Australia: International Tax Panel Update

Last Updated: 3 November 2008
Article by William Thompson

Originally Published September 2008

Federal Budget roundup

The 2008-09 Federal Budget, the first under the new Labor government, introduced major revenue and expenditure measures that will have a significant impact on business.

Taxation of Financial Arrangements (TOFA) Stages 3 and 4

The final components, stages 3 and 4, of the TOFA reforms introduce new tax rules for accruals/realisation, fair value, retranslation, reliance on financial reports and hedging. The legislation will apply for income years commencing on or after 1 July 2009.

Debt/Equity: Upper Tier 2 hybrid instruments

The Government also announced technical amendments to earlier TOFA legislation, and will proceed with measures that clarify the tax treatment of certain Upper Tier 2 and similar capital instruments.

Specifically, regulations will be made to facilitate debt tax treatment for certain Upper Tier 2 and similar capital instruments issued by:

  • authorised deposit-taking institutions (ADIs) that are banks, and their Australian Prudential Regulations Authority (APRA) regulated subsidiaries
  • ADIs that are non-mutual building societies, and their APRA regulated subsidiaries
  • any entity that has undertaken to comply with APRA's prudential standards dealing with capital adequacy, and any of its subsidiaries covered by the undertaking and
  • a foreign ADI that is a bank and is regulated for prudential purposes by a foreign prudential regulator that has a regulatory role comparable to that of APRA, and under ADI capital requirements comparable to those of APRA.

The Government will extend the debt/equity transitional arrangements under the income tax law to 1 July 2008 to ensure that the law preceding the debt/equity tax rules continues to apply for Upper Tier 2 instruments.

Foreign currency amendments

Amendments will be made to the foreign currency provisions of the income tax law to extend the scope of a number of compliance cost saving measures in the law, and to make technical amendments to ensure that the provisions operate as intended.

Final withholding tax on certain distributions of Australian managed investment trusts to foreign residents

The Government is reducing the withholding tax on certain distributions from Australian managed investment trusts (MITs) to foreign resident investors. The non-final rate of 30% will be reduced to a final rate of 7.5%.

The measure will affect fund payments made in relation to the first income year after the enabling legislation becomes law, intended to be in the 2008 09 income year. It will cover distributions made directly from MITs to foreign residents as well as distributions made through other intermediaries (including custodians). Distributions of dividends, interest and royalties will continue to be covered by the existing final withholding tax arrangements.

Foreign residents, who reside in a country that is defined as an 'information exchange country' will be subject to:

  • a 22.5% non-final withholding tax for fund payments of the first income year after the enabling legislation becomes law (intended to be the 2008-09 income year)
  • a 15% final withholding tax for fund payments of the second income year (intended to be the 2009-10 income year) and
  • a 7.5% final withholding tax for fund payments of the third income year (intended to be the 2010-11 income year) and later income years.

For the first income year, as an interim measure, foreign residents will be eligible to claim deductions for expenses relating to their fund payments. These residents will be taxed at a new rate of 22.5% on an amount net of any deductions. Foreign residents, not resident in a country defined as an 'information exchange country' will be subject to a 30% final withholding tax.

Capital gains tax — cancellation of interests in widely held entities

From the 2006-07 income year, the Government will allow taxpayers to calculate their capital gains or losses using the actual proceeds received where shares or units in widely held entities are cancelled or surrendered (rather than requiring the calculation to be done using the market value of the shares or units).

Capital gains tax — modify the scrip for scrip roll over provisions for corporate restructures

The Government will modify the scrip for scrip capital gains tax roll over relief provisions, with effect from 13 May 2008. This will ensure that for corporate restructures, the acquiring entity's cost base of shares in the target entity reflects the tax costs of the target entity's net assets. This cost base will also be used in determining the value of the target entity's assets for tax consolidation purposes if the target entity subsequently joins the acquiring entity's tax consolidated group. This measure has an ongoing unquantifiable revenue impact.

Review of Australia's tax system

The review will look at the current tax system and make recommendations to position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century. It will consider:

  • the balance of taxes on work, investment and consumption and the role for environmental taxes
  • further enhancements to the tax and transfer systems facing individuals, families and retirees
  • the taxation of savings, assets and investments, including the role and structure of company taxation
  • the taxation of consumption and property and other state taxes
  • simplifying the tax system, including the interactions between federal, state and local government taxes
  • interrelationships between the elements of the tax system, as well as the proposed emission trading system.

