Forfeited deposits and GST refunds – beware the taxman’s view

Before you leap on the possible chance to relieve your GST headache, make sure you’re not on a collision course with the taxman. By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

What happens when a deposit is forfeited? Do you have to pay GST? A decision of the full Federal Court in July suggests that there is no GST liability for deposits forfeited to vendors under a standard land contract. But a High Court appeal is pending, so the position is unclear for now.

Reliance Carpet, a vendor of real property, granted an option for $25,000 to buy the property for $3 million (less the option fee) in December 2001. Under the terms of the option agreement, the 10% deposit of $297,500 due under the sale contract became payable upon exercise of the option.

The option was exercised in January 2002 and the deposit was paid, late. The sale contract provided for deferred settlement of up to one year. However, the purchaser failed to settle in time and Reliance issued a rescission notice.

The contract was subsequently rescinded and the deposit was forfeited to the company.

In March 2004, the purchaser’s accountant requested a tax invoice for the forfeited deposit. The company’s solicitor declined to provide a tax invoice on the basis that “the deposit was retained as damages in part satisfaction of the applicant’s loss”.

The Tax Commissioner assessed that the company should pay GST on the forfeited deposit, but the full Federal Court has disagreed.

The case is not finalised just yet, as the Commissioner has sought special leave to appeal to the High Court from the decision. As yet, the High Court has not released its decision on this.

The case, however, raises the issue of GST refunds on forfeited deposits in general – they don’t have to be deposits on property.

Tax office views

The issue is important to businesses that may be affected, and the tax office has now released what is called a “decision impact statement” on the case. The following points made by the tax office in that statement should be noted:

• Any requests for refunds of GST paid on forfeited deposits will be held pending the outcome of the High Court proceedings. Taxpayers who consider they are entitled to a refund of GST should notify the Commissioner of their intention to seek a refund by completing a “Notification of entitlement to GST refund“.
• If the High Court does not grant the Commissioner’s application for special leave, any refund of GST made by the Commissioner will be subject to the GST being passed on to customers where that is required by the tax law. The tax office says taxpayers should await the outcome of the High Court proceedings before complying with this requirement.
• Taxpayers who have paid GST on forfeited deposits, and who meet all the conditions to be entitled to a refund, may be entitled to interest on the refund of that GST. In general, the interest will start to accrue 14 days after a taxpayer requests an amendment to treat the forfeited deposit as not subject to GST.
• Where tax office compliance action has commenced and one of the issues under review involves a forfeited security deposit, the Commissioner will not finalise the forfeited security deposit issue pending the outcome of the High Court proceedings.
• Taxpayers who follow the view of the full Federal Court may be required to pay any GST not remitted if the Commissioner’s view of the law is confirmed by the High Court. Any shortfall penalty will be remitted and, in certain circumstances, the “general interest charge” penalty may also be remitted by the tax office.
• Some taxpayers may choose to follow the Commissioner’s view in preparing their activity statements, but may choose not to pay the relevant GST pending the outcome of the High Court proceedings. In these cases, and subject to the outcome of those proceedings, the tax office says the Commissioner will usually defer any legal action to recover the unpaid amount until 14 days after those proceedings are complete. However, the Commissioner says he may take legal action for recovery in any case where “a significant risk to the revenue is felt to exist, for instance where assets are being dissipated”.

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory, a leading Australian provider of tax, accounting and legal information solutions.

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