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Who does this affect?

GST registered vendors that supply real property in the course of carrying on their enterprise.

What do you need to do?

GST may apply to a deposit that is forfeited under a Contract for the Sale of Land. The GST provisions in contracts should be reviewed to ensure that they allow for the recovery of GST on forfeited deposits, where possible.

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High Court decision overturns GST treatment of forfeited deposits - 22 May 2008

In a unanimous decision, the High Court has held that GST does apply to a forfeited deposit. This overturns the earlier decision of the Full Federal Court, which specified that GST does not apply to a forfeited deposit.

The High Court today handed down its decision in Reliance Carpet Co Pty Ltd v Commissioner of Taxation [2008] HCA 22. The case concerned the GST treatment of a deposit that had been forfeited under a Contract for the Sale of Land.

What is the impact of this decision for GST registered vendors?

There will be three immediate impacts of this decision:

  • GST registered vendors that sell property as a part of their enterprise (business) will now be liable for GST on any forfeited deposits (meaning that 1/11th of a deposit will effectively be lost as GST),
  • vendors that had ceased paying GST on forfeited deposits, following the earlier Federal Court decision, may now be required to pay GST on those deposits (subject to the time limits that apply to the recovery of unpaid GST amounts), and
  • vendors that may have been intending to claim GST refunds in light of the earlier Federal Court decision (pending the High Court decision) will now not be entitled to any refunds.

Will GST apply to all forfeited deposits?

GST will only apply to a forfeited deposit if:

  • the vendor is GST registered (or required to be registered), and
  • the vendor entered the contract as a part of an enterprise that it carries on (for example, the supply is made by a developer).

This means that GST will not apply to forfeited deposits that may have been paid under a contract for the sale of a private home (as the contract will not be entered by the vendor as a part of an enterprise). Further, as most residential property investors are not GST registered (or required to be registered), GST should not generally apply to forfeited deposits paid under a contract in respect of a residential investment property. There may however be exceptions to this general rule (for example, GST may apply if the vendor is a GST registered self managed super fund which is selling a residential investment property).

Will GST apply if the underlying sale would have been GST-free (such as for going concern or farm land sales) had the contract completed?

The Tax Office view is that GST applies to all forfeited deposits (where the vendor is GST registered and is supplying the real property as part of an enterprise), regardless of whether the underlying supply would have been GST-free had the contract been completed.

Unfortunately this issue was not tested in the Reliance Carpet decision, as the contract in question would have involved a taxable supply had it completed.

Is there anything a vendor can do to ensure that it continues to receive the full 10% value of a forfeited deposit?

In most instances, where GST applies, there will be little that a vendor can do to ensure that it continues to receive the full 10% value of a forfeited deposit. The best option is to ensure that the contract includes a GST clause that allows the vendor to recover an additional amount on account of GST if it makes a taxable supply to the purchaser. This will allow the vendor to recover an additional amount from the purchaser on account of GST, although recovering the extra amount may be difficult in practice.

A further practical difficultly with GST clauses is that the clause in a particular contract may not allow for the recovery of an additional amount on account of GST if the purchase price is expressed to be GST inclusive.

Another option that may be put forward is to increase the deposit amount to 11%. However, this would be a risky option because deposits that exceed 10% may be viewed as either a penalty or an instalment payment, with potentially adverse consequences.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.