The decision of High Court in Reliance Carpet case on 22 May 2008 held that GST is payable by a vendor on a forfeited deposit under a standard land contract that has been terminated by the purchaser. This decision reinstates the Commissioner’s view and the practice adopted to this point by the Commissioner. The judgement overturns the contrary decision by the Full Federal Court.
The Case
Briefly, the taxpayer, being the vendor, entered into a contract of sale of a property on 10 January 2002 for $2,975,000 with the purchaser paying a deposit of 10% of $297,500 where settlement was to take place 12 months later. Both the taxpayer and the purchaser were registered for GST.
The purchaser paid the 10% deposit but failed to complete the balance of the purchase price due. The taxpayer issued a notice of rescission. The purchaser failed to remedy its default and the taxpayer exercised its right to rescind the contract and the deposit was forfeited to the taxpayer.
The taxpayer was assessed to GST on the forfeited deposit. The Administrative Appeals Tribunal (AAT) upheld the Commissioner’s assessment and the taxpayer appealed to the Full Federal Court. In finding for the taxpayer the Full Federal Court decided a supply did not take place because the contract was rescinded. As such there was no GST payable on the forfeited deposit.
Concerned about the wider implication of the decision, the Commissioner sought special leave to appeal to the High Court.
The High Court’s Decision
High Court, in contrary to the Full Federal Court decision, decided in the Commissioner’s favour, in that:
- The deposit was “consideration” for a taxable supply subject to GST as it was security for performance;
- The contractual promise of the vendor to convey the subject land on the completion of the contract was supply because at the time the contract was entered into and the deposit was paid, the vendor also granted the purchaser rights exercisable over the property, including the right to require the vendor to transfer the property at settlement; and
- Although the vendor made the supply before the purchaser’s breach that led to forfeiture of the deposit, under Division 99, the GST is attributable to the tax period during which the contract is terminated and the deposit forfeited.
The Australian Taxation Office’s Response
The ATO has published a Decision Impact Statement on 4 June 2008 in relation to the recent decision of High Court. The Commissioner considers that his public rulings and approach to administration of the GST are broadly consistent with High Court’s view.
The Decision Impact Statement also considers the situation where a contemplated supply would have been GST-fee or input taxed. This was not the situation in Reliance Carpet. Broadly, the Statement states that a supply consisting of a right to receive another supply that would be GST-free or input taxed is also GST-free or input taxed, as the case requires. This represents a departure from the view in the Commissioner’s ruling GSTR 2006/2.
The ATO states in its Decision Impact Statement that taxpayers who have previously submitted a “Notification of Entitlement to Refund” in relation to forfeited deposits will not be able to claim that refund. Taxpayers who followed the view of the Full Federal Court and lodged their business activity statement (BAS) now need to amend the relevant activity statement.
According to the Statement, the decision of High Court may extend beyond land contracts to deposits forfeited on contracts for the provision of goods and services generally.
Recommended Action
For taxpayers, who followed the view of the Full Federal Court and lodged their BAS, they are allowed a period of 3 months from the issue of this Statement to make amendments to the relevant BAS without attracting administration penalty or general interest charges (GIC). If taxpayer is unable to meet this deadline, a request of extension of time to make amendments should be made to the ATO.
Taxpayers, who have paid GST on forfeited security deposits in relation to a contract where the contemplated supply would have been GST-free or input taxed, should consider if a refund of GST paid is possible under the decision of High Court in Reliance Carpet case.
For future transactions, vendors may wish to consider asking purchasers to pay GST on deposits to cover the GST liability that may arise in the event that purchasers do not complete the contract and the deposit is forfeited.
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