High Court holds GST payable on forfeit of the deposit – Reliance Carpet

In a unanimous decision, the High Court held that GST does apply to a forfeited deposit. This overturned the earlier decision of the Full Federal Court, which held that the taxpayer (the vendor) was not liable to pay GST in respect of a deposit that was forfeited to it by the purchaser upon the rescission of a contract for the sale of real property, on the ground that there was no supply by the taxpayer in relation to the forfeited deposit.

However, the High Court found that in signing the sale contract, the vendor, Reliance made a supply in that it agreed to maintain the property and pay rates, taxes and insurance premiums until the deal was finalised. Accordingly, upon forfeiture, the deposit was treated as consideration for those interim obligations.

The Court also confirmed that if the sale had been completed rather than forfeited, there would not have been two separate supplies (entering into the contract and supplying the land). When the deposit is applied as part of the consideration for the land, the GST is attributable for the tax period during which that occurs, and there is only one taxable supply.

Accordingly, if a vendor has received a forfeited deposit, and GST was not remitted in accordance with the decision of the Full Federal Court, then consideration should be given amending the GST returns as a matter of urgency.

Decision Impact Statement

The Australian Taxation Office has published a Decision Impact Statement in relation to the recent decision of the High Court in FCT v Reliance Carpet Company Pty Ltd.

The Decision Impact Statement considered the GST consequences if the contemplated supply would have been GST free (e.g. a going concern or the sale of farm land for farming purposes) or input taxed (e.g. residential premises).  The Statement confirmed that if a deposit is initially paid in relation to a proposed supply that would be GST-free or input taxed, the deposit, when forfeited, will also have that GST-free or input taxed character. The Commissioner will update the public ruling GSTR 2006/2 to reflect this view.

Implications

If for example, a contract is in respect of a sale of a residence that would have been input taxed, then the supply made by the vendor in the case where the contract was not completed and deposit forfeited will also be input taxed with no GST liability arising.

Administrative Consequences

In respect of the administrative consequences of the High Court decision, the Australian Taxation Office has advised that taxpayers who followed the view of the Full Federal Court on the GST treatment of forfeited deposit in lodging their BAS now need to amend their relevant activity statements and pay any additional GST liability arising from those amendments.

Taxpayers will have until 4 September 2008 to make amendments to the relevant BAS without attracting an administrative penalty and/or General Interest Charge (“GIC”) for the shortfall and shortfall period respectively. After this time, penalty and GIC may apply.

Taxpayers who require additional time to comply (because of their circumstances) may request an extension of time to make amendments to the relevant BAS. In order to request such an extension, the following information must be provided in writing to
the ATO:

  • the details of the taxpayer including their name and ABN;
  • detail of tax period/periods that the extension relates to;
  • reason supporting why the extension should be granted, and;
  • any other relevant details that may support the request.

Any clients requiring assistance either in amending their previous BAS or seeking an extension should contact us at HWL Ebsworth immediately.

 

Ari Schachna, Partner, wrote this article.