Private ruling: GST and security deposits
Date of advice: 6 February 2017
Published: July 2017

Ruling: Q1: When are you required to attribute goods and services tax (GST) payable on a taxable supply where you receive a deposit from a customer? | A1: You are required to attribute GST payable on a taxable supply in the tax period in which you receive a deposit.

Relevant facts and circumstances: ● You are registered for GST. ● You account for GST on a non-cash basis. ● You are a manufacturing company. ● You provide quotes for jobs and take a deposit when the customer places an order. ● The amount of the deposit is approximately 20%. However, it will vary depending on the job. ● This deposit covers the initial costs. ● In all cases, the deposit is deemed authority to start work, unless the customer advises they wish to withdraw. ● Once the deposit is received, plans are commenced and presented to the customer for approval - together with any price variations from the initial quote. ● At this point, the customer either proceeds or withdraws. ● If a customer withdraws, the deposit is refunded to the customer (less the cost of the plans). ● If the job proceeds, the deposit is applied to the first customer invoice raised.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 29-5; and | A New Tax System (Goods and Services Tax) Act 1999 Division 99.

Reasons for decision: Summary: Division 99 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out special rules in relation to a deposit held as security for the performance of an obligation. To fall within the provisions of Division 99 of the GST Act, the amount received by the supplier must be a 'deposit'. The term 'deposit' is not defined in the GST Act. However, judicial decisions have indicated that the term 'deposit' has a particular meaning in a commercial context. In Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd ( Reliance Carpet) [2008] HCA 22; (2008) 2008 ATC 20-028; (2008) 68 ATR 158, the High Court noted that the term 'deposit' had several aspects. These aspects include that a deposit: could be counted towards the payment of the purchase price; be brought into account in assessment of damages (however, the forfeiture of a security deposit is not a payment in the nature of damages or liquidated damages); be a token provided by the purchaser as 'an earnest to bind the bargain'; and provide a form of security for performance by the purchaser. Goods and Services Tax Ruling GSTR 2006/2 discusses security deposits. This ruling has been amended in parts to reflect the decision made in the High Court decision in Reliance Carpet. Paragraph 20 of GSTR 2006/2 provides that for a payment to be considered a 'security deposit' for the purposes of Division 99 of the GST Act, it should have the following characteristics: ● be held as a security for the performance of an obligation ● the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit ● be at risk of forfeiture upon failure to perform the obligation ● be a reasonable amount. Further, paragraph 51 of Goods and Services Tax Ruling GSTR 2006/2 states: 51. A fundamental requirement of a security deposit is that the parties to a contract clearly understand at its commencement, either through an express term or by implication, that the deposit may be forfeited if the recipient fails to perform the secured contractual obligations. It is necessary in the Commissioner's view, that there be a mutual intention by the contracting parties to make the deposit subject to forfeiture. If this intention is not present, the deposit is not a security deposit. Based on the information you provided, there is no mutual intention between you and your customers to make the deposit subject to forfeiture. In addition, you advised that the deposit will be refunded, (less the cost of the plans), if the customer cancels the purchase order. Therefore, the deposit in your circumstances is not a security deposit. Paragraphs 7 and 8 of GSTR 2006/2 state: 7. For GST purposes, a payment is treated as consideration for a supply if it is in connection with, in response to, or for the inducement of the supply. If the payment is consideration for a taxable supply, receipt of the consideration in a particular tax period requires attribution of the GST payable to that tax period. 8. The payment of a deposit may constitute part of the consideration for a supply. Under the basic rules of the GST Act, the GST payable on a taxable supply is subject to the attribution provisions contained in section 29-5. We consider that the deposit paid to you by a customer is part payment towards the supply of the thing ordered and is applied towards the consideration for the total supply. You have advised that you account for GST on a non-cash basis. Paragraph 32 of Goods and Services Tax Ruling GSTR 2000/29 provides that if you do not account for GST on a cash basis, you attribute all the GST payable on a taxable supply to the earlier of: ● any of the consideration for the supply is received; or ● an invoice for the supply is issued. In your circumstances, you take a deposit when the customer places an order. If the job proceeds, the deposit is then applied to the first customer invoice raised. Therefore, we consider that you attribute all the GST payable on a taxable supply in the tax period in which you received the deposit.