Edited version of private advice

Authorisation Number: 1052292699802

Date of advice: 19 August 2024

Ruling

Subject: Mixed supply of a residential premises - forfeited deposit

Question 1

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell your residential property (the Property)?

Answer

Yes, the supply of the Property is a taxable supply but only to the extent the supply is not an input taxed supply of a residential premises.

Question 2

Is the forfeited deposit consideration for a taxable supply under section 9-5 of the GST Act?

Answer

Yes, the forfeited deposit is consideration for a taxable supply, but only to the extent the supply is not an input taxed supply of a residential premises.

This ruling applies for the following period:

19 August 2024 to 19 August 2028

The scheme commenced on:

1 May 2022

Relevant facts and circumstances

The Property

You are X, the owner of the Property located at X.

On or around MM YYYY, you purchased the Property without a dwelling for $X, plus $X in land transfer (stamp) duty. GST did not apply to the purchase of the Property.

Immediately after the acquisition, you constructed a dwelling on the Property that was completed in or around YYYY.

You occupied the dwelling as your main residence and it has been your family home since that time.

The dwelling has never been used to produce assessable income.

The land is X hectares under one title.

Business

You have been registered as an individual for GST since DD MM YYYY.

You, as an individual sole trader, had carried on a business (the X Business) on the property that involves various X Business activities; however, from DD MM YYYY most of these activities are carried on by the Family Trust.

From time to time, you continue to conduct business activities in relation to the business as a sole trader, including activities similar to Business X on the Property. Such activities are minimal and are done on an ad-hoc basis.

Business Sheds

Two sheds were constructed by you on the property in connection with the businesses.

One shed, built in or around YYYY, was used for Business X and storage purposes. This shed is approximately X square meters.

In YYYY, the second shed was built and was used for the same purposes. This shed is approximately X square meters.

Current Activities

The X Business continues to be operated predominately by the Family Trust and operates from the Property.

Your sole trader business continues to operate on an ad hoc basis under your personal ABN.

The Trust is called X Trust.

The trust was settled around DD MM YYYY.

You are the director of the corporate trustee of the trust, and also the beneficiary.

Different uses of the property

The property is divided into 3 areas of usage:

•         Residential Section - An area containing the dwelling occupied by you as your main residence and family home. This part of the land includes the curtilage and area surrounding the dwelling. It includes space where your children have played over the years and space for private infrastructure such as septic tanks, etc, because the Property is not connected to town water. You estimate that this part of the land is approximately X hectares.

•         Business Section - An area containing the two sheds and storage space used for certain activities in connection with the X businesses the Family Trust and you as an individual sole trader operate from the Property. You estimate this part of the land is approximately X hectares.

•         Vacant Section - An area that is vacant, which you and your family used for enjoyment and leisure. The area contains a dam and a shed. You estimate this part of the land is approximately X hectares. No agistment or business activities have been carried out in this section of the property.

The Land

You have never taken any steps to develop the land or subdivide the Property. Further you have never chosen to treat any other dwelling as your main residence during your period of ownership of the Property.

The Sale

During or around MM YYYY, you engaged a real estate agent, to assist with selling the Property. The Property was soon placed on the market.

On or around DD MM YYYY, a 'Contract for the Sale of Land' (the Contract) was executed to sell the Property to an unrelated third party, with the sale price of $X. Settlement was scheduled to occur on or around DD MM YYYY.

Pursuant to the Contract, the Purchaser was to pay the deposit of 20% (totalling $X) in two instalments.

On or around MM YYYY, the first instalment of the deposit, being $X was paid to you.

On or around DD MM YYYY, you paid $X to the real estate agent as commission in accordance with the agreement. The commission paid was 1.5% of the sale price of the Contract.

During or around late MM YYYY, the Purchaser defaulted on paying the second instalment of the deposit, being $X.

The Contract was terminated on or around DD MM YYYY (Forfeiture Date) and you retained the first instalment of the deposit, being $X (Forfeited Deposit). You did not take legal action to recover the second instalment of the deposit or enforce the settlement of the Contract.

You retain full ownership of the Property as at the date of this application.

Continued Sale

You still wish to sell the Property. After the Forfeiture Date you commenced discussions with a new real estate agent to relist the Property.

You estimate that the sale of the Property is likely to occur within the next 2 to 3 years.

On DD MM YYYY, through your solicitors, you notified the Commissioner of the receipt of the Forfeited Deposit via a written letter.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-80

A New Tax System (Goods and Services Tax) Act 1999 section 11-30

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

A New Tax System (Goods and Services Tax) Act 1999 section99-5

A New Tax System (Goods and Services Tax) Act 1999 section99-10

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

A New Tax System (Goods and Services Tax) Act 1999 section 142-10

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Question 1

Are you making a taxable supply under section 9-5 of the GST Act when you sell your residential property?