The review (known as the Henry Review) will be conducted by the Federal Treasury in several stages. An initial discussion paper was released on 6 August 2008. The review panel will provide a final report to the Treasurer by the end of 2009.

Climate Change

Tax Implications within the Garnaut Report on Climate Change

The Draft Report, issued in July 2008, proposes an emissions trading scheme (ETS) and calls for as many sectors as possible to be included in the scheme to share the costs across the economy. However, the tax implications of the ETS, which are likely to be wide-reaching across industries, are not examined in detail in the Report. To read the full report please click here.

The ETS will have the most considerable effect on trade exposed, emission-intensive industries and the Report proposes that domestically, up to 30 per cent of permit sales revenue could be returned to these industries.

The parts of these payments which are not committed to firms that exceed the threshold can be recycled into broad-based efficiency-raising tax cuts to the corporate sector (see page 387 of the Report). Detailed advice on tax reductions could be provided within the parallel Henry Review, but any tax cuts should be ongoing not transitional.

While this approach sacrifices the precision of targeted assistance schemes, a well-designed tax relief has the potential to reduce the loss incurred by the economy due to the inherent uncertainty found in materiality tests and algorithms for assistance payments. Candidates for reduction or abolition would be input-based or transaction taxes (such as stamp duties), which are highly inefficient.

A contentious issue is whether countries should be allowed to impose border adjustments if they introduce carbon pricing ahead of others. The global community has a strong interest in accepting international agreements and avoiding border taxes that create distortions in production and investment in trade-exposed, emissions-intensive industries. However, if an international agreement on emissions trading is not forthcoming, the pressure, and indeed the case, for border adjustments will grow.

The Supplementary Draft Report, Targets and Trajectories, issued on 5 September 2008, includes proposals for emissions reduction trajectories and targets for Australia within an international context. The Final Report is due by 30 September 2008.

The modelling for the price of carbon under any emissions trading scheme is being prepared by Treasury and is not expected to be released until September 2008 or later.

ATO scanning process for proposed carbon emissions trading scheme

The Commissioner of Taxation commented, at the 8th International Conference on Tax Administration, that the ATO had developed a robust scanning process to examine the proposed emissions trading scheme. This helps the ATO understand the size and scale of the tax impacts of the proposed scheme so it can be proactive in responding to the Government's requirements.

The ATO is focussing on:

  • understanding and contributing to the administrative design
  • identifying the tax technical issues and taxation arbitrage opportunities
  • providing advice on opportunities for reducing compliance costs
  • identifying possible compliance issues and strategies for addressing them.

International tax news

Reforms to Australia's foreign source income anti-deferral regimes

Australia currently has a number of different regimes for the taxation of foreign source income - that is, regimes that seek to prevent taxpayers deferring Australian tax by storing foreign source income in offshore entities. These include the controlled foreign company (CFC) and foreign investment fund (FIF) provisions, the transferor trust rules, the trust deemed present entitlement rules and the capital gains tax regime.

These regimes have been introduced at different times over several decades. In many cases, they have potentially overlapping and inconsistent operations and the provisions are exceedingly complex and confusing. These regimes are in need of fundamental reform, based around consistent, unifying principles.

The Board of Taxation released an issues paper as part of its review of the regimes that addresses several key topics:

  • a new listed public company exemption
  • the CFC active investment exception
  • a distribution exemption
  • the identification of interests
  • branch-equivalent calculations.

The Board has stated its support of a listed public company exemption, provided integrity rules can be developed to address any inappropriate deferral risk, and of the continued application of the Capital Import Neutral (CIN) benchmark to foreign active investment. However, the Board identified ensuring an appropriate boundary between active and passive investments as being a challenge.

In relation to the distribution exemption, the Board is advocating that it be confined to managed funds and other similar collective investment vehicles. The Board has expressed concern about the integrity issues that may arise if the exemption is applied more broadly.

The Board has advocated the retention of the existing approach to identifying relevant interests for the purposes of reformed attribution rules. The concern is that any diminution of the existing approach would undermine the rules and threaten the revenue base.

The Board is considering ways of simplifying the current branch-equivalent calculations, either through the adoption of an accounting based approach or through the maintenance of the current tax law approach (but with a reviewed list of modifications or applicable provisions). Both approaches could assist in alleviating compliance costs.

