Decision Impact Statement
Commissioner of Taxation v Reliance Carpet Co Pty Ltd
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 HCA 22
2008 ATC 20-028
68 ATR 158
Venue: High Court of Australia
Venue Reference No: M163/2007
Judge Name: Gleeson CJ, Gummow, Heydon, Crennan and Kiefel JJ
Judgment date: 22 May 2008
Appeals on foot:
Administrative Treatment (Implication on current Public Rulings and Determinations)
GSTR 2000/28GSTR 2006/2
Except as noted herein, this document is not a public ruling, but provides a statement of the Commissioner's position in relation to the decision and how the law will be administered as a consequence of the decision. Any proposals for changes in the law are matters for government and it is not appropriate for the Commissioner to comment.
Whether GST is payable on the forfeiture of a security deposit.
Impacted Practice Statements:
Brief Summary of Facts
The respondent vendor (taxpayer) entered into a contract of sale of commercial property for $2,975,000, with a deposit of 10%. The contract of sale was dated 10 January 2002 and was entered into consequent on the exercise of an option to purchase by the purchaser. Both the taxpayer and the purchaser were registered for GST.
The purchaser paid the deposit of $297,500 but failed to pay the balance of the purchase price by the settlement date of 10 July 2003.
On 11 July 2003, the taxpayer issued a rescission notice to the purchaser, requiring the purchaser to remedy its default within 14 days. The purchaser failed to remedy its default.
On or about 26 July 2003, the contract was rescinded and the deposit was forfeited to the taxpayer.
The taxpayer was assessed to GST on the forfeited deposit. The taxpayer objected and, following the disallowance of the objection, applied to the Administrative Appeals Tribunal (AAT) for a review of the objection decision ( Reliance Carpet Co Pty Ltd and Commissioner of Taxation  AATA 486).
The AAT found against the taxpayer and held that, upon execution of the contract and payment of the deposit by the purchaser, there was a taxable supply and GST was payable on the forfeited deposit.
The taxpayer appealed to the Full Federal Court ( Reliance Carpet Company Pty Ltd v Commissioner of Taxation  FCAFC 99). In finding for the taxpayer, the Court decided:
- there was no supply of 'interim' obligations at the time of entry into the contract or subsequently;
- a supply did not take place at forfeiture as a result of the rescission of the contract; and
- the Commissioner's argument that Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deems there to have been a supply, based on the language of section 99-5, was not accepted.
The Commissioner appealed to the High Court. The High Court unanimously allowed the Commissioner's appeal, finding, as contended by the Commissioner, that a vendor of land makes a supply to a purchaser when a contract for sale is entered into and that the deposit paid by the purchaser is consideration for that supply where the deposit is forfeited.
Relevant Case Law
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457.
Howe v Smith (1884) 27 Ch D 89.
Tax Office view of Decision
In reaching its decision the High Court examined the facts and determined whether they disclosed the presence of the statutory requirements in section 9-5 of the GST Act for there to be a taxable supply. The critical elements in this case for the existence of a taxable supply were whether there was a supply and whether the deposit paid and forfeited by the purchaser was consideration for any such supply.
Was there a supply?
In determining that there was a supply made by the taxpayer to the purchaser, the High Court examined the events that actually occurred and asked whether they gave rise to something meeting the statutory definition of supply in section 9-10. As a result, they found that there was such a supply. This can be contrasted with the Full Federal Court's approach which seemed to characterise events that, although contemplated, did not occur and on that basis determined that actual events meeting the statutory description of supply were not to be treated as such.
Specifically, the High Court referred to two reasons for its conclusion that there was a supply. First, at paragraph 37 of the judgment the Court endorsed the comments of Deputy President Olney in the AAT that there was a supply in terms of paragraph 9-10(2)(g) because the vendor entered into obligations (principally an obligation to transfer title to the land) upon the contract being made. Second, at paragraph 38 of the judgment, they also indicated that the events met the description of supply set out in paragraph 9-10(2)(d) because the vendor granted rights to the purchaser over or in relation to land. Such rights meet the definition of 'real property' in section 195-1 of the GST Act.
The Commissioner considers that his public rulings and approach to administration of the GST are broadly consistent with the reasoning of the Court as to the existence of a supply. In particular, the Court's approach of examining the events that actually transpired is consistent with Proposition 10 in Goods and Services Tax Ruling GSTR 2006/9 (concerning supplies) that, in determining whether there is a supply and its character, "it is necessary to analyse the transaction that occurs, not a transaction that might have occurred".
Was the supply for consideration?
The High Court noted that, under section 9-15 of the GST Act, consideration includes, among other things, any payment 'in connection with' a supply of anything. The Court's judgment indicates that such a connection was apparent in this case for a number of reasons relating to the connection between the payment of the deposit and the bargain struck by the parties.
The Commissioner considers that the High Court's judgment discloses a practical approach to determining whether there is a connection between consideration and a supply. The taxpayer had argued that various technical characteristics of security deposits in relation to contracts for the sale of real property meant that they served a purpose inconsistent with them being consideration for GST purposes (see the discussion in paragraphs 22 to 28 of the judgment). In rejecting those arguments, the Court simply noted the obvious connection between the payment of the deposit and the contract agreed by the parties.
In analysing the decision of the European Court of Justice in Société thermale d'Eugénie-les-Bains v Ministère de l'Économie, des Finances et de l'Industrie  3 CMLR 1003, the High Court gave some indication that the connection between consideration and a supply need not be direct (see paragraph 30 of the judgment). The Court did not expand on what the extent of the connection needs to be, probably because the Court found the connection 'readily' apparent in this case.
The Commissioner considers that his public rulings and approach to administration of the GST are broadly consistent with the approach of the High Court to the question of consideration.
The effect of Division 99 (concerning security deposits)
The High Court described section 99-5 in Division 99 of the GST Act as a 'wait and see' provision, finding that its effect in the present case was to treat the deposit as consideration for the supply when it was forfeited. The effect of that, according to the Court, was to make the supply that occurred on entry into the contract a taxable supply only once the deposit was forfeited, with section 99-10 ensuring that the GST payable is attributed to the tax period in which the forfeiture occurred.
The Commissioner accepts that Division 99 is about delaying the time of attribution of GST payable on a taxable supply for which a security deposit is consideration. Before the AAT and the Full Federal Court, the Commissioner pursued an argument, in the alternative to his primary contentions, that Division 99 deems there to be a taxable supply in cases where a security deposit was forfeited. That argument was rejected by the Full Federal Court and the Commissioner did not pursue that argument in the High Court.
Is the reasoning of the High Court restricted to forfeited deposits on contracts for the sale of land?
In the Commissioner's view, the reasoning of the High Court is equally applicable to cases involving the forfeiture of deposits on contracts for the provision of goods and services generally. Each case will turn on its facts and circumstances, but in any case where parties make a contract for the provision of goods or services and a purchaser pays a deposit as security, there would likely be a supply in terms of subsection 9-10(1) and paragraphs 9-10(2)(e) and (g) of the GST Act. It is likely that the deposit paid would be consideration in connection with such a supply.
Does the High Court's approach mean that what is in substance a single thing needs to be dissected into multiple taxable supplies?
It might be thought that the High Court's approach of treating the obligations entered into by the vendor, and the consequent rights created, as a supply means that contracts can, or must, be broken down into various elements each of which is to be treated as a separate taxable supply. For example, it might be thought that each obligation arising under a contract is to be treated as a separate taxable supply or that an obligation to provide a thing is to be treated as a taxable supply separate from the actual provision of that thing.
At paragraph 5 of its judgment, the Court indicated that 'upon examination' of a transaction that includes several things meeting the statutory definition of 'supply' there may be no more than one taxable supply. The Court did not elaborate on the reason for this conclusion, which could arise from multiple supplies being treated as part of a single whole, and/or from a view that the consideration paid only has a connection with one of the relevant supplies. The answer will depend on the nature of the transaction in question. However, on either view, paragraph 5 would seem to be a caution against dividing and treating separately for GST purposes what is in substance no more than one taxable supply.
It can be noted also that, in endorsing the approach of Deputy President Olney in the AAT to the characterisation of the supply that occurred, the High Court appears to have implicitly accepted that a number of obligations arising under a contract can be characterised as giving rise to a single supply. This seems consistent with the principle referred to by the Full Federal Court in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd  FCAFC 115 at paragraph 35 that "... [w]here one can identify a supply as incidental to a principal supply, courts have generally treated the transaction as giving rise to one supply". And paragraph 9-10(2)(h) of the GST Act provides that a supply includes "any combination of any 2 or more of the matters" referred to in paragraphs 9-10(2)(a) to (g).
Further, the Court confirmed at paragraph 42 of the judgment that where a contract for the sale of land in respect of which a deposit is paid proceeds to completion there will be only one taxable supply.
The Commissioner will maintain his approach in GSTR 2001/8 that a 'commonsense approach' and an 'overall view' should be taken where it is necessary to characterise a supply (see, in particular, paragraphs 19, 20 and 40 to 42 of that ruling).
What if a contemplated supply would have been GST-free or input taxed?
Parties may enter into a contract for the supply of goods or services that would meet the description of a supply that is GST-free or input taxed. A security deposit may be paid in relation to the contract. If the contemplated supply does not occur, a question may arise as to whether the supply that actually took place (being the entry into of obligations and consequent granting of rights by the supplier) is also GST-free or input taxed.
The Commissioner put before the Court the possibility that in such circumstances, paragraphs 9-30(1)(b) and 9-30(2)(b) may be read as ensuring that the supply on entry into the contract had the same tax character (GST-free, input taxed or taxable) as the contemplated supply.
This circumstance did not arise on the facts of the case before the High Court because the land the subject of the contract was commercial property and thus fully taxable. Probably for that reason, the High Court did not address the GST treatment of cases where the contemplated supply would have been GST-free or input taxed.
GSTR 2006/2 concerning the GST treatment of security deposits indicated, through Example 13 at paragraphs 127 and 128, that a forfeited deposit would have been taxable notwithstanding that the contemplated supply would have been GST-free or input taxed. GSTR 2006/2 was published prior to the Full Federal Court decision in the Reliance Carpet case and was based, at least in part, on the view that Division 99 deems a taxable supply. The Commissioner did not challenge that part of the Full Federal Court's decision in the High Court.
The High Court decided that a vendor makes a supply when it enters into a contract consisting of the obligations it undertakes and the consequent rights it grants. In light of that, the Commissioner considers that paragraphs 9-30(1)(b) and 9-30(2)(b) of the GST Act would be applicable in a case where a security deposit is forfeited in relation to a contract where the contemplated supply would have been GST-free or input taxed. Broadly those provisions state that a supply consisting of a right to receive another supply that would be GST-free or input taxed is also GST-free or input taxed, as the case requires. (This paragraph is a public indirect tax ruling for the purposes of section 105-60 of the Taxation Administration Act 1953 (TAA) in relation to the application of paragraphs 9-30(1)(b) and 9-30(2)(b) to cases of forfeited security deposits. The Tax Office view of what constitutes a security deposit, as expressed within GSTR 2006/2, remains unchanged by the High Court decision.)
So, for example, if the real property in this case had been residential premises that would have been input taxed under section 40-65 of the GST Act, then the supply actually made by the vendor in the case where the contract was not completed and the deposit forfeited would also have been input taxed.
The Commissioner will update GSTR 2006/2 to reflect this view.
Damages as consideration
The High Court confirmed that a forfeited security deposit is not damages (see paragraph 24 of the judgment). As a consequence, the Court did not discuss the significance of a payment being damages to the test of whether such a payment can be in connection with a supply. The Commissioner's views on the application of the GST to court orders and out of court settlements are set out in GSTR 2001/4. The Commissioner does not currently expect there to be any consequences for that ruling arising from the High Court's judgment, but will consider whether there are any implications. The views set out in the ruling remain the Commissioner's views pending that review.
Relevance of practical and business considerations in interpreting the GST Act
The High Court did not refer at all in its judgment to the need to consider the 'economic or social reality', or 'practical and business' considerations, of a transaction in applying the provisions of the GST Act to it. Those considerations had been referred to by the Full Federal Court in the Reliance Carpet case (see for example, paragraphs 13 and 16 of the Full Federal Court's judgment), and had developed from earlier decisions of the Federal Court in Sterling Guardian Pty Ltd v Commissioner of Taxation  FCA 1166 and Saga Holidays v Commissioner of Taxation  FCAFC 191. These considerations have led some to describe the GST as a 'practical business tax'.
The Commissioner does not consider that the High Court's lack of reference to practical and business considerations should be taken to mean that those considerations are not relevant to the application of the GST Act. The Commissioner agrees with the observations in Saga Holidays (at paragraph 30 of  FCAFC 191) that there is no special canon of construction for the GST Act. The Commissioner contends that practical and business considerations cannot override the language and intent of the Act (and the High Court's decision could be seen as providing implicit support for that proposition). Rather, the Commissioner considers that those considerations are often a useful tool to aid in characterising transactions and interpreting the Act in a manner consistent with its purpose or object.
In any event, the Commissioner considers that the outcome of the High Court's decision reflects the commercial reality of the events that took place. The purchaser did obtain a commercial benefit from the contract (e.g. the removal of the property from the market) and it would seem out of step with commercial reality to suggest that the forfeited deposit was 'money for nothing'.
Relevance of foreign GST and value added tax (VAT) systems in interpreting Australian law
The High Court referred, at paragraphs 29 to 31 of its judgment, to some foreign GST and VAT systems and case law, finding that they were not of value in interpreting the GST Act on the facts before it. This was, it seems, largely because of the different statutory provisions to be found in those foreign systems. The Commissioner considers that the High Court's views reinforce the caution that needs to be exercised in seeking to draw upon foreign GST and VAT law and concepts in interpreting the GST Act. Sometimes foreign law may provide useful insights, but ultimately the interpretation of the GST Act depends on the language to be found in it and on its purpose or object as disclosed by its statutory context and relevant extrinsic materials.
In terms of its outcome, the Tax Office administration of the treatment of forfeited deposits is consistent with the High Court's decision.
Implications on current Public Rulings & Determinations
GSTR 2006/2 and GSTR 2000/28 have been amended to accord with the decision and reasons of the High Court.
We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer by the due date.
| Date Issued:
|| 4 June 2008
| Due Date:
|| 30 July 2008
| Contact officer:
|| Mark Tomlinson
| Email address:
|| (03) 9285 1435
|| (03) 9285 1943
|| Australian Taxation Office, GPO Box 9990, Melbourne, Victoria, 3000
A New Tax System (Goods and Services Tax) Act 1999
Taxation Administration Act 1953
Reliance Carpet Co Pty Ltd and Commissioner of Taxation
 AATA 486
63 ATR 1001
2006 ATC 2206
Reliance Carpet Company Pty Ltd v. Commissioner of Taxation
 FCAFC 99
2007 ATC 4650
66 ATR 117
Saga Holidays v. Commissioner of Taxation
 FCAFC 191
2006 ATC 4841
64 ATR 602
Societe thermale d'Eugenie-les-Bains v. Ministere de l'Economie, des Finances et de l'Industrie
 3 CMLR 1003
Sterling Guardian Pty Ltd v. Commissioner of Taxation
 FCA 1166
2005 ATC 4796
60 ATR 502
Westley Nominees Pty Ltd v. Coles Supermarkets Australia Pty Ltd
 FCAFC 115
2006 ATC 4363
62 ATR 682
McDonald v. Dennys Lascelles Ltd
(1933) 48 CLR 457
Howe v. Smith
(1884) 27 Ch D 89
PS LA 2006/8