The first decision of the high court relating to the interpretation of GST Act is the case of Reliance Carpet. The decision relates to the treatment of GST on deposit amount in case of decline of land contract. In this paper, the decision of the court is examined and the implications are analyzed (Millar 2013).
The High Court on May 2008 held that for supplies made by the Reliance Carpet Co Pty Ltd in relation with retention of forfeited deposit the company is liable to account for the GST (Thampapillai et al. 2015). This is a remarkable decision because of various reasons that are highlighted below:
- This is the first decision of the high court relating to the application of the GST Act;
- In this case, the court has made numerous observations relating to the characteristic of the transaction. This would be helpful in analyzing the transactions for the purpose of GST;
- In this case the court has departed from the approach that was applied to the analogous transactions in the same context by the foreign courts;
- The application of this decision by the commission in various other context makes this decision more remarkable and important;
In this case, Reliance carpet made an agreement on 3 December 2001 that gives the holder of the agreement an option to purchase commercial property in lieu of an option fee of $25000.00. It was stipulated in the option agreement that if the Reliance Carpet receives the letter exercising the option along with the payment of $297500. Then in such case, the Reliance carpet and the purchaser both are bound by the terms of the agreement and they are compulsorily required to sell and purchase the property as per the agreement (Millar 2014). On 5 February 2002, the payment for deposit was made and the contract was implemented and exchanged. It was provided in the contract that the balance of the purchase price should be paid on or before 10 January 2003. The solicitor of Reliance carpet released the deposit on 27 February 2002. The purchaser failed to comply with the contract within the scheduled date (Krever and Mellor 2014). There was further a failure to provide any remedy by the purchaser within 14 days of recession notice issued by the Reliance Carpet. The contract was cancelled on 26 July 2003 and this resulted in the forfeiture of deposit of Reliance Carpet. The commissioner in its notice dated 9 November 2004 assessed that the Reliance carpet is liable to pay GST on the amount of deposit that has been forfeited. There was an objection made on the decision by Reliance Carpet and they applied for appeal on the Administrative Appeals Tribunal (AAT) for reviewing the decision (Tolhurst 2016).
Relevant laws related to the case
The section 7-1 of the GST Act states that on taxable supplies the GST is payable. There are two requirements that must be fulfilled for a supply to be taxable supply as provided in section 9-5(a) of the act (Wheelahan 2016). These requirements are:
- The first requirement is that there must be a supply;
- The second requirement is that supply must be made for a consideration;
The definition of supply provided under section 9-10(1) of the act states that supply include any form of supply. The definition specifically includes grant of real property, surrender of any right or release from any obligation (O’Rourke 2016). The definition of consideration has a broad meaning and it includes:
- Payment made in supply of anything; and
- Payment made for the supply of anything;
The GST Act also deals with the rules relating to the timing of the GST. In case of accrual taxpayer the rules provides that GST liability for the taxpayer will arise earlier of the following:
- At the time of receiving the consideration; or
- At the time of receiving of supply;
The rules also provides that if the taxpayer has received part payment for the supply then GST amount is payable on the entire amount of the supply. Therefore, it can be said that GST liability is not limited to 1/11 of the amount received but the GST is payable on the total consideration payable for the supply (Barnett and Harder 2014). However, it is provided that if the deposit is forfeited or applied as a part of full consideration then deposit is regarded as a part of the supply for the purpose of GST. The commissioner argued that in Division 99 the forfeited deposit is regarded as a taxable supply. If this judgment is held, correct then the question of supply and whether the deposit is part of the supply will be answered (Freedland et al. 2016).
The decision of the tribunal states that based on the provisions of the GST Act the deposit should be treated as a part of the consideration after it is forfeited. The GST amount becomes payable in the period the deposit amount is forfeited. Therefore, it was concluded that Reliance carpet is required to pay GST on the amount of the deposit forfeited (Butt 2013). The Reliance carpet appealed to the decision of the tribunal in the full Federal Court.