Venture capital tax concession

The venture capital tax concession provides certain exemptions for capital gains on venture capital by certain tax-exempt entities. The concession consists of:

  • the 2002 concession to 'tax-exempt foreign residents', 'foreign venture capital fund of funds' and certain other non-residents from prescribed countries
  • the 1999 exemptions from capital gains tax on 'venture capital equity' by certain tax-exempt 'foreign superannuation funds'
  • the 'early stage venture capital' tax concession which provides tax concessions to Australian residents and foreign residents investing in early stage venture capital activities.

Certain changes will apply to the 2002 concession and early-stage venture capital tax concession for the 2007-08 income year and later years. The 2002 concession aims to facilitate non-resident investment in the Australian venture capital industry. Specifically, the concession provides for:

  • flow-through tax treatment to two newly created venture capital investment vehicles (the Venture Capital Limited Partnership (VCLP) and the Australian Venture Capital Fund of Funds (AFOF) where an investment was made either directly or through a VCLP)
  • an exemption from income tax on profits (capital or revenue) from the disposal of eligible Australian investments by partners or members of these investment vehicles or by 'eligible venture capital investors' who invest directly in such eligible Australian investments.

For the early stage venture capital tax concession starting from the 2007-08 income year, the eligibility requirements have been relaxed. The effect is that investments in companies and unit trusts not located in Australia may be eligible. The exemptions generally extend to residents of any foreign country. These changes are part of a package of measures announced by the previous Australian government, aimed at increasing activity in the venture capital sector.

Changes have also been made to encourage investments in start-up enterprises with a view to commercialisation of the activity. The new investment vehicle is the early stage venture capital limited partnership (ESVCLP) which replaces the pooled development fund. ESVCLPs will be treated as flow-through vehicles for tax purposes and, for the 2007-08 income year and later years, the concession provides an exemption from tax to all partners in relation to their share of income and gains derived from, or from disposal of, early stage venture capital investments.

Temporary residents' superannuation

The Minister for Superannuation and Corporate Law, the Hon. Nick Sherry, released a consultation paper on the proposed plan to require the payment of temporary residents' superannuation to the Australian Government.

Under the proposed plan, all future superannuation contributions and existing balances of temporary residents will be paid to the Australian Government. The measure, announced by the previous government, was intended to commence on 1 July 2008 but the Rudd Government will defer the start date to allow consultation on administrative issues.

Temporary residents:

  • who permanently depart Australia will be able to claim their superannuation within five years of departure (subject to withholding tax rules)
  • who become permanent residents will have their superannuation transferred back to a superannuation fund with interest.

Amendments to the Convention between Australia and the Republic of South Africa

A protocol was signed on 31 March 2008 to amend the double tax agreement between Australia and the Republic of South Africa. The amendments include new rules to prevent tax discrimination and changes to the withholding tax rates that may be imposed on cross-border dividends, interest and royalties. The changes bring the treaty more closely into line with OECD practice on withholding taxes. The changes in relation to dividends seem to be driven by the South African Government's recent announcement of changes in its taxation of companies, and the removal of secondary tax on companies. The existing protocol to the Australia/South Africa treaty contains a specific obligation on South Africa to notify Australia if it limits the rate at which it can impose its secondary tax under a treaty with a third country. It is not surprising that a proposed removal of the secondary tax from South Africa's domestic law has triggered a renegotiation of the treaty.

The changes to dividend withholding tax are fairly significant, and reduce the rate on unfranked dividends paid from Australia to South Africa from 15% to 5%. Franked dividends (i.e. dividends on fully taxed profits) paid from Australia will continue to be exempt under Australia's domestic law.

The new exemptions from interest withholding tax for interest derived by a financial institution, or by a government from investment of official reserve assets, are also significant, and may assist to encourage investment between the two countries.

The inclusion of the non-discrimination article is of interest. Australia has a non-discrimination article in its treaty with the US, however, Australia has never given the force of law to that article, even though the rest of the treaty has the force of law. Accordingly, it will be interesting to see whether or not Australia gives the force of law to the non-discrimination article in the South African treaty.

The protocol also amends the definition of 'permanent establishment' to include prescribed time limits for the creation of a permanent establishment where an enterprise operates substantial equipment or is engaged in the exploration for, or exploitation of natural resources. While natural resources companies will now have more certainty as to whether or not they have a permanent establishment, it is likely that their prospects of having a permanent establishment will actually increase, as a result of the new rule that provides that they only need to carry on activities relating to exploration or exploitation of natural resources in Australia for 90 days in a 12 month period. This 90-day rule is not a standard provision in Australia's treaties.

