Decision impact statement

Reliance Carpet Co Pty Ltd v Commissioner of Taxation

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Court Citation(s):
[2007] FCAFC 99
2007 ATC 4650
66 ATR 117

Venue: Federal Court of Australia
Venue Reference No: VID 724 of 2006
Judge Name: Heerey, Stone, Edmonds JJ
Judgment date: 5 July 2007
Appeals on foot:
The Commissioner filed an application for special leave to appeal to the High Court on 2 August 2007. The special leave application was heard on 14 December 2007 and special leave was granted.

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2006/2

Impacted Practice Statements:

• PS LA 2006/8
• PS LA 2006/11

Subject References:
GST
supply
security deposits
forfeiture

Précis

Whether GST is payable on the forfeiture of a security deposit.

Brief summary of facts

On 10 January 2002, the applicant vendor (taxpayer) entered into a contract of sale of a property for $2,975,000, with a deposit of 10%. Both the taxpayer and the purchaser were registered for GST.

The purchaser paid the deposit of $297,500 but failed to pay the balance of the purchase price by the due date of 10 July 2003.

On 11 July 2003, the taxpayer issued a rescission notice to the purchaser, requiring the purchaser to remedy its default within 14 days. The purchaser failed to remedy its default.

On or about 26 July 2003, the contract was rescinded and the deposit was forfeited to the taxpayer.

The taxpayer was assessed to GST on the forfeited deposit. The taxpayer objected and, following the disallowance of the objection, applied to the AAT for review of the objection decision.

The Tribunal found against the taxpayer and held that, upon execution of the contract and payment of the deposit by the purchaser, there was a supply and GST was payable on the forfeited deposit.

The taxpayer appealed to the Full Federal Court. In finding for the taxpayer the Court decided:

1.

The taxpayer entered into a contract for the supply of real property, nothing more and nothing less.

2.

There was no supply of interim obligations at the time of entry into the contract or subsequently.

3.

A supply did not take place because the contract was rescinded.

4.

The Commissioner's argument that Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deems there to have been a supply, based on the language of s99-5, was not accepted.

Relevant Case Law

None.

Tax Office view of Decision

The Full Federal Court's decision is in contrast to the views expressed by the Commissioner in GSTR 2006/2 entitled "Deposits held as security for the performance of an obligation".

The Commissioner considers that both the scope of the definition of 'supply' and the GST treatment of forfeited security deposits are important issues for the community that warrant further consideration by the High Court. As a result, the Commissioner sought special leave to appeal to the High Court from the Full Federal Court's decision. The special leave application was heard on 14 December 2007 and special leave was granted.

Administrative Treatment

Refund Requests

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". That will ensure that they are not prejudiced by time limits on refunds that may apply under the Taxation Administration Act 1953 (TAA).

For further information and for access to an online form to notify the Commissioner, visit the Tax Office website at www.ato.gov.au.

If the High Court finds against the Commissioner any refund of GST made by the Commissioner will be subject to the GST being passed on to customers where that is required by section 105-65 of Schedule 1 to the TAA. 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.

However, there are a range of individual circumstances that may affect the date interest starts to accrue. For example, if the taxpayer has not lodged certain BAS statements interest may not accrue. For a more detailed explanation, see Chapter 84 of PS LA 2006/11 ATO Receivables Policy.

Compliance action

Where 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. However, where required, the Commissioner will notify the taxpayer to ensure the Commissioner's right to amend is not adversely affected by time limits that may apply under the TAA.

Current transactions

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 may also be remitted (those circumstances are explained at paragraphs 110 to 112 of PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods).

Some taxpayers may choose to follow the Commissioner's view in preparing their activity statement, 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 Commissioner will usually defer any legal action to recover the unpaid amount until 14 days after those proceedings are complete. However, the Commissioner 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. For a more detailed discussion on 'significant risk' see Chapters 3 and 28 of PS LA 2006/11 ATO Receivables Policy.

It should be noted that taxpayers who claim an input tax credit can only do so if the supplier provides the recipient of the supply with a valid tax invoice indicating that GST is payable in accordance with the Commissioner's view.

Private Rulings

Any private rulings issued by the Commissioner will inform taxpayers that the GST treatment of forfeited security deposits is currently the subject of proceedings in the High Court and that clarification of this advice may be required, dependant on the outcome of those proceedings.

Implications on current Public Rulings & Determinations

Any implications will be considered when the proceedings become final.

Implications on Law Administration Practice Statements

We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer by the due date.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
7-1
9-5
9-10
9-15
29-5
99-5
99-10

Other References:
GSTR 2006/2
PS LA 2006/8
PS LA 2006/11
Chapter 3 ATO Receivables Policy
Chapter 28 ATO Receivables Policy
Chapter 84 ATO Receivables Policy