The facts in Reliance Carpet are as follows:
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.
Reliance 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 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 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.
A 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.
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Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
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