This article is from the Australian Property Journal archive
OPINION: THE High Court has held that GST is payable by a vendor registered for GST on a forfeited deposit under a standard land contract that has been rescinded.
Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22 the judgement overturns the contrary decision by the Full Federal Court. This may result in vendors 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. The decision may extend beyond land contracts to other commercial arrangements such as sale of business agreements and even deposits forfeited on everyday items such as hotel bookings and airline tickets.
This decision reinstates the Commissioner’s view and the practice adopted to this point by the ATO. After the earlier decision of the Full Federal Court, the Commissioner sought special leave to appeal to the High Court. Applications for refunds of GST paid on forfeited deposits have been held over, pending the outcome of the application for special leave. Following the High Court’s decision, there will be no refunds for GST paid on forfeited deposits under standard land contracts.
Background Facts
On 3 December 2001, Reliance Carpet Co Pty Ltd (Vendor) granted 699 Burke Road Pty Ltd (Purchaser) an option to purchase property in Camberwell, Victoria (Property) for an option fee of $25,000. The Purchaser exercised the option and on 10 January 2002, the Vendor and Purchaser entered into a contract of sale of the Property for $2,975,000, with a deposit of 10%. The Purchaser paid the deposit on 5 February 2002. Both the Vendor and Purchaser were registered for GST. Settlement was due 10 July 2003. The Purchaser failed to pay the balance of the purchase price on the due date for settlement and on 11 July 2003 the Vendor issued a notice of rescission. The Purchaser failed to remedy its default and the Vendor terminated the contract on 26 July 2003 and forfeited the deposit.
The Vendor was assessed to GST on the forfeited deposit. The AAT upheld the Commissioner’s assessment and the Vendor appealed to the Full Federal Court. In finding for the Vendor the Full Federal Court essentially decided a supply did not take place because the contract was rescinded.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 implications of the decision, the Commissioner agreed to treat the appeal to the High Court as a test case and pay the taxpayer’s legal costs of the appeal.
Decision of the High Court
The High Court considered whether there was a “supply” made for “consideration” once the contract had been rescinded and the deposit was forfeited.
The Court found that a deposit serves several functions including forming part of the purchase price and being security for performance by the Purchaser. The deposit fell within the definition of “consideration” because it was security for performance.
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. The Court held that this constituted a supply.
The High Court held that although the Vendor made the supply before the Purchaser’s breach that led to forfeiture of the deposit, the GST was not payable at the earlier time. Under the GST rules that apply to deposits, the GST is attributable to the tax period during which the contract is terminated and the deposit forfeited.
By David Stavropoulos, Melbourne partner and Anna Wilson, Deacons.*
Australian Property Journal