Summary

Yes, the supply of the property is a taxable supply but only to the extent the supply is not an input taxed supply of a residential premises.

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a 'taxable supply' where the supply is:

(a)  made for consideration;

(b)  made in the course or furtherance of an enterprise that you carry on;

(c)   connected with the indirect tax zone; and

(d)  made by a supplier who is registered, or required to be registered, for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, the sale of the Property will be made for consideration, being the sale price stated in the proposed sale contract, the Property is located in Australia and so connected to the indirect tax zone. You are registered for GST as an individual.

It remains to be determined whether the sale of the Property is in the course or furtherance of an enterprise you carry on and, if so, to what extent (if any) would the sale of the Property be input taxed.

Would the sale of the Property be in the course or furtherance of an enterprise you carry on?

Subsections 9-20(1)(a) to (c) of the GST Act provide that an enterprise is an activity, or series of activities, done:

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Section 195-1 of the GST Act defines 'carrying on' as:

"carrying on" an * enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number (MT 2006/1) contains the Commissioner's view on what constitutes an enterprise for the purpose of eligibility for an Australian business number.

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GSTD 2006/6)extends the application of MT 2006/1 to the GST Act. The principles in MT 2006/1 apply equally to the term enterprise and can be relied upon for GST purposes.

Paragraphs 94, 120 and 140 of MT 2006/1 provides the following guidance on carrying on an enterprise:

Enterprise

[...]

94. Carrying on an enterprise includes activities done in the commencement or termination of the enterprise.

[...]

When is an enterprise being carried on?

120. In order to be entitled to an ABN most entities must carry on an enterprise. The term 'carrying on' is defined in section 41. The definition ensures that activities done in the course of commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.[...]

[...]

Termination of an enterprise

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

Goods and Services Tax Ruling GSTR 2004/8 Goods and services tax: when does an entity have a decreasing adjustment under Division 132? (GSTR 2004/8) provides further guidance on how the sale of a thing has a connection to your enterprise at paragraphs 29 and 30:

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.[19]

30. Each of the following characteristics of a thing indicates strongly that the sale of the thing has a connection with your enterprise:

•         at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

•         at the time of sale it was applied[20] in carrying on your enterprise to at least some extent; and

•         it is sold as a transaction of your enterprise.

Application in your case

Given the facts of this case, we can establish based on MT 2006/1 that on the sale of the Property, the sole trader business carried out under your individual ABN will cease to carry out business activities on the Property, effectively terminating the operations of the business in connection with that asset.

MT 2006/1 details that termination of the enterprise is effectively carrying on an enterprise, and this would satisfy the last limb of subsection 9-5(b) of the GST Act, rendering the sale of the Property a taxable supply; however, only to the extent of carrying out the sole trader enterprise.

GSTR 2004/8 clarifies that a connection with the Property as part of the furtherance of the enterprise can be established even though the thing (the Property) is not principally applied. In this case, the business uses some portion of the Property for business purposes, establishing a sufficient connection in the furtherance of the enterprise at the time of the sale.

Apportionment

Section 9-80 of the GST Act provides that, where a supply is partly taxable and partly input taxed, the value of the supply is to be apportioned between the taxable and non-taxable (that is, input taxed) parts of the supply.

A supply which contains both taxable and non-taxable parts is referred to as a mixed supply. Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides guidance on apportionment at paragraphs 89-90 detailing the concept of apportionment to sales of real property that includes a residential premises.

Supplies requiring apportionment

89. In some circumstances, premises consist of two or more parts: one part residential premises to be used predominantly for residential accommodation, and the other part premises of another kind. As paragraph 40-35(2)(a), subsection 40-65(1), and paragraph 40-70(1)(a) refer to the extent that the premises or property are to be used predominantly for residential accommodation, it is necessary that the value of the supply of such premises be apportioned.

90. This means that, if there is a single supply of the premises but only part of premises is residential premises to be used predominantly for residential accommodation, the supply is input taxed to the extent of that part. For example, if residential premises are designed, built or modified so that part of the premises is a house and part is for commercial purposes, such as a shop (based on its physical characteristics), a supply of the premises is a taxable supply to the extent that it relates to the shop. The supply of the premises is input taxed to the extent that it consists of the house. See Examples 8 and 9 at paragraphs 41 to 45 of this Ruling.

Applying this reasoning to the sale of the Property, consideration should be given as to how much of the Business Section relates to the enterprise activities of the sole trader enterprise, which forms the taxable supply component. With regards to the balance of the property, we are satisfied that both the Vacant Section and the Residential Section form the input taxed component of the property sale.

