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The aim of this page is to keep our clients aware of certain aspects of the law and to point out some of the changes or developments in the law. However, the law is constantly changing and we cannot guarantee the information is current or complete. If you have a legal issue that requires resolution you should consult your solicitor.

TOPICS THIS ISSUE

1. GST Payable on Forfeited Deposits.

2. Buyers Beware  

3. Ten (10) percent deposits not necessarily enforceable.  

4. GST Penalties Trap

 

1. GST Payable on Forfeited Deposits.

In view of this decision, it would be prudent that stakeholders of deposits receive a ruling of possible GST liability before releasing forfeited deposits to Vendors when a contract is rescinded. 

In Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22 (22 May 2008) the High Court of Australia overruled the 2007 decision of the Full Court of the Federal Court of Australia. The unanimous High Court decision ruled in favour of the Tax Office that the Vendor of a commercial property had to pay the goods and services tax (GST) assessed by the Australian Tax Office. The Purchasers had failed to complete the contract for sale within the terms of the agreement and the Vendors, Reliance Carpet, terminated the agreement and rightly claimed the 10% deposit of $297,500. The High Court ruled that GST was payable on 'receipt by the supplier of any of the consideration for the taxable supply'. The deposit was part of the  consideration for a taxable supply.

2. Buyers Beware  

This case is indicative of the High Court’s propensity to ignore convention and precedent affirming its self appointed role as the most powerful law-making body in Australia . In Black v Garnock the High Court ruled (perhaps unwittingly) that the interests of an unsecured creditor ranked higher to the interests of a Buyer who hours earlier had paid hundreds of thousands of dollars to purchase a home. Effectively, the Court has made the Buyer responsible for the Vendor’s debts.    

Traditionally, the interests of a Purchaser of land were protected by convention during the period between completion of the sale and registration of the Transfer of Title to the buyer. It was the practice that the Land and Property Information Office would give the Purchaser of land priority should a third party try to register an interest. 

In Black v Garnock [2007] HCA 31 however, the High Court overturned this long held principle and ruled that a creditor’s writ lodged over the property on the day of completion took precedence over the interests of the Buyer. This High Court Decision makes it quite clear that prudent conveyancing practice should now include lodgment of a Caveat prior to settlement. The Caveat will automatically expire on registration of the Transfer of Title to you. 

Without the Caveat the Buyer’s interests are exposed to possible third party interests between settlement and registration of the Transfer. Discuss this issue with your solicitor after exchange of contracts.

3. Ten (10) percent deposits not necessarily enforceable.

Vendors should not be encouraged to accept less than 10% deposit on exchange of Contracts of Sale of property. Following Ianello v Sharpe there is every possibility that the Vendor may never be able to recover the balance of the deposit should the Purchaser be unable to complete the purchase. 

Until recently, a Buyer of real estate who failed to meet the contractual requirements to complete the sale would forfeit the customary 10% deposit to the Vendor. Even when the Buyer was allowed to exchange contracts on less than 10% deposit (frequently say 5% on exchange), the contract would be amended to make the Buyer liable to the remaining 5% on rescission of the agreement. In Ianello v Sharpe (2007) NSWCA 61 the New South Wales Court of Appeal reinforced the old cliché that the only guarantees in life are taxes and death. 

The Court of Appeal ruled that neither normal conveyancing convention nor precedent could be relied upon in future in property conveyancing. The Court held that the balance of deposit payable on default of the contract (the extra 5%) could not be regarded as part deposit. The Court ruled that the outstanding portion was a penalty and a penalty in not enforceable in a property contract. should the Buyer fail to complete the contract. 

This case may also open a Pandora's Box. It would appear to question forfeiture of a deposit "unless the amount in question is a genuine pre-estimate of damages." Perhaps in future we can expect forfeiture of the 10% deposit or any part thereof to be challenged on the basis that the amount exceeds damages incurred by the Vendor. In the meantime we need to be aware of the changing attitude to contract law by our superior courts. 

4. GST Penalties Trap

Come clean on shortfalls, and promptly

The Tax Office appears to be taking a punitive approach to GST shortfall amounts at the same time as placing increasing emphasis on corporate governance and tax risk management. This means more of an onus, particularly on directors and senior management, to have a genuine awareness of their GST compliance.

A taxpayer is liable to a penalty if they have a GST shortfall as a result of a statement which is “false or misleading in a material particular”. A shortfall amount is the amount by which the relevant liability, payment or credit, is less or more than it should be.

Base penalties extend from 75 per cent of the shortfall amount for intentional disregard of a tax law to 25 per cent of the shortfall for failing to take reasonable care to comply with a tax law. Once a penalty is levied, the burden of proof shifts to the taxpayer.

There are certain aggravating factors which allow the Commissioner of Taxation to increase the base penalty by 20 per cent. These include taking steps to prevent or obstruct the Commissioner from finding out about the shortfall, and failing to give notice of the shortfall amount within a reasonable time of becoming aware of it.

Thankfully, legislation also allows for the reduction of penalties. The base penalty may be reduced by 20 per cent – or 80 per cent in certain circumstances – if the taxpayer voluntarily discloses the shortfall to the Commissioner.

The GST perils of property transactions are high. In terms of risk, the GST challenges posed by property dealings extend from the intricacies of the margin scheme and the GST-free supply of a going concern concession, all the way to the reporting of GST obligations.

Taxpayers seem to be becoming more combative when faced with penalties, but the Tax Office’s very high success rate in GST penalty cases serves as a warning that the area of law is a very complex one and that taxpayers must be on solid legal grounds if they decide to challenge a decision.

Extract: Client Newsletter No.2, 2008 Published by the Law Society of New South Wales           

 

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