The Federal court in its judgment found that forfeited deposit amount is not to be regarded as a consideration for supply. The argument of the company was that contract of supply was made only for one supply and this is a real property. It was further argued that on completion of the contract the property was made available to the purchaser as per the terms of the contract (Burrows 2015). As per the single supply argument, it was held that if the contract is terminated then there is no supply for which deposit could be considered as consideration. The taxpayer relied on two arguments this are guarantee argument and damages argument. The guarantee argument provides that as suggested by the tribunal and commissioner the deposit have two purposes. The first purpose is that deposit acts as a part payment for the supply of the real property. The second purpose is that deposit acts as a guarantee that the purchaser will perform its obligations under the contract. The taxpayer argued that if the guarantee was the supply then it was provided to the purchaser on behalf of the deposit. It was argued that if guarantee is regarded as separate supply then purchaser provided it to the vendor. Therefore, in such case the forfeiture of the deposit amount will not result in any supply by the vendor to the purchaser. It was found that forfeiture of deposit is the contractual right that was exercised by the vendor (Carter 2013). The damages argument stated that deposit is regarded as damage so it cannot be considered as supply that is made by the vendor to the purchaser. In the full court judgment, it was found that if an applicant enters into a contract for sale or purchase then such contract is for the supply of real property and nothing more or less. The court held that the decision of the tribunal required the contract to be split into two parts supply of interim obligation and supply of actual property. The court adopted the approach that transaction cannot be classified based on the individual rights as held in the case of Hallstroms Pty Limited V Commissioner of Taxation (1946) and Commissioner of Taxation V Raymor (NSW) (1990). Therefore based on the above arguments it was held that forfeited deposit is not to be regarded as supply and hence GST is not payable.
The commissioner challenged the judgment in the high court. The court has made significant observation in deciding the case. The court held that the term supply should include a grant, assignment or surrender of real property. It was held that the term real property has an extensive meaning. The court has made number of important observation relating to the nature of deposit. It has said that deposit is a type of standalone obligation and the deposit is a form of security that the purchaser has given to the taxpayer for the performance of the contract. There was other aspect of deposit that supported the case of the taxpayer (Groppi and Ponthoreau 2013). However, the court concluded that for the case of the commissioner it is sufficient that one or more characteristics of consideration are satisfied so that deposit can be regarded as consideration. In this case, the deposit performed as a security for the completion of the contract and it was to be forfeited on failure. Based on the above arguments the High Court found that forfeited deposit is a consideration in connection with the supply made by the taxpayer. Hence, it was concluded that the taxpayer has made taxable supply (DAVIES 2013).
Analysis of the decision
In the judgment of the high court, there was no observation made on the nature of the GST. The Judgment only mentions that GST is a tax on supplies but it is not a tax on consumption. The judgment did not provide any general guidance relating to the interpretation of the GST. From the decision, it could be implied that high court has rejected the commercial or substance approach that have been taken for the interpretation of GST (Stefanou 2016). The high court has ignored one of the main concerns raised in the full federal court that whether the termination of deposit is subject to GST if the supply is free from GST. The section 9-30 of the GST Act has provided solution to this difficulty. It states that if the right to receive a supply is GST free then the supply itself will be GST free. There is no clarity whether section 9-30 of the GST Act is applicable in the judgment of the high court. The commissioner has earlier adopted a position in GSTR 2006/2 that GST is applicable for forfeited deposit even if it is a GST free supply. However, currently the commissioner in its statement has confirmed that in case of a GST free supply the deposit forfeited for such supply is also GST free (Stefanou 2016).
The decision of the high court has far-reaching consequences this decision will make the taxpayer revisit all the transaction related to forfeited deposit. There is another effect in the court’s decision that where the Division 99 is not applicable then the consideration that is received on supply is regarded as initial grant of right and not the part of the core supply that is the main subject matter of the contract. The high court decision has encouraged the use of the liquidated damage clause. The contracting party can enter into agreement for refund of deposit on all situation rather than forfeiture (Barkoczy 2016). The high court has rejected the argument of the Reliance carpet that there was no relation between the supply and the forfeited deposit. It was argued by the Reliance carpet that numerous rights and obligations under the contract were exchanged irrespective of the fact whether the deposit is paid or not. From the decision of the high court, it can be implied that if the considered is connected with the supply then it is regarded that there is a relationship between the supply and consideration. This can be contrasted with the test provided under section 95- (a) for determining supply made for a consideration (Stefanou 2016).
The above discussion has highlighted the case of the Reliance carpet and the decision that was taken on that case. Based on the above discussion it can be concluded that the case will have significant impact on the landscape of the GST. The importance of the decision can be realized from the fact that it was recently quoted in a full federal court and the commissioner has also quoted the decision in recent draft rulings.
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