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Edited version of your written advice
Authorisation Number: 1051231689938
Date of advice: 13 June 2017
Ruling
Subject: GST and sale of proposed lots with a 20% deposit
Question 1
Will the cash deposit including those not exceeding 20% of the purchase price paid under the contract of sale (contract) constitute a security deposit for the purposes of Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Answer
Yes, the cash deposit including those not exceeding 20% of the purchase price (Deposit) paid under the contract will constitute a security deposit for the purposes of Division 99 of the GST Act.
Relevant facts and circumstances
You are registered for goods and services tax (GST).
You are the registered proprietor of land which is intended to be developed to create a substantial mixed use development. You have appointed the Developer to develop the land.
The development of the land will occur in stages.
The contact provides that in consideration of the purchase price, the buyer agrees to buy and the seller agrees to sell the Lot on the terms in the contract.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Division 99
A New Tax System (Goods and Services Tax) Act 1999 subsection 99-5(1)
A New Tax System (Goods and Services Tax) Act 1999 subsection 99-10(1)
Reasons for decision
Division 99 of the GST Act contains special rules for deposits made as security for the performance of an obligation.
Subsection 99-5(1) of the GST Act provides that a deposit held as security for the performance of an obligation is not treated as consideration for a supply, unless the deposit:
● is forfeited because of a failure to perform the obligation, or
● is applied as all or part of the consideration for a supply.
The term deposit is not defined in the GST Act. Paragraph 19A of Goods and Services Tax Ruling GSTR 2006/2 discusses the meaning of deposit as follows:
19A. 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 noted at paragraphs 22 to 27 of the decision 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; 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: deposits held as security for the performance of an obligation (GSTR 2006/2) provides at paragraph 20 that for a payment to be considered a security deposit for the purposes of Division 99 of the GST Act it should have the following characteristics:
● 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: see paragraphs 65 to 108.
Reasonable amount
In relation to the requirement that the Deposit must be reasonable, in many cases the Deposit paid by the buyers will be reasonable as it will not exceed the customary amount of 10% of the purchase price, as established by the courts of equity.
However, the Deposit to be paid by buyers that present a higher risk of default may be as high as 20% of the purchase price and will therefore exceed the customary amount of 10%.
The customary amount of the Deposit has effectively been altered by stature to an amount not exceeding 20% of the purchase price. State legislation expressly provides that a sum not exceeding 20% of the purchase price of the proposed lot that is paid under the contract as a deposit is not, either at law or in equity, a penalty if the sum is forfeited and retained by the vendor because the contract is terminated following the purchaser’s breach of the contract.
Paragraph 78 of GSTR 2006/2 sets out those factors that may be taken into account in determining the reasonableness of an amount paid as a security deposit for a purchase contract.
The considerable time between payment of the Deposit and settlement, the financing practices involving off the plan sales, the expense of enforcing judgement against foreign buyers in the event of default, the uncertainty in the market and other factors outlined by you point to there being special circumstances and higher risk for you of significant losses in the event of default by some buyers. On that basis, the Deposit including Deposits not exceeding 20% of the purchase price from buyers at higher risk of default to be held under the contract will be reasonable.
Accordingly, on the facts provided, the cash Deposits payable under the terms of the contract will constitute a security deposit for the purposes of Division 99 of the GST Act.