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August 2007
GST refunds on forfeited deposits under sale of land contracts
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 Lawyer in Profile  Chris BeenyPartner, Commercial Group Phone: 03 9288 0555 Chris Beeny is a partner in the Maddocks Corporate Commercial group. His principal areas of practice are superannuation, trusts, taxation, general corporate advice, company secretarial law and the law of charities and non-profit organisations. He also has extensive experience in private client work - wills and estates. A special focus for Chris has been superannuation, where Chris has been involved in related tax, trust, Corporations Act and regulatory advice for more than 17 years and is recognised as one of Australia's leading legal practitioners. Before joining Maddocks, Chris was a partner in the Melbourne office of Mallesons Stephen Jaques for 23 years. The 1996/97 edition of Legal Profiles described Chris as an "outstanding expert on drafting and compliance matters". In the 1998/99 edition he was described as having an "in depth knowledge of superannuation, a strong customer focus" and being "proactive and responsive"; while in the 2000/01 edition he was described as "highly regarded in the area of superannuation law and having demonstrated a high degree of commerciality". In the most recent edition he is referred to as having the "ability to consider what are often difficult legal issues and recommend a course of action that is clearly understood by board members who have varying levels of business experience" and for his "knowledge of super matters beyond simply legal issues". Chris's professional memberships include:
As well as writing numerous articles and speaking at many conferences, Chris is a joint author of "Superannuation: A Practical Approach" (Leo Cussen Institute), a contributor on superannuation topics to "The Employment Factbook" (Centre for Professional Development) and a member of the Editorial Panel of "Australian Superannuation Law Bulletin" (Prospect Media).  
A deposit forfeited by a purchaser to a vendor under a rescinded sale of land contract is not taxable for GST. The Commissioner may have to refund GST to taxpayers who have previously paid GST on forfeited deposits.
Anna Tang and Inna Shibalova
FactsThe facts in Reliance Carpet1 are as follows:
The issue: Was the deposit a "taxable supply"?The key issue in Reliance Carpet was whether the forfeited deposit could be considered as payment in consideration of a taxable supply, given that the Property was not supplied to the Purchaser. Division 99 of the GST Act contains special rules for dealing with deposits. A deposit held as security for the performance of an obligation is not consideration for a supply unless the deposit is forfeited or is applied as all or part of the consideration for a taxable supply. For Division 99 to apply, as the Full Federal Court pointed out, a relevant taxable 'supply' must still be made. The argumentsReliance Carpet argued before the AAT, and then before the Full Federal Court, that the deposit was not subject to GST as it was not possible to identify a taxable supply for which the forfeited deposit was consideration. The Commissioner responded that:
The AAT decision: Obligations between payment of deposit and settlement amount to a relevant supplyThe AAT held that the forfeited deposit was subject to GST on the basis that the forfeited deposit was consideration for a taxable supply. The AAT was of the view that the Contract created a number of obligations owed by Reliance Carpet to the Purchaser which together constituted a relevant taxable 'supply'. These obligations included:
The payment of the deposit by the Purchaser was therefore consideration for the taxable supply by Reliance Carpet of these obligations. Accordingly, the forfeited deposit was subject to GST. The Full Federal Court's decision: No relevant supply by vendor to purchaserThe Full Federal Court unanimously found in favour of Reliance Carpet. The Court rejected the AAT finding that the relevant taxable supply was the supply of obligations by Reliance Carpet to the Purchaser under the Contract. The Court considered the AAT's finding "artificial". The Court held that it was not possible to identify a taxable supply for which the forfeited deposit could be considered as consideration. Therefore, the forfeited deposit was not subject to GST. The Court also rejected the Commissioner's argument that Division 99 deems there to be a taxable supply. Rather, the Court held that Division 99 only applies GST to those forfeited deposits for which a taxable supply could be readily identified. Implications of caseA number of commentators predict there will be a flood of taxpayers seeking refunds for GST paid in respect of forfeited deposits. The amounts refunded may add of up to millions of dollars. In view of this, it is unsurprising that on 3 August 2007 the ATO announced that it would seek leave to appeal the decision in the High Court. More informationFor more information in relation to this article, contact Anna Tang on 03 9288 0555 or Inna Shibalova on (03) 9240 0772. For more information about tax and revenue queries generally, contact Maddocks and ask for a member of the Maddocks Tax and Revenue Team:
1 Reliance Carpet Co Pty Limited v Commissioner of Taxation [2007] FCAFC 99
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