The amendments provide for two rates of dividend withholding tax, being 5% for non-portfolio dividends, and 15% otherwise, which is not the same as the double tax agreement between Australia and the United States of America which provides for a zero rate for 80% owned companies in certain circumstances. Nonetheless, Australia's domestic provisions will continue to apply so that dividends paid on profits which have been fully taxed in Australia will remain exempt from dividend withholding tax.

The amendments will come into force when Australia and the Republic of South Africa notify each other that they have completed their domestic requirements. The legislation necessary to give effect to the amendments in Australia is expected to be introduced in the Spring 2008 sitting of Parliament.

Australia's tax treaties – key themes of submissions revealed

As part of the Government's review of Australia's tax treaty negotiation policy and program announced in January 2008, the Assistant Treasurer revealed some key themes that have emerged from submissions by industry, professional associations and the public. They include:

  • giving priority under the treaty program to Australia's key investment partners and emerging economies such as China and India
  • promoting a modern treaty network to position Australia as a better regional headquarters for multinational companies in Asia, America and Europe
  • proceeding with negotiations previously commenced, including those countries with which Australia has 'most favoured nation' (MFN) obligations
  • strongly endorsing a more residence-based taxation treaty policy and a move away from tax treaties based on taxation of income at source
  • continuing government efforts to seek low royalty and dividend withholding tax rates (such as those negotiated in Australia's treaties with the US, UK and Japan)
  • including a specific provision relating to withholding tax on distributions from Real Estate Investment Trusts (REITs) and continued government efforts to achieve the same rates in future tax treaties as is proposed under the domestic law
  • aligning treaties with the OECD position of exempting nonresidents with portfolio interests in Australian entities from CGT, for the reciprocal benefit of Australians investing offshore
  • including time limits on when tax authorities can commence transfer pricing audits (as is the case under the tax treaty with Japan)
  • including in future tax treaties arbitration clauses under which disputes that were not resolved under mutual agreement procedures within 2 years would be subject to mandatory arbitration.

Tax Administration

Draft Taxation Determination TD 2008/D3 - distinguishing between debt and equity

Draft Taxation Determination TD 2008/D3 states that where a taxpayer has supplied or acquired property under an international agreement and that gives rise to a debt interest or an equity interest, Division 974 does not bear on the characterisation to be adopted for the purposes of applying Division 13 of Part III of the Income Tax Assessment Act 1936 (Cth) to the transaction.

The transfer pricing provisions in Division 13 of the Income Tax Assessment Act 1936 (Cth) permit the ATO to apply an arm's-length consideration in assessing the correct amount of income or deductions in connection with the supply or acquisition of property by the taxpayer under an international agreement. In applying Division 13 it may, be important to establish whether the contribution of funds under a loan agreement was equivalent to equity.

Division 974 of the Income Tax Assessment Act 1997 (Cth) provides tests to determine whether a scheme gives rise to a 'debt interest' or an 'equity interest'. The test for determining this is relevant for 'particular tax purposes'. The provisions dealing with international taxation to which the characterisation in Division 974 is relevant are set out in the Explanatory Memorandum to the New Business Tax System (Debt and Equity) Bill 2001. No mention is made of Division 13 of the Income Tax Assessment Act 1936 (Cth).

Where it is relevant to distinguish between debt and equity in the application of the transfer pricing provisions to a supply or acquisition of property, the characterisation is not affected by Division 974 of the Income Tax Assessment Act 1997 (Cth).

Use of certain legal structures established in Liechtenstein to attempt to avoid or evade Australia tax obligations

The ATO has released Taxpayer Alert 2008/2 concerning the use of certain legal structures established in Liechtenstein to attempt to avoid or evade Australia tax obligations. Liechtenstein's banking secrecy laws, which are comparable to those of Switzerland, and the low tax rates applied to certain corporate structures there, have attracted the attention of taxpayers and the ATO.

The Alert applies to the anonymous establishment and running of structures by promoters in Liechtenstein for Australian taxpayers, who then directly or indirectly return the income or property of the structures to the Australian taxpayer or their associates, often in a disguised manner. The involvement of the taxpayer or their associates with the structures is not disclosed in Australia, nor is any income reported.

The ATO has already issued notices to produce information and conducted unannounced access visits with Australians who have suspected links to Liechtenstein accounts or legal entities. There are currently 20 audit cases underway relating to funds in Liechtenstein ranging from $200,000 to millions of dollars.

