A recent decision of the Full Federal Court of Australia has caused a major rethink regarding the GST treatment of forfeited deposits.
In Reliance Carpet Co Pty Ltd v C of T, the Full Federal Court held that the forfeiture of a security deposit does not constitute a supply by the recipient of the deposit. Accordingly, there is no supply on which to impose GST.
This is contrary to the view expressed by the Commissioner of Taxation regarding Division 99 of the GST Act in Goods and Services Tax Ruling GSTR 2006/2 that forfeited deposits were consideration for the various rights and obligations under the relevant contract of sale.
The Commissioner of Taxation has applied to the High Court of Australia for special leave to appeal against the Full Federal Court decision. It could be sometime before the final decision on the matter is handed down.
Until then, the Commissioner has stated that he will not be issuing any refunds of GST which (according to the Full Federal Court) have been incorrectly paid. However, the Commissioner has advised taxpayers who consider they may be entitled to a refund to notify the Australian Taxation Office in writing of their entitlement now.
Early notification has the advantage for taxpayers of extending the refund period. Under the GST law, a refund can only go back four years. Notifying the ATO of the entitlement to a refund now will start the clock, meaning that a refund could go back to 2003, even if the ultimate decision of the High Court is not delivered until 2009. Waiting until then to claim the refund would mean only being able to go back to 2005.
Any business that has taken security deposits should review their records to see if there are opportunities to seek a refund. This would be most common for participants in the travel, property and construction industries. Other businesses could be affected too.
If you believe you have remitted any GST on forfeited deposits in the last four years, you should send a notice of intention to claim a refund to the Australian Taxation Office (ATO) as soon as possible. Contact your Moore Stephens tax advisor for further details or assistance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
