The High Court's decision in Commissioner of
Taxation v Reliance Carpet Co Pty Limited  HCA 22
confirms that GST is payable on the forfeiture of deposits.
While the decision concerns real property transactions, the
Court's wide concept of "supply" means the
implications of the decision have much broader application and
The purchase of land
The case arose out of the purchase of land in Victoria. The
purchaser, following exercise of a purchase option, paid a
deposit to the vendor, Reliance. The purchaser failed to pay
the purchase price on the date due for payment under the
contract for the sale of land. Reliance served a rescission
notice on the purchaser requiring remedy of the
purchaser's default within 14 days, but the purchaser
failed to remedy the default, so the contract was rescinded and
the deposit was forfeited to Reliance.
Both Reliance and the Commissioner accepted that the sale of
the land would have been subject to GST and that Reliance would
have been liable to remit GST on the sale of the land to the
purchaser. The question raised by the case was whether Reliance
was liable to pay GST on the deposit retained after the
collapse of the sale.
The matter was first heard in the Administrative Appeals
Tribunal ("AAT") where the Tribunal held that GST was
payable on the forfeiture of the deposit. On appeal to the Full
Federal Court, the AAT decision was overturned as the Court
struggled to identify any supply by the taxpayer to the
purchaser for which the forfeited deposit could be
consideration. As such, the Court determined that as there was
no supply, there could be no taxable supply and therefore GST
was not payable on the forfeited deposit.
High Court decision
The High Court preferred the view of the AAT supporting the
argument that there was a supply of interim obligations made by
the taxpayer to the purchaser. As such, the operation of
Division 99 (specifically section 99-10) of the A New Tax
System (Goods and Services Tax) Act 1999 ("GST Act")
ensured that the consideration for such supply was the
forfeited deposit albeit that the supply and consideration
lacked temporal coincidence.
The High Court held that, while there was always an interim
obligation supply made by the taxpayer, the effect of Division
99 was to ensure that such a supply would only be taxable where
the deposit was forfeited. That is, it was only at the time of
forfeiture, "by reason of the failure by the purchaser to
complete the Contract that the supply represented by the making
of the Contract became a taxable supply".
The High Court acknowledged that the effect of its decision
was that in the context of the transaction, there were, in
fact, two supplies made by the taxpayer, being the:
supply of interim obligations - which could be
characterised as a grant by the taxpayer to the purchaser of
contractual rights exercisable over or in relation to land,
in particular the right to require the conveyance of the land
to the purchaser upon completion; and
supply of the land.
However, the High Court stated that upon the proper
construction of the GST Act, the effect of Division 99 was to
ensure that there was only one taxable supply, by applying the
consideration to either the supply of interim obligations
(where the deposit was forfeited) or supply of the land (where
the contract proceeded to completion).
How does this decision affect you?
The decision reflects a very wide concept of
"supply" for the purposes of the GST Act and
accordingly requires you to look beyond economic concepts of
supply to legal concepts and construction to better understand
the legal obligations contemplated by the parties that may give
rise to supplies.
While the decision is specific to real property transactions
which have very particular interim obligations supplied at the
time of exchange, the concepts discussed are a timely reminder
that the definition of supply is very broad and captures a
range of obligations made by parties in varied contexts.
For real property transactions, you should ensure that GST
payable on a forfeited deposit is appropriately canvassed in
your contractual arrangements by including an appropriate GST
gross up clause. For other transactions, you should consider
the ramifications of arrangements that you enter into that
involve the making of a deposit in order to secure the
performance of an obligation and properly safeguard against
potential GST consequences that could result should the deposit
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Many retail leases include a covenant to trade, requiring the tenant to open the premises for trade during certain hours.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).