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Tax Rate Biases In Tax Planning Decisions

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Discuss about the Tax Rate Biases in Tax Planning Decisions.



The following case is based on the contract of sale entered by the taxpayer on January 10 2002, for the purpose of land sale valued $2,975,000. The contract was formed as per “the Option Agreement” between the parties along with the option fee amounted to $25,000 to be borne by the purchaser as soon as the contract is executed. According to the clause 2 of the contract, it was stated that the option would be exercised by providing written notice including the payment of contract deposit amount. Another clause of the contract i.e. clause 5 stated that on receiving the written notice and requisite payment, the seller would be liable to sell the land while the purchaser would be liable to buy the same.  According to the terms and conditions of the contract, buyer paid the deposit amount but failed to pay the balance amount $2,677,500 on the extended settlement date July 10 2003. Due to the failure in payment, taxpayer served a rescission notice on buyer to fulfill the default amount, which was not complied on 11 July 2003. Accordingly, the taxpayer rescinded the contract on sale on land while the amount of deposit was forfeited on 26 July 2003.

Issue: Accordingly, the case was proceeded to the commissioner and assessed the seller for payment of GST with respect to the forfeited amount. The Commissioner contended that the forfeited amount was deposited within the meaning of “taxable supply” under section 9-5 GST Act (Goods and Service Tax Act) 1999. The Federal Court of Australia contended that the taxpayer forfeited the deposit amounted was subjected to receipt of consideration for the supply on rescission of the contract. 

Law/ Regulations breached

Law: Considering the regulations of GST Act 1999 section 9-5, it is stated that the “taxable supply” would be regarded as “supply for consideration” if the payment of such supply does not meet the other present relevant criteria. Further, section 9-10(1) provides the meaning of supply that includes grant, assignment or sale of real property against the consideration (Wilkinson?Ryan and Hoffman 2015). In addition, it has been stated that under section 29-5 GST Act 1999, taxable supply is subjected to the charge of GST for the period of tax during which the amount of consideration has been received in terms of the issued invoice (Odening, Ritter and Hüttel 2015).

The Act of GST 1999 also states the regulations on security deposit under section 99-5 providing that the amount of security deposit cannot be referred as an amount of consideration. However, it would be considered as consideration only if the amount of security deposit is forfeited by the seller due to failure of performance as per the contract obligation (Kowalski 2015). The amount of deposit will be included as a part of consideration if such amount is accounted in the form of consideration. Therefore, the amount of deposit with respect to taxable supply is subjected to the charge of GST since the security deposit was a part of consideration for the performance as per the contract (Moore 2016).

Breach of Law: In view of the facts of the case, it has been noted that the payment of contract amount for sale of land had been categorized as deposit amount and the balance amount of settlement date. As the buyer failed to pay the balance amount of consideration as on the extended date of the contract therefore, the taxpayer forfeited the balance amount and failed to consider the amount as a taxable supply for the payment of GST. It can be said that the taxpayer breached the regulation of GST Act 1999 section 99-5 on constituting the forfeited amount as consideration. Since the principle under section, 99-5 provides that the security deposit amount is regarded as consideration if such amount has been forfeited due to failure of performance (May 2016). Since the amount of security deposit $297,500 forfeited by the taxpayer, it is said that the requirement of section 99-5 has been breached. Further, taxpayer did not consider section 9-5 of GST 1999 with respect to the meaning of “taxable supply”, which states the inclusion of consideration if the same does not fall in any other criteria (Yung 2016). In both the situations, the deposit amount forfeited by the taxpayer constitutes the part of consideration hence Goods and Service Tax charge would be applicable on the amount of deposit.   

With respect to the terms of economy, GST is referred as consumption tax since the burden is imposed on the consumers while it is directly chargeable to the receiver of the consideration. Additionally, section 9-10 provides that the word “supply” include real property, which means the right or interest on the land as well as a license to own the land (Behal 2016). Accordingly, in the present case, the contract on sale of land had been created but the taxpayer has not provided the invoice to the purchaser. Further, mere presentation of contract does not constitute or transfer the right to use or occupy the land since the full consideration had not been paid to the seller.


Analysis of court’s decision

In view of the principles of GST Act, the Australian court held that the contract between the taxpayer and purchaser for sale of land i.e. for the “supply of real property”. However, the supply of property could not be considered since the contract was rescinded. On the contrary, the taxpayer forfeited the amount of security deposited and as per the rules of section 99-5 of GST Act 1999 forfeiture of deposit is considered as consideration. Accordingly, taxpayer is liable to pay GST charges on the deposit amount $297,500 @ 10% i.e. $29,750.

According to the section 9-70 under GST Act, GST is chargeable on the amount of “taxable supply” at the rate 10%, which was breached by the taxpayer since the taxpayer did not charge the amount of GST. Division 29 under the GST Act states the regulations on charges for a tax period if the taxpayer receives the consideration and if the respective invoice has been issued for the taxable supply (Smalley 2016). In the present case, the taxpayer or seller did not issue any invoice but the taxpayer had received consideration with respect to the security deposit. Therefore, it can be noted that the taxpayer breached the regulations of division 29 since one criteria has been followed in terms of receipt of consideration.                     

