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.
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sale contract was rescinded and the deposit forfeited to the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
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
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.
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.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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).