1 Do you (Company A) receive a security deposit at the end of the contract term from vendors that subscribe to your service as defined by section 99-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Act when you provide widgets to a vendor under a widget depositary scheme?
1 No. For an amount to be considered a valid security deposit under section 99-1 of the GST Act it needs to be paid in advance, the deposit needs to be held at risk, and require the performance of an obligation. As no deposit is provided at the start of the scheme to secure the performance of an obligation to return the widgets to you, the payment at the end of the contract is not a security deposit. Question 2 If the Commissioner's response to Question 1 determines the amount is not a security deposit defined by section 99-1 of the GST Act, is the amount payable at the end of the contract a taxable supply under section 9-5 of the GST Act? Answer 2 Yes. The 'deposit' amount payable at the end of the contract represents: • Consideration for the taxable supply under section 9-5 of the GST Act where widgets which have been on-supplied by the vendors to the end user and not returned; or • Further consideration for the membