Settlement risk on property deals is reported in the press daily. Regardless of whether such risks are accurate or exaggerated the following sets out the main GST consequences when a sale does not proceed.

The GST consequences below apply to sales that fell over during the past four years, or happen now or in the future.  The GST consequences also apply equally to deals other than those relating to real property such as commercial orders, merger and acquisition deals and most arrangements where a deposit is paid and then forfeited or lost when the sale does not proceed.

Most businesses already have a good understanding that GST is not payable when a forfeitable deposit, normally up to 10 per cent of the full consideration, is received by the vendor.  That occurs even if the deposit relates to a sale that will be taxable when it proceeds, and applies whether the deposit is held in a trust account or is accessed and used by the vendor.

What is not as well known is that the special deposit rules do not apply to consideration received under instalment contracts, so the following relates only to forfeitable deposits received under property sales that are not paid by instalments.

Property sales that do not settle

The GST treatment of a vendor keeping a deposit forfeited by the person who contracted to buy the property will, of course, depend upon the precise terms and conditions of the contract, any claims made for compensation for losses, timing of the forfeiture, interest payable under the contract, and how the kept deposit is applied in the vendor’s accounts.

The most likely outcomes when a vendor retains a forfeited deposit are as follows:

1. Sale of an input taxed residential premises (i.e. one that is not “new residential premises”):

      a. No GST payable by the vendor
      b. No GST input tax credits claimable by the purchaser

2. Sale of taxable new residential premises (not using the margin scheme):

      a. GST is payable by the vendor, except to the extent that the deposit can be applied against interest,         or compensation for losses or damages
      b. GST input tax credits are not normally claimable by the purchaser

3. Sale of taxable new residential premises (using the margin scheme):

      a. GST is payable by the vendor, except to the extent that the deposit can be applied against interest,         or compensation for losses or damages. Note that this is not effected by the cost or valuation that                would have been used for calculating the margin scheme
      b. GST input tax credits are not normally claimable by the purchaser

4. Sale of taxable property (such as vacant land, commercial premises, partly developed land) by a GST registered vendor (not using the margin scheme):

      a. GST is payable by the vendor, except to the extent that the deposit can be applied against       interest of compensation for losses or damages
      b. GST input tax credits would normally be claimable by a GST registered purchaser, subject to getting       a Tax Invoice from the vendor for the forfeited deposit

5. Sale of a development as a GST free going concern:

      a. No GST payable by the vendor
      b. No GST claimable by the purchaser

The above is meant only to give general guidance for both vendors who keep forfeited deposits, and for purchasers who lose or forfeit deposits, when a sale does not proceed. Both vendors and purchasers should gain expert GST advice before acting on any of the above general guidelines

Ken Fehily, Director
Fehily Advisory
GST Advocates