March 23, 2009

The High Court of Australia recently ruled* that GST applies to forfeited deposits if:-

  • The vendor is registered for GST (or required to be registered); and
  • The vendor carries on a business of buying, developing and selling property, eg a developer

Thus in circumstances where a sale is itself a “taxable supply”, the vendor must account for 1/11 of the deposit as GST if the sale does not proceed and the deposit is forfeited. The High Court decision reverses an earlier ruling of the Federal Court that held that GST did not apply to forfeited deposits in developer sales.

Since the High Court judgment, the ATO has clarified the matter further. The ATO has issued a statement that GST will not apply to forfeited deposits if the contract itself is GST free (e.g. the sale of a going concern) or input taxed (e.g. the sale of second-hand residential premises).

There is no GST payable on forfeited deposits under a contract of sale of a private home.

What about investment property contracts? Because most residential property investors are not GST registered (or required to be registered) in most cases the vendor will not be required to account for GST if the buyer defaults and the deposit is forfeited.

Note that a different outcome may be reached in a “nominee contract” where the buyer nominates a third-party to complete.

If a GST liable vendor wants to ensure that the buyer also pays GST on a forfeited deposit in the event of default, a special condition should be included in the contract requiring the buyer to pay the GST in such circumstances.

*Commissioner of Taxation v Reliance Carpet Co P/L(2008) 82 ALJR 968

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