”) to purchase a residential Lot in the Development for a purchase price of $X (inclusive of any applicable GST) and paid a X% deposit of $X. The date of the Contract is X.
In mid 201X the Purchasers advised A that they did not want to proceed with the Contract. The Purchasers requested A to advise whether it would agree to cancel the Contract by mutual consent.
A has agreed to cancel the Contract by mutual consent. A will refund the Purchasers' deposit less any GST (if GST is applicable). A Deed of cancellation was executed between A and the Purchasers.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Division 99
Reasons for decision
In this reasoning, unless otherwise stated, all legislative references are to A New Tax System (Goods and Services Tax) Act 1999 (the GST Act).
Subsection 99-5(1) states:
99-5 Giving a deposit as security does not constitute consideration
(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.
Goods and Services Tax Ruling GSTR 2006/2 deposits held as security for the performance of an obligation, sets out the factors necessary for a deposit to be considered a security deposit. Paragraph 20 states that for a payment to be considered a 'security deposit' for the purposes of Division 99, it should have the following characteristics:
● be held as 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 should the obligations not be performed; and
● be a reasonable amount.
On the information you have provided, we consider the deposit of $X by the Purchasers to be a security deposit.
Paragraph 51 of GSTR 2006/2 discusses forfeiture in stating:
A fundamental requirement of a security deposit is that the parties to a contract clearly understand at its commencement, either through an express term, or by implication, that the deposit may be forfeited if the recipient fails to perform the secured contractual obligations. It is necessary, in the Commissioner's view, that there be a mutual intention by the contracting parties to make the deposit subject to forfeiture. If this intention is not present, the deposit is not a security deposit.
“Forfeit” is defined in the Australian Oxford Dictionary in part as follows:
“1 a penalty for a breach of contract or neglect; a fine.”
On the information you have provided we consider that the security deposit was liable to be forfeited upon failure by the Purchasers to proceed to settlement but instead A mutually agreed with the Purchasers to cancel the Contract rather than enforce its forfeiture rights. As such there is no forfeiture for the purposes of paragraph 99-5(1)(a). As the deposit will be refunded and Contract did not proceed to settlement, there is no consideration for a supply for the purposes of paragraph 99-5(1)(b).
In Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd [2008] HCA 22 the High Court reasoned that the payment of the deposit by the purchaser was in connection with the supply made by the vendor. At paragraph 33 of the judgment it stated:
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...
Your case is distinguishable in that the Deed of Cancellation effectively releases both A and the Purchasers from their obligations under the Contract and refund the deposit to the Purchasers. As such, neither element of section 99-5 applies and there is no GST applicable.