The Liechtenstein Global Trust (LGT) has previously confirmed that client account details were stolen by a former employee of the bank who sold the information to German authorities. The investigations currently being undertaken by the ATO relate to entities with accounts with the LGT. However, the ATO says that its investigations predate the information being obtained illegally by the German revenue authority. While the ATO has said that it would not pay for such information, it is understood that the ATO does have possession of the information. The ATO insists that it received it for free.

PS LA 2008/7 and PS LA 2008/8 - promoter penalty provisions

The ATO released two Practice Statements which outline the principles the ATO will follow in applying the new promoter penalty provisions in Division 290 in Schedule 1 of the Tax Administration Act 1953 (Sch 1 TAA).

The Practice Statements are significant, because until now, little guidance was available on how the provisions, which have been drafted broadly and may apply to professional advisors (eg. lawyers and accountants), would be applied by the ATO.

The promoter penalty provisions were introduced in 2006 with the aim of deterring the promotion of tax exploitation schemes, by exposing 'promoters' of such schemes to heavy civil penalties (e.g. a maximum penalty for a body corporate of $2.75 million or twice the consideration received or receivable in respect of the scheme), injunctions and voluntary undertakings.

The key concern with the new provisions was their potentially broad application, due to the wide definitions of the key concepts of 'promoter', 'tax exploitation scheme' and 'implementation of a scheme otherwise than in accordance with a ruling'. For example, it was not clear to what extent professional advisors could be liable as 'promoters' of tax exploitation schemes for providing advice to taxpayers in relation to the entering into or carrying out of a tax exploitation scheme.

Although the Practice Statements primarily deal with the administration of the provisions (i.e. the ATO's internal review processes), the ATO provides the following relevant comments:

  • an entity which merely provides independent and objective tax advice, including advice regarding tax planning, will not be a 'promoter' for the purposes of the penalty provisions
  • not every case which involves the application of the general anti-avoidance rule (in Part IVA of the Income Tax Assessment Act 1936) will be a tax exploitation scheme or involve conduct that warrants the application of the penalty provisions
  • a change in the way a product ruling scheme is implemented will not be materially different from the way it is described if it is merely a difference in the implementation of the arrangement which will not impact upon the tax outcome for investors.

The two Practice Statements indicate that the ATO intends to apply a practical, commercial approach to the application of the promoter penalty provisions. However, it should be noted that The statements are not binding on the ATO, and do not necessarily reflect how the courts will interpret the new provisions.

ATO warns against tax evasion arrangements in Vanuatu

A Taxpayer Alert warned people against using arrangements in Vanuatu or other tax havens to claim false deductions or hide income offshore.

The ATO is investigating arrangements that may involve Australian resident taxpayers claiming for deductions in relation to services provided or otherwise justifying the flow of funds to overseas entities. These funds are then transferred back to the taxpayer through loan arrangements or the use of debit or credit cards. Alternatively, the funds may be transferred to a separate asset-holding structure in Vanuatu and used to acquire assets.

A former Sydney accountant, now a resident of Vanuatu, is the third person to be arrested in an investigation by Australian Federal Police (AFP) and the ATO (the Project Wickenby taskforce) examining multimillion-dollar offshore money laundering schemes through the use of tax havens.

Certain 'wash sale' arrangements under review

The ATO issued a Taxpayer Alert warning people to be cautious about certain 'wash sale' arrangements to reduce capital gains tax or claim deductions. A wash sale is used to describe the sale and purchase of the same, or substantially the same, asset within a short period of time. Since the sale and purchase essentially cancel each other out, there is no change in the economic exposure of the owner of the asset. The ATO is not concerned with the genuine disposal of an asset at market value.

Tax Cases

First Australian decision to consider transfer pricing methodology: Roche Products Pty Limited and Commissioner of Taxation

The Administrative Appeals Tribunal (AAT) held that the ATO's assessments of amounts paid for pharmaceutical products by Roche Products Pty Ltd, an Australian company, to its Swiss parent company Roche Holdings Ltd, were excessive.

The case examined various transfer pricing methods and attempted to establish a benchmark that actual prices could be tested against. Generally, the best method to determine the price of sale is to determine the price of the products elsewhere, this task was particularly difficult in relation to pharmaceutical products because:

  • comparable sales are hard to find (pharmaceutical companies rarely sell their products through third parties)
  • when they can be found, they generally relate to marketing processes linked to varying retail circumstances.

This is the first case where an Australian tribunal or court has considered the operation of Australia's transfer pricing rules and the application of transfer pricing formulae. It will be of substantial importance in conducting future transfer pricing studies and negotiating transfer pricing disputes.