The decision of the court had been taken on the basis of legal requirements of GST Act 1999 on “taxable supply”. Even though the contract was not complied as the taxpayer rescinded it but the forfeiture of deposit amount would be constituted as consideration, hence the provision of GST Act 1999 would be applicable. The case is similar to the case of “Brien v Dwyer (1978) 141 CLR 378” where in the deposit amount was considered as “a standalone obligation” therefore GST charge was applicable. Another reason for which the court contended application of GST charges is the inclusion of deposit amount as a part of consideration for supply of property. The amount of security deposit was a part of supply consideration as in the case of “Carpenter v McGrath (1996) 40 NSWLR” in which the taxpayer held for breach of GST principles section 9-70.  


Considering the present case of “Reliance Carpet Co. Pty Ltd v FC of T”, it can be concluded that rescinding of contract does not exclude the chargeability of Goods and Service Tax on the amount of consideration. As per the principle of section 9-5 GST Act 1999, it was contended that the amount of security deposit would not be considered as amount of consideration. However, if the seller forfeits the amount on failure of contractual performance, then it would be subjected to consideration. In the present case, taxpayer rescinded the contract since the purchaser paid the deposit amount but failed to pay the balance amount on the settlement date. On failure of payment, the taxpayer forfeited the amount of security deposit but did not pay the GST charges and breached the regulations of section 9-5 and division 29 of GST Act 1999.

Further, the meaning of supply as per the principles of GST Act 1999 constitutes transfer of real property (Amberger, Eberhartinger and Kasper 2016). Hence, in the given case sale of land would be referred as supply within the meaning of section 9-70, GST Act 1999 whereas the transfer would not be constituted since the obligation of performance was failed. The principle on considering the deposit amount for charges of GST is available only if the receiver forfeits the deposit amount due to failure of contractual performance. In the given case, even though the taxpayer has not provided the invoice for sale of property, amount of security deposit was forfeited. Accordingly, the taxpayer would be liable to pay 10% GST on deposit amount $297,500 as per section 99-5 GST Act 1999. Therefore, it can be concluded that the decision of the court with respect to the charges of GST was correct and reasonable.


Reference List

Amberger, H., Eberhartinger, E. and Kasper, M., 2016. Tax Rate Biases in Tax Planning Decisions: Experimental Evidence. WU International Taxation Research Paper Series, (2016-29).

Bal, A., 2015. Taxing Virtual Currency: Challenges and Solutions. Intertax, 43(5), pp.380-394.

Behal, V., 2016. IMPACT OF GST ON INDIAN ECONOMY. South Asia Journal of Multidisciplinary Studies, 2(4).

Bramwell, A.W. and Socash, L., 2015. Preserving Inherited Exclusion Amounts: The New Planning Frontier. Real Property, Trust, and Estate Law Journal, 50(1), p.1.

Bryant, J.J., 2013. Recovering Taxes Paid When Income Is Forfeited: An Analysis of Section 1341. Journal of Taxation of Investments, 30(3).

Kowalski, P., 2015. Taxing Bitcoin Transactions Under Polish Tax Law/Opodatkowanie Obrotu Bitcoinami Na Gruncie Przepisów Polskiego Prawa Podatkowego. Comparative Economic Research, 18(3), pp.139-152.  

May, S., 2016. Applying the GST to imported digital products and services: Problems and solutions. Tax Specialist, 19(3), p.110.

Millar, R. and McCarthy, D., 2012. The Future of Indirect Taxation: Recent Trends in VAT and GST Systems Around the World–Australia. THE FUTURE OF INDIRECT TAXATION: RECENT TRENDS IN VAT AND GST SYSTEMS AROUND THE WORLD, T. Ecker, M. Lang, and I. Lejeune, eds., Kluwer Law International: The Netherlands, pp.21-96.

Millar, R., 2014. Grappling with basic VAT concepts in the Australian GST: the meaning of ‘supply for consideration’. World Journal of VAT/GST Law, 3(1), pp.1-31.

Moore, M.L., 2016. 16 Tax Implications of the Treatment of Marketing Expenses. Accountable Marketing: Linking Marketing Actions to Financial Performance, p.218.

Odening, M., Ritter, M. and Hüttel, S., 2015. The term structure of land lease rates. In 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California (No. 201664). Agricultural and Applied Economics Association & Western Agricultural Economics Association.

Petra, S.T. and Dorata, N.T., 2012. Restricted Stock Awards and Taxes: What Employees and Employers Should Know: Forfeiture Risk, Stock's Potential Future Value Are Key Considerations for Sec. 83 (b) Elections. Journal of Accountancy, 213(2), p.44.

Smalley, K.E., 2016. Student Note: Section 83 (b) Elections: Taxation and Governance Considerations for Tennessee Start-Up Ventures. Transactions: The Tennessee Journal of Business Law, 17(2), p.5.

Smalley, K.E., 2016. Student Note: Section 83 (b) Elections: Taxation and Governance Considerations for Tennessee Start-Up Ventures. Transactions: The Tennessee Journal of Business Law, 17(2), p.5.

Wilkinson?Ryan, T. and Hoffman, D.A., 2015. The common sense of contract formation. Stanford Law Review, 67, pp.14-5.

Yung, B., 2016. Justice and taxation: From GST to Hong Kong tax system. In Ethical Dilemmas in Public Policy (pp. 183-195). Springer Singapore.

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