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ATO has High Court win on GST payments

In a decision that could save the Australian Taxation Office up to $1 billion, the High Court has ruled GST is payable on forfeited deposits.

In an unanimous ruling the court held forfeited deposits were essentially payment for a "taxable supply" of interim obligations under the Goods and Services Tax Act.

The landmark case centred on a $297,500 deposit paid to Reliance Carpets in January 2002 for the purchase of a $2.98 million commercial property in Melbourne.

The buyer paid the deposit to Reliance but not the balance.

Reliance rescinded the contract in July 2003 and kept the deposit.

The tax office said Reliance had to pay GST on the $297,500 deposit, but the company resisted the move in the Administrative Appeals Tribunal (AAT).

Reliance lost its AAT application but won a subsequent appeal to the Full Court of the Federal Court, which ruled there was no taxable supply because the contract for sale had been rescinded.

But on Thursday the High Court of Australia allowed the tax commissioner's appeal against the Full Federal Court finding.

It found in signing the sale contract Reliance made a supply in that it agreed to maintain the property and pay rates, taxes and insurance premiums until the deal was finalised.

Therefore, upon forfeiture the deposit was treated as consideration for those interim obligations.

The High Court said the AAT was correct in finding the deposit paid to Reliance required an "ultimate obligation to transfer title to the purchaser" but also "other obligations".

"In the circumstances it may fairly be said that upon execution of the contract the applicant made a supply in that it 'entered into an obligation' to do the things it was bound to do under the contract."

The tax office had previously agreed to pay the costs of the test case.

Before the judgment was handed down, Deloitte tax partner Andrew Nutman said if the tax office lost it could be forced to repay up to a $1 billion in GST on forfeited deposits.

"This would open up the door for significant retrospective claims which could be up to $1 billion," Mr Nutman said in a statement.

May 22, 2008 AAP


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