RELIANCE CARPET COMPANY PTY LTD v FC of T

Members:
H Olney DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 486

Decision date: 5 June 2006

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Hon H Olney AM QC (Deputy President)

The application

1. This is an application to review a decision to disallow the applicant's objection to an assessment of goods and services tax (GST).

2. The matter in issue is whether the applicant is liable to pay GST in respect of a deposit that was forfeited to it upon the recision of a contract for the sale of real property.

The facts

3. The relevant facts, which are not in dispute, are as follows:

• (a) On 3 December 2001 the applicant entered into an agreement (the option agreement) with 699 Burke Road Pty Ltd (the purchaser) whereby, in consideration of the sum of $25,000 (the option fee), the applicant granted to the purchaser the option to purchase the applicant's property at 699-701 Burke Road, Camberwell (the property) for the sum of $3,000,000 less the option fee.
• (b) The option agreement provided that a further sum of $297,500 would be paid by the purchaser upon the option being exercised, being the deposit payable under the contract of sale (the deposit).
• (c) The option agreement provided for the exercise of the option on or before 3 January 2002 but the parties agreed to extend the time for exercise of the option until 10 January 2002, and for the deferral of payment of the deposit until 31 January 2002.
• (d) On 10 January 2002 the purchaser gave notice in writing exercising the option to purchase.
• (e) The purchaser defaulted in payment of the deposit and on 1 February 2002 the applicant's accountant served on the purchaser a recision notice requiring the default to be remedied and the payment of interest and costs, within 14 days.
• (f) The purchaser paid the sum of $300,679.90 to the applicant's solicitors on 5 February 2002 being the deposit plus interest and legal costs as required by the recision notice.
• (g) The applicant and the purchaser subsequently executed a contract of sale of real estate (the contract) which specified a sale date of 10 January 2002 for the sale of the property to the purchaser for $2,975,000 plus GST.
• (h) The contract provides, inter alia, that:
  • i) The purchaser pay a deposit of $297,500 (which had already been paid);
  • ii) The balance of purchase price, $2,677,500, to be paid on settlement on or before 10 January 2003;
  • iii) The applicant had the option to defer settlement for a period of 6 months if required to relocate its business;

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  • iv) The provisions of Table A of the Transfer of Land Act 1958 (Table A) were incorporated in the contract.
• (i) On 27 February 2002 the applicant's solicitors released the deposit to the applicant pursuant to s 27 of the Sale of Land Act 1962.
• (j) On or about 18 October 2002 the applicant exercised its option to defer the date of settlement for 6 months to 10 July 2003.
• (k) The purchaser failed to pay the balance of purchase price on 10 July 2003.
• (l) On 11 July 2003 the applicant caused a recision notice to be served on the purchaser requiring the purchaser to remedy its default within 14 days.
• (m) No action was taken by the purchaser to remedy its default.
• (n) On or about 26 July 2003 the contract was rescinded and the deposit was forfeited to the applicant.

4. On 18 March 2004 and again on 7 May 2004 the purchaser's accountant wrote to the applicant's solicitors requesting a tax invoice for the forfeited deposit. The applicant's solicitors declined to provide a tax invoice on the basis, as it was said, that the deposit was retained as damages in part satisfaction of the applicant's loss.

5. By notice dated 9 November 2004 the respondent assessed the applicant as being liable to pay GST in respect of the forfeited deposit in the 3 month period ending 30 September 2003. By letter dated 29 December 2004 the applicant objected to the assessment and on 21 April 2005 the respondent notified the applicant that the objection was disallowed. The applicant seeks review of the respondent's decision to disallow its objection.

The hearing

6. The application was heard on 28 April 2006. Both parties were represented by senior and junior counsel who presented both written and oral submissions. Considerable reliance was placed upon judicial determinations from other jurisdictions, notably the United Kingdom and New Zealand, as well as rulings by the respondent, extracts from the relevant explanatory memorandum and a variety of learned writings. This type of material was obviously resorted to in the absence of any binding Australian judicial determination relating to the specific statutory provisions under consideration.

7. The Tribunal does not consider itself bound by the material relied upon by the parties particularly as that material did not disclose any consensus of opinion. Rather, the Tribunal considers it appropriate to resort to the legislative provisions themselves and to apply them to the particular facts of the case. In the event that the legislation proves to be uncertain or contradictory, resort may then be had to extraneous material.

