Commissioner Carpets Seller

Commissioner of Taxation v Reliance Carpet Co Pty Ltd

A commercial property was sold for almost $3 million in 1992, and contracts were exchanged with a deposit of 10 per cent. Both vendor and purchaser were registered for GST.

 The purchaser did not complete the transaction and the deposit of $297,000 was forfeited to the vendor. The Commissioner of Taxation assessed the deposit for GST but the vendor (taxpayer) objected, applying to the Administrative Appeals Tribunal (AAT) for a review on the grounds that no supply in the terms of the 1993 GST Act had been created. His appeal was rejected.

 The taxpayer appealed to the Full Federal Court which found in his favour, ruling that a supply had not been created, either when the contract was entered into or at the point of rescission and forfeiture of the deposit.

 The Commissioner appealed to the High Court which allowed the appeal, agreeing with the AAT that the supply had in fact been created when the contract was entered into, and the deposit was consideration for that supply.

 Tax Office View

 The Full Federal Court considered that events in this case were only contemplated and as they did not actually occur (because the transaction was never completed), no supply arose.

 The High Court, however, considered that as the vendor granted rights to the purchaser over or in relation to land, this met the definition of real property in the GST Act 1993 and thus created a supply.

 The Tax Office concurs with the High Court’s approach which it considers practical. It also agrees with the High Court’s treatment of the security deposit as a consideration for the supply when it was forfeited and believe that this approach reflects the legislation.

 Possible Implications for Sellers

 If your sale attracts GST and your purchaser defaults and forfeits the deposit, consider that in the light of the above case, you will be liable to pay 10% GST on the forfeited deposit. To cover that, load the usual 10% deposit with an additional 10% for notional GST.