GST Payable on Forfeited
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Vendors when a contract is rescinded.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 
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.
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
. 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
 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.
should not be encouraged to accept less than 10% deposit on exchange of
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.
GST Penalties Trap
clean on shortfalls, and promptly
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.
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.
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.
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.
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.
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.
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
of New South Wales