The legislation

8. A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that "GST is payable on taxable supplies and taxable importations" (s 7-1). The Tribunal is presently concerned with the term "taxable supplies" and in this context sections 9-5, 9-10 and 9-15 are relevant. Those sections provide as follows:

• 9-5 Taxable supplies

• You make a taxable supply if:

  • (a) you make the supply for consideration; and
  • (b) the supply is made in the course or furtherance of an enterprise that you carry on; and
  • (c) the supply is connected with Australia; and
  • (d) you are registered, or required to be registered.

• However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

• 9-10 Meaning of supply
  • (1) A supply is any form of supply whatsoever.
  • (2) Without limiting subsection (1), supply includes any of these:
    • (a) a supply of goods;
    • (b) a supply of services;
    • (c) a provision of advice or information;
    • (d) a grant, assignment or surrender of real property;

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    • (e) a creation, grant, transfer, assignment or surrender of any right;
    • (f) a financial supply;
    • (g) an entry into, or release from, an obligation:
      • (i) to do anything; or
      • (ii)to refrain from an act; or
      • (iii) to tolerate an act or situation;
    • (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

  • …

  • 9-15 Consideration
    • (1) Consideration includes:
      • (a) any payment, or any act or forbearance, in connection with a supply of anything; and
      • (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
    • (2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

    • …

9. The only element of the definition of "taxable supply" that is in dispute between the parties is that set out in s 9-5(a) namely whether the applicant made a supply for consideration.

10. Division 99 of the GST Act contains special provisions which apply specifically to deposits which are given as security. Sections 99-5 and 99-10 provide as follows:

• 99-5 Giving a deposit as security does not constitute consideration
  • (1) A deposit held as security for the performance of an obligation is not treated as consideration for a supply, 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.
  • (2) This section has effect despite section 9-15 (which is about consideration).
• 99-10 Attributing the GST relating to deposits that are forfeited etc.
  • (1) The GST payable by you on a taxable supply for which the consideration is a deposit that was held as security for the performance of an obligation is attributable to the tax period during which 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.
  • (2) This section has effect despite section 29-5 (which is about attributing GST for taxable supplies).

The deposit

11. It is not in issue that the applicant was entitled to rescind the contract by reason of the purchaser making default in payment of the balance of purchase price nor is it disputed that upon recision the deposit was forfeited to the applicant. It is nevertheless appropriate to consider the nature of the deposit in the overall transaction.

12. There is no real debate as to the nature of a deposit paid by a purchaser under a contract of sale. As long ago as 1884 in the English Court of Appeal in
Howe v Smith (1884) 27 Ch D 89 Cotton LJ posed the question (at p. 95) "What is the deposit?" and proceeded to answer it thus:

… The deposit, as I understand it, and using the words of Lord Justice James, is a guarantee that the contract shall be performed. If the sale goes on, of course, not only in accordance with the words of the contract but in accordance with the intention of the parties in making the contract, it goes in part payment of the purchase-money for which it is deposited; but if on the default of the purchaser the contract goes off, that is to say, if he repudiates the contract, then, according to Lord Justice James, he can have no right to recover the deposit.

13. There is nothing out of the ordinary about the contract struck between the applicant and the purchaser. It can properly be described as a standard contract for the sale of real estate. In accordance with usual practice the purchaser paid a deposit of 10 per cent of the agreed purchase price to secure the bargain. At that

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stage the payment of the deposit did not attract any liability for GST due to the operation of s 99-5. If the contract had proceeded to execution as contemplated, the deposit would have been applied as part of the purchase price and GST would have been payable on the total consideration. But that of course did not happen.

14. Although the purpose of the contract was to regulate the sale and purchase of the property, it also made provision for 2 other contingencies namely that the vendor may breach its obligations under the contract and also that the purchaser may do likewise. In the former event, upon rescission by the purchaser, it would become entitled to repayment of the deposit (Table A, clause 6(3)(a); Sale of Land Act, s 26(1)(b)). In the case of the purchaser's default, upon the exercise of the vendor's right to rescind, the deposit would be forfeited to it (Table A, clause 6(3)(b); Sale of Land Act, s 26(1)(a)). In the events which happened the deposit was forfeited to the vendor, an event contemplated by s 99-5(1)(a) of the GST Act. Until that occurred, the status of the deposit money was unresolved. But for the vendor's recision, the deposit may have become part of the ultimate purchase price; or indeed, it may have been refundable to the purchaser. Having regard to the 3 possible alternative destinations of the deposit it is understandable that the legislature has put on hold the question of liability for GST until one or other of the events referred to in s 99-5(1) has occurred.

