GST on forfeited deposit

08 July 2008 Topics: Property and planning law

The High Court, in its decision on 22 May 2008 in the case of Commissioner of Taxation v Reliance Carpet Co Pty Ltd, has held that GST is payable on forfeited deposits under contracts for the sale of property.

In this case, Reliance Carpet Co Pty Ltd entered into a contract to sell land in Victoria to a purchaser. When the purchaser failed to complete the contract, Reliance terminated the contract and forfeited the deposit of $297,500.

The Commissioner treated the forfeited deposit as consideration for a taxable supply and assessed Reliance as liable to pay GST in respect of the forfeited deposit.

The taxpayer disputed that assessment and was successful when the case was previously considered by the Federal Court, which in July 2007, held that GST was not payable on the forfeited deposit.

The Commissioner appealed and the High Court has now overturned the decision of the Federal Court.

The High Court has ruled that the payment by the purchaser of the deposit was in connection with a supply when the deposit was forfeited because of the failure of the purchaser to complete the contract. This conclusion follows from the application of s. 99-5 of the GST Act.

If you would like more information please contact Lara Dawson, Senior Associate in Cooper Grace Ward’s Property Team on 3231 2566.

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