Reliance Carpet Co Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 724 of 2006)
Judgment date: 5 July 2007
Date published: 31 July 2008

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

Overview 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 | On or about 26 July 2003, the contract was rescinded and the deposit was forfeited to the taxpayer.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 A supply did not take place because the contract was rescinded. 4.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. | 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 A supply did not take place because the contract was rescinded. 4.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.

Issues decided:

ATO 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:
Implications on current Public Rulings & Determinations | None

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
Subject references: GST supply security deposits forfeiture
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