The full Federal Court handed down an important ruling on a vendor’s liability to pay GST on a forfeited deposit for the sale of real property in the recent decision of Reliance Carpet Co Pty Limited v Commissioner of Taxation [2007] FCAFC 99 (5th July, 2007) ("the Reliance decision").
The vendor under the contract for sale had lodged an objection with the Australian Taxation Office (“the ATO”) to an assessment of GST in respect of a deposit that was forfeited to it on the rescission of a contract for the sale of real property.
The ATO made a public GST ruling on the objection of the vendor. The ATO ruled that a GST-registered vendor who is selling real property in the course of carrying on an enterprise will be liable for GST in relation to a forfeited deposit following a default by the purchaser under the contract for sale.
The vendor appealed the ATO ruling to the Administrative Appeals Tribunal ("the AAT"). The AAT upheld the ruling of the ATO.
The vendor appealed the decision of the AAT to the Federal Court. The full Federal Court held that the vendor was not liable for GST in respect of a forfeited deposit.
The Facts in the Reliance Case
In 2001 the vendor entered into an option agreement with the purchaser for consideration of $25,000.00 ("the option fee") for the purchase of the property for $3,000,000.00 less the option fee. In time, the purchaser exercised the option to purchase the property and the parties entered into a contract for sale of real estate for the sum of $2,975,000.00 plus GST.
The contract for sale provided that the purchaser pay a deposit of $297,500.00 with the balance of $2,677,500.00 to be paid on settlement. The purchaser was also granted the option to defer the settlement date for six months if required to relocate its business. The purchaser’s solicitors released the deposit to the vendor after which the purchaser exercised its option to defer settlement for six months.
The purchaser failed to pay the balance of the purchase price by the deferred settlement date and the contract was rescinded with the deposit forfeited by the purchaser.
The Legislation in Respect of GST and Deposits
GST is payable on "taxable supplies" which are supplies made for consideration. Consideration will include "any payment or any act...in connection with a supply of anything".
However, Section 99-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 ("GST Act") states that a deposit will not be treated as a supply for consideration unless the deposit:
(a) Is forfeited because of a failure to perform the obligation; or
(b) Is applied as all or part of the consideration for a supply.
The Full Federal Court Decision in the Reliance Case
The Full Federal Court in the Reliance case examined the reasoning of the AAT's finding that the vendor was liable for GST in respect of the forfeited deposit.
The AAT had held that the forfeited deposit was consideration for supplies that the vendor made when it entered into the contract for sale. The supplies that the vendor had made centred around a number of obligations that the vendor had to the purcahser on the entry into the contract for sale. The AAT found these obligations included:
(a) The maintenance of the property in its present condition; and
(b) The payment of all rates, taxes, assessments, fire insurance premiums and other outgoings in respect of the land.
The AAT stated that upon execution of the contract for sale the vendor made a supply as it entered into an obligation to take actions under the contract. The payment of the deposit was the consideration the vendor received for this supply.
The full Federal Court found that the reasoning of the AAT had an artificial resonance to it and stated that when the vendor entered into the contract for sale with the purchaser it entered into a contract for the supply of real property; nothing more and nothing less.
Accordingly, there was no supply of interim obligations on the entering of the contract nor subsequently and the vendor had not made any supply to the purchaser when the contract was rescinded. In light of these findings the full Federal Court stated that Section 99-5(1) of the GST Act did not deem the vendor to make a taxable supply to the purchaser. Therefore, the vendor was not liable for GST in respect of the forfeited deposit.
In the event that the decision of the full Federal Court in Reliance is not appealed to the High Court, vendors who have previously remitted GST in respect of a forfeited deposit may be able to apply to the ATO for a refund of any GST that has been overpaid.