Private ruling: GST and deposit held as security for 'off-the-plan' sale of properties
Date of advice: 2 December 2015
Published: February 2016

Ruling: Q1: Will section 99-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to the deposit of X% of the purchase price you will receive from foreign purchasers under the proposed 'off-the-plan' contracts for properties that will be constructed in Australia? | A1: Yes. Subsection 99-5(1) of the GST Act provides that 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 secured obligation; or b) is applied as all or part of the consideration for a supply. Goods and Services Tax Ruling GSTR 2006/2 discusses the characteristics of security deposits for GST purposes and Goods and Services Tax Ruling GSTR 2000/28 discusses the application of Division 99 of the GST Act in regard to a deposit held under a standard land contract. According to paragraph 20 of GSTR 2006/2, 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; and • be a reasonable amount. In this case, the deposit from the foreign purchaser under the proposed contract of sale of land will display the essential characteristics of a deposit under Division 99 of the GST Act as: • The proposed contract for sale of land will provide for a payment of X% of the purchase price as a deposit payable by the foreign purchaser at the time of entering into the contract. • The deposit will be retained until completion of the contract or earlier termination of the contract. Where the contract goes through to completion, the deposit goes against the purchase price; • Where the foreign purchaser fails to perform its obligation under the proposed contract, you will be able to keep the forfeited deposit of up to X% of the purchase price. • Having regards to the duration of the 'off-the-plan' contract for properties not yet constructed the bank's practice to financing the construction and the degree of risk of making supplies to foreign purchasers, the X% deposit is considered to be a reasonable amount in this circumstance. Accordingly, the deposit to be received from foreign purchasers and held by your solicitor under the proposed contract of sale of land will not be treated as consideration for a supply under section 99-5 of the GST Act unless the deposit is either forfeited because of a failure to perform the obligation or applied as part of the consideration for the supply of the apartment..

Relevant facts and circumstances: You are an Australian entity and registered for the goods and services tax (GST). You own a development site in Australia. You will construct residential properties on that land by seeking financial assistance from a bank. Under the standard banking practice, finance for the construction of the properties will be conditional upon your achieving a minimum level of 'off-the-plan' sales prior to draw down under the construction facility. The bank may not count 'off-the-plan' sales to foreign residents on the basis that it is not practical to enforce an order for specific performance against a foreign resident. However, the bank may be willing to count 'off- the-plan' sales to foreign residents if the deposit is of at least X% of the purchase price. You will ask a deposit of X% from foreign purchasers so that these sales can be included to the level of 'off-the plan' sales as requested by the bank in regard to financing the construction of the properties and to take into consideration the degree of risk when dealing with foreign purchasers. It is anticipated that a significant portion of purchasers of the properties will be foreign residents. You advised that the purchase price (referred to as the 'price' in the contract for sale of land) will be a GST inclusive amount. Unless the purchaser negotiates special terms, the contract for sale of land will provide for a deposit of Y% where a purchaser under the contract is an Australian resident. However, a deposit of X% will apply to foreign residents for the 'off-the-plan' sales and standard condition at xx in the contract (which is about the purchaser's default) will be amended to allow you to keep the forfeited deposit of up to X% of the purchase price. You have provided us with a copy of a draft of the contract for sale of land. The contract provides that if the purchaser does not pay the deposit in accordance with clause XYZ, you will be entitled to terminate the contract forthwith and without notice to the purchaser in which event the deposit will be forfeited to you.