FCT –v– Reliance Carpet Co Pty Limited is of interest to people selling properties because it was the first GST case heard in the High Court and involved the forfeiture of a deposit.
Facts
The purchaser of a property failed to settle in time and the sale contract was rescinded and the deposit forfeited to the vendor. The purchaser's accountant requested a tax invoice for the forfeited deposit. The vendor declined to provide a tax invoice on the basis that the deposit was retained as damages in part satisfaction of the vendor's loss and was not consideration for a taxable supply. The vendor was assessed for GST on the forfeited deposit, and objected to the assessment.
High Court of Australia Decision
The High Court unanimously affirmed the ATO's decision that the forfeiture of a deposit, as rendered under a standard land contract, is consideration for a supply for the purposes of the GST Act.
Practical Consequences – Should vendors require a deposit of 11%?
Is it necessary, in contracts for sale of real estate entered into by vendors registered (or required to be registered) in the course or furtherance of an enterprise, to require the purchaser to pay more than a ten per cent deposit to cover the potential GST imposition on the vendor if there is a forfeiture of the deposit?
As only a small percentage of sales are made by vendors registered for GST purposes in the course or furtherance of an enterprise and as an even smaller percentage of those sales fail to proceed to completion, it is problematic whether the contract of sale should contain any gross up or increased deposit mechanism. There may be a place for an 11% deposit in commercial contracts. But great care and our advice should be sought if a gross up is proposed – for example in Queensland if a deposit is more than 10% the contract will be deemed an instalment contract giving the purchaser additional rights and making termination of the contract by the vendor more difficult.
It may be preferable for vendors to either absorb the GST (on the deposit) as a cost of business or, alternatively, increase the sale price by an amount to cover the contingency.
The case also has implications for other kinds of forfeited deposits, like deposits on contracts for provision of goods and services generally. But the ATO, in a revised impact statement after the decision, says GST will not apply to a forfeited deposit if the underlying transaction would have been GST free or input taxed.
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.