The effect of rescission

15. The applicant's action in rescinding the contract affected both the rights and liabilities of both parties. The applicant for its part was relieved of the obligation to make title to the property in favour of the purchaser and became entitled to sue for damages but nevertheless it ceased to be entitled to sue for specific performance or to sue for the balance of purchase price. The purchaser on the other hand lost any right it had to enforce the contract but was no longer bound by the remaining obligations imposed by the contract. In
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, Dixon J (as he then was) addressed these issues (at pp 476-7) in these terms:

… When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach.

16. It may be open to argument that the discharging of the purchaser from further performance of the contact amounted to "a supply" on the part of the applicant for which the forfeiture of the deposit was consideration. The difficulty with such a proposition is that the deposit was not paid in connection with such "supply"; it had been paid to the applicant at the time the contract was entered into for an entirely different purpose. Forfeiture meant that the applicant was no longer obliged to bring the deposit to account as part of the purchase price or to have it available to refund to the purchaser in the event of the purchaser rescinding the contract (an event that was no longer possible).

Consideration for a supply

17. Upon the execution of the contract and payment of the deposit by the purchaser, the vendor entered into a number of obligations towards the purchaser. The ultimate obligation was of course to transfer title to the purchaser upon payment of the balance of purchase price. But there were other obligations, such as maintaining the property in its present condition (Special Condition 2.1), to pay all rates, taxes, assessments, fire insurance premiums and other outgoings in respect of the land (Table A,

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clause 9) and to hold the existing policy of fire insurance for itself and in trust for the purchaser to the extent of their respective interests (Table A, clause 10). In the circumstances it may fairly be said that upon execution of the contract the applicant made a supply in that, in terms of s 9-10(2)(g) of the GST Act, it "entered into an obligation" to do the things it was bound to do under the contract and further that the payment of the deposit was consideration for a supply in that it was a "payment in connection with a supply" (s 9-15(1)(a)).

18. The premise upon which s 99-5 of the GST Act is based is that the payment of a deposit held as security for the performance of an obligation would (but for the provisions of the section) be treated as consideration for a supply. If this were not so then the section serves no purpose. What the section does however is to recognise that character of the deposit may not be finally established at the time it is first paid. Unless the deposit is either forfeited or applied as all or part of the consideration for a supply it is not to be treated as consideration for a supply. Thus, in a case where the deposit is refunded to the purchaser, as for example where the vendor defaults, s 99-5 operates so as to ensure that the original payment of the deposit is not treated as consideration for a supply.

19. Section 99-10 is equally consistent with the proposition that a deposit held as security for the performance of an obligation would, but for s 99-5, be treated as consideration for a supply. What this section does is to identify the tax period to which the taxable supply it attributable. Possibly the same effect could have been achieved if s 99-5(1) had provided that a security deposit is not to be treated as consideration for a supply "unless and until" the deposit is forfeited or applied as consideration for a supply.

20. The applicant has argued that by rescinding the contract it did not make a supply. The Tribunal agrees with this proposition. The supply was made when the deposit was paid upon entering into the contract. The subsequent rescission and forfeiture had the effect that the protection afforded by s 99-5 no longer applied and the payment thereupon was to be treated as a consideration for a supply attributable to the tax period during which the forfeiture occurred.

Deposit not liquidated damages

21. The applicant has advanced the proposition that the forfeiture of the deposit was in effect the payment of liquidated damages for the purchaser's breach of contract. With respect there is no basis for such a proposition. The deposit was not calculated on the basis that it was a genuine pre-estimate of the damages likely to be suffered by the applicant in the event of the purchaser's breach nor was it agreed to as such by the purchaser.

Conclusion

22. The Tribunal is of the view that on a proper construction of the relevant provisions of the GST Act, upon forfeiture of the deposit paid by the purchaser under the contract, the deposit is to be treated as a consideration for a supply attributable to the tax period during which the deposit was forfeited.

Determination

23. The Tribunal affirms the decision under review.