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Security Deposits |
If a sale goes bung, will you pay tax on the deposit? When is a deposit treated as an instalment payment, or part payment, and when is a forfeited deposit subject to GST? |
The Tax Office has recently released public rulings on these matters, which are particularly pertinent for any vendor who has had a projected sale collapse. |
Recently, a GST-registered vendor sold land to a purchaser as a taxable supply under a standard contract for sale in Victoria. The purchaser defaulted in paying the purchase price. When the purchaser did not rectify the default within the required timeframe, the seller rescinded the contract and kept the forfeited deposit. |
In that case, which had gone to tribunal, the vendor was held liable for GST on the forfeited deposit, and has appealed. A range of suggestions have been put forward for dealing with GST on forfeited deposits, including increasing the deposit to 11 per cent of the purchase price. |
The suggested solutions have their problems. For example, if the deposit is set at 11 per cent, it may be treated as an instalment payment (because it exceeds 10 per cent of the purchase price), and hence become liable for GST. |
Until the GST treatment of forfeited deposits has been judicially determined, GST-registered vendors should be aware of the risk that they may lose a portion of any forfeited deposit as GST (including deposits paid under contracts involving GST-free or input-taxed supplies). |
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