Edited version of private advice

Authorisation Number: 1051908440774

Date of advice: 12 October 2021

Ruling

Subject: GST and security deposit

Question 1

Are you entitled to a refund of the GST from the original landlord?

Summary

Whether you as a lessee are entitled to an amount of GST from the original landlord is a matter of contract law. The Office cannot intervene in contractual matters between entities.

Question 2

What are your options if the original landlord is not forthcoming with a refund? Can you claim the GST?

Summary

An entity can claim the GST on a security deposit once it is forfeited and applied as consideration for a taxable supply.

In the event a security deposit has not been forfeited and applied as consideration for a taxable supply then the lessee cannot get a refund of the GST from the Tax Office.

In this case the information provided does not indicate the security deposit was forfeited and applied as consideration for a taxable supply. Therefore, this issue is subject to contract law and has to be settled between the parties.

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commences on:

XX Month 20XX

Relevant facts and circumstances

You leased a commercial property from a lessor.

The landlord sold the property and transferred the bond (security deposit) to the new owner.

You have not claimed the GST as it was part of the security deposit, which you assumed you would receive on termination of the lease.

You informed that you have also since determined that GST should not have been charged on the security deposit.

You asked the original landlord to refund the GST to you but have had no response.

Relevant legislative provisions

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

Reasons for decision

Question 1

Detailed reasoning

In this case you informed us that you have determined that GST should not have been charged on the bond (security deposit) and you asked the original landlord to refund the GST to you but have had no response.

Should GST not have been charged on the security deposit and are you entitled to a refund of GST from the original landlord?

Liability for the GST when a security deposit on a commercial property is forfeited or applied as consideration for a taxable supply will fall on the lessor. However, the lessor generally will want to pass on to the lessee the cost of the GST. As there is no automatic right of recovery for suppliers under the GST Act, to achieve this the lessor will need to include suitable clauses in the lease agreement which allow it to include an amount for GST payable by the lessee to cover the amount of GST for which it is liable.

In this case we have not seen any document between you and the lessor establishing that the lessor was not allowed to include an amount of GST on the security deposit.

We consider that the subject of the dispute between you and the landlord is a matter of contract law. The Tax Office cannot get involved in contractual matters between entities. As such we cannot make a decision as to whether you are entitled to a refund of the GST from the original landlord.

Reasons for decision

Question 2

Detailed reasoning

Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation discusses payments treated as consideration for a supply.

Paragraphs 10, 160-162 of GSTR 2006/2 have been reproduced below:

10. The Explanatory Memorandum (EM) states:

If you make a security deposit, the intention is usually that it will be refunded to you when you meet the obligations to which the deposit relates. The deposit may be consideration for a taxable supply. However, it would be pointless for the supplier to charge GST on the deposit if the deposit is to be refunded, in which case the GST would have to be refunded to the supplier.

However, some security deposits later become incorporated in the consideration for a taxable supply. At some point the deposit ceases to be held as a security deposit and is offset against the remaining consideration that is payable. GST should be charged on such deposits if they become part of the consideration for the taxable supply.

Also, if a security deposit made in relation to a taxable supply is forfeited, GST should be payable on the deposit.

For these reasons, Division 99 provides special rules in relation to security deposits.

If a security deposit is made, it is treated as not being consideration for a supply (and hence not subject to GST) unless the deposit is forfeited or is applied towards the consideration for the supply. Section 99.5.

If the deposit is forfeited or is applied towards the consideration for the supply, GST is paid on the amount of the deposit. The GST is attributed to the tax period in which the deposit is forfeited or is applied towards the consideration. Section 99.10.

Can a recipient of a supply claim an input tax credit at the time the security deposit is paid?

Purchase contracts

160. Under the ordinary rules, a recipient that makes a creditable acquisition is entitled to claim an input tax credit for that acquisition when the consideration is paid. A security deposit, when paid, may ordinarily meet the definition of consideration for a taxable supply. This would mean that a recipient is entitled to claim input tax credits under the ordinary attribution rules at the time a security deposit is paid. However, under Division 99, a security deposit is not treated as consideration for a supply until it is applied as consideration for that supply. Payment of the security deposit does not, therefore, trigger attribution of an input tax credit under paragraph 29-10(1)(a) or paragraph 29-10(2)(b). Therefore, a recipient is not entitled to claim an input tax credit when the security deposit is paid.

161. When the security deposit is forfeited and is treated as consideration for a taxable supply, the recipient is entitled to claim an input tax credit for the creditable acquisition for which the security deposit is consideration. The recipient attributes the input tax credit to the tax period in which the deposit is forfeited but must hold a valid tax invoice if the forfeited amount is greater than $82.50.

Example 20: Purchase contract - claiming input tax credits

162. Assume the facts from Example 13A at paragraph 128B of this Ruling where the contemplated supply is a taxable supply of cardboard boxes. The forfeited deposit is consideration for a creditable acquisition. Jo-Anne can make a claim for an input tax credit of $10 in the tax period in which the deposit is forfeited.

As stated at paragraph 161 of GSTR 2006/2 an entity is entitled to input tax credits for the creditable acquisition for which the security deposit is consideration in the tax period the security deposit was forfeited and applied as consideration.

In this case, we have been informed that the landlord sold the property and the security deposit was transferred to the new owner. Further, there is no indication that the deposit was forfeited or applied towards the consideration for a taxable supply.

Therefore, if the previous owner transferred the amount of the security deposit including the GST amount to the new owner you are not entitled to claim the GST.

In the event the previous owner transferred the security deposit but did not transfer the amount retained as GST to the new owner, as the information provided does not indicate you breached any of the conditions under the agreements in place then the original owner could not have forfeited and/or applied the security deposit as consideration for a taxable supply. Such matter arising will be subject to contract law and will need to be addressed directly with them.

You may want to contact the new owner to enquire whether the security deposit amount transferred to them includes that amount of GST remitted by you to the previous owner.