The ATO assessed Roche Products to income tax on the basis that amounts paid by it to Roche Holdings were more than the amounts that would have been paid in an arm's-length transaction. It was conceded by Roche Products that these sales were not arm's-length sales, but it was argued that the ATO's assessments were excessive.

In relation to the appropriate method for assessing transfer prices, AAT President Mr Justice Downes noted the usual starting point in determining whether or not acquisitions were at arm's-length, is to look for actual arm's-length transactions, preferably for the same goods in the same market.

Where there are no such arm's-length sales, the next step is to look for very similar goods or a very similar market. If this is possible the question becomes whether or not the goods or markets are sufficiently comparable and whether or not any, and if so, what, adjustments can be made to compensate for any differences.

Interest Deductibility – St George Bank Ltd v Commissioner of Taxation

Following the acquisition of Advance Bank in 1996, St George Bank (St George) was required to raise Tier One capital in order to remain within the capital adequacy ratio limits as set by the Reserve Bank of Australia (RBA)(which was the prudential regulator of authorised deposit-taking institution at the time – the regulator is now the Australian Prudential Regulation Authority (APRA)).

$US350m of capital was raised by St George in July 1997 by participating in the following arrangement:

  • two wholly owned subsidiaries of St George, Dysty Pty Limited and Buchelin Pty Limited subscribed for all of the common securities in St George Bank Funding Co LLC (LLC) a Delaware corporation for $US107.2m
  • Merrill Lynch, as underwriter, acquired 250,000 preference securities issued by LLC for $US242.8m
  • LLC used the $US350m to subscribe for a subordinated debenture issued by St George (subordinated to deposit holders and other creditors) at 9.485% p.a. interest.

The consequence of the arrangement was that the RBA was satisfied that St George complied with the minimum ratio of qualifying capital to risk-weighted assets.

On the facts, the Court found that a condition of St George's banking licence was having a sufficient capital adequacy ratio position within the RBA's limits. Accordingly, the Court held that the capital raising by St George, through the LLC, was not an affair of revenue, but rather of capital, undertaken to improve the underlying capital structure of St George and its group and for the purpose of establishing or enlarging the profit yielding subject of St George's banking business. As a result, the assessments were upheld.

St George has filed an appeal against the decision to the Full Federal Court.

Amendment to tax treatment of call options – restoring the pre-McNeil position

The Tax Laws Amendment (2008 Measures No. 3) Bill, will restore the position that shareholders issued with rights by companies seeking to raise capital will not have an income tax liability at the time of issue. Rather, rights issues will be treated as being on capital account.

The purpose of these amendments is to provide certainty for taxpayers by restoring the position that existed prior to the decision of the High Court of Australia in McNeil and prevent unnecessary compliance costs for companies and their shareholders.

If enacted, the amendments will apply to rights issued on or after 1 July 2001.

GST and forfeited deposits - Reliance Carpets

As reported in the October 2007 edition of this newsletter, the Australian Taxation Office (ATO) sought special leave to appeal to the High Court of Australia against the ruling of the Full Federal Court in the Reliance Carpets case.

In the Reliance Carpets case the taxpayer (Reliance Carpets) entered into a contract with a purchaser to sell land to the purchaser for approximately $3 million. The purchaser paid a deposit of 10% of the purchase price, but ultimately rescinded the contract. The deposit was forfeited and the taxpayer kept the amount. The Full Federal Court held that it did not consider that there was a 'taxable supply' in the circumstances within the meaning of the GST legislation, and the taxpayer was not required to pay GST on the amount

In its decision, the High Court confirmed that:

  • the deposit was consideration for the supply by the taxpayer at the commencement of the contract of 'entering the obligation to do something' - that is, the supply by the taxpayer was its agreement to sell the land
  • the GST legislation operates so that, once the deposit is forfeited, the GST liability arises at that point - in other words, the deposit was consideration for that initial supply by the taxpayer but it only become attributable once it was forfeited (ie. the GST liability was only triggered upon forfeiture).

Notwithstanding the above, the High Court then suggested that in the normal course of events, if a contract is performed so that the land is transferred and the deposit is applied as part of the purchase price, it would be treated as consideration for the supply of the land, not the supply of agreeing to enter into the contract for sale. Essentially, the High Court appears to be of the view that if a sale completes as normal, the deposit is, and always was, consideration for the supply of the land; but if the sale does not complete, the deposit is (and presumably always was) consideration for the seller's agreement to enter into the contract to sell.

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

Click to Login as an existing user or Register so you can print this article.

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”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
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).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.