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10 Jul 07 No GST on forfeited deposit - Reliance Carpet

The Full Federal Court (Heerey, Stone and Edmonds JJ) has upheld the taxpayer's appeal from the decision of the AAT, which had held that the taxpayer was liable to pay GST in respect of a deposit that was forfeited to it upon the rescission of a contract for the sale of real property.

The Full Federal Court noted, at para 10, that s 99-5(1)(a) of the GST Act:

"...provides that the deposit cannot be treated as consideration for a supply unless the deposit is forfeited because of a failure to perform an obligation in respect of which it is held as security for the performance of that obligation. However, in those circumstances, and contrary to the situation where the contract is completed and the relevant supply is quite clearly the supply of the land, the supply for which the forfeited deposit can then be treated as consideration is not readily apparent. It is the identification of this supply, if it exists, which lies at the heart of the dispute between the parties."

The Commissioner submitted that there were 3 possible supplies (as alternatives) for which the forfeited deposit was consideration:

"(1) a supply of one or more of the [taxpayer’s] rights and/or obligations under the contract prior to its rescission (what the [taxpayer] paraphrases as interim obligations) [this alternative was accepted by the AAT]; or
(2) a supply of one or more of the [taxpayer’s] rights and/or obligations arising from the rescission of the contract (rescission supplies); or
(3) a supply on forfeiture of the deposit by operation of Division 99 of the GST Act itself (deemed supply)."

The Full Federal Court rejected each of the 3 possible alternatives as the relevant supply. In relation to the third (deemed supply), the Court noted that the Explanatory Memorandum to the GST Bill said: "...if a security deposit made in relation to a taxable supply is forfeited, GST should be payable on the deposit". In the Court's view, the language of s 99-5 did not permit such a construction, and concluded, at para 28:

"This is one of those cases in which the language of the statute cannot be "massaged" through the application of modern principles of statutory construction to accommodate the legislative purpose identified through the statute itself and permissible extrinsic materials."

Accordingly, the taxpayer's appeal was upheld, and the Commissioner's decision to disallow the taxpayer's objection to the GST assessment set aside: Reliance Carpet Co Pty Ltd v FCT [2007] FCAFC 99 (Full Federal Court; Heerey, Stone and Edmonds JJ); 5 July 2007).

For a copy of the decision, go here

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