Conclusion

The supply of the property is a taxable supply under section 9-5 of the GST Act, but only to the extent that it relates to the furtherance of the sole trading enterprise. The remainder of the property is considered an input taxed supply of a residential premises. Apportionment of taxable and input taxed components of a mixed supply is required on a fair and reasonable basis.

Question 2

Is the forfeited deposit consideration for a taxable supply under section 9-5 of the GST Act?

Summary

Yes, the forfeited deposit is consideration for a taxable supply, but only to the extent the supply is not an input taxed supply of a residential premises.

Detailed reasoning

Forfeited Deposit

Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation (GSTR 2006/2) provides guidance on the purpose of Division 99 of the GST Act at paragraphs 13 to 15:

The Purpose of Division 99

13. Subsection 99-5(1) prevents a security deposit from being treated as consideration for a supply until such time that the deposit is either forfeited because of a failure to perform the secured obligation or applied as all or part of the consideration for a supply.

14. Under subsection 99-10(1), the GST payable on a taxable supply for which the consideration is a security deposit is attributable to the tax period in which the security deposit is forfeited or applied as all or part of the consideration for a supply. The EM contemplates at least two types of security deposit arrangements to which this Division applies.

15. One type of arrangement involves a contract for the purchase of real property, goods or services (a 'purchase contract'), where the recipient pays a deposit to secure their obligations under the contract.

As provided above under 'The Sale', in late MM YYYY the Purchaser defaulted on paying the second instalment of the deposit and, as a result, the contract was terminated on or around DD MM YYYY. Subsection 99-5(1) of the GST Act ceases to apply and subsection 99-10(1) of the GST Act attributes the GST payable to the tax period the deposit was forfeited, being the financial year ending 30 June 2024 for this transaction.

GSTR 2006/2 also provides the following commentary on the characteristics of a 'security deposit', so we can establish that the deposit for the Property is a deposit for which Division 99 applies in paragraphs 18-20:

18. To fall within the provisions of Division 99, the amount received by the supplier must be a 'deposit'.

19. The term 'deposit' is not defined in the GST Act. However, judicial decisions have indicated that the term 'deposit' has a particular meaning in a commercial context.

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.

20. For a payment to be considered a 'security deposit' for the purposes of Division 99, it should have the following characteristics:

•         be held as a security for the performance of an obligation: see paragraphs 21 to 30;

•         the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit: see paragraphs 31 to 50;

•         be at risk of forfeiture upon failure to perform the obligation: see paragraphs 51 to 64; and

•         be a reasonable amount:[8] see paragraphs 65 to 108.

Based on the characteristics of the deposit made by the Purchaser to you, the deposit would satisfy the requirements of Division 99 of the GST Act to qualify as a security deposit before the default occurred and therefore is not treated as consideration until the forfeiture event on DD MM YYYY.

In application of GSTR 2006/2 paragraphs 18-20:

•         The deposit was paid to you, the supplier.

•         The deposit is held as security for the performance of an obligation, being the completion of the Contracts of Sale of Land agreement.

•         The deposit is at risk of forfeiture upon the failure to perform an obligation. This occurred on the 24 August 2023 when the second instalment was not fulfilled, resulting in the contract being terminated.

•         Finally, the full deposit amount is 20% of the purchase price and is considered reasonable.

We have established that the forfeited deposit becomes a supply for consideration, the next question to be answered is, is the supply taxable and to what extent?

GSTR 2006/2 provides an example on forfeited deposits with the characteristics of a mixed supply:

Example 13B: Purchase contract - forfeiture of a deposit on what would have been a mixed supply

128B. Assume the local supplier would have made a mixed supply consisting of both beef and cardboard boxes under a single contract for which Joanne paid a single deposit. Upon forfeiture of the deposit the supplier would determine on a reasonable basis the amount of the forfeited deposit relevant to the supply of a right to Joanne to receive the cardboard boxes under the contract. The supplier would attribute GST payable on this portion of the forfeited deposit. The supplier would not attribute any GST for that portion of the forfeited deposit applicable to the contemplated GST-free supply of beef.

As detailed in the Example 13B, the 'Contract for the Sale of Land' deposit would be attributed as GST payable on the relevant taxable portion of the total supply of that original contract. We have already established that the Property sale would include both taxable and input taxed supplies and, by extension, the same apportionment should be applied to the deposit consideration.

Apportionment

The deposit is consideration for a mixed supply as established in question 1 above. The same rules of apportionment apply.

Conclusion

The forfeited deposit is consideration for a taxable supply, but only to the extent the supply is not an input taxed supply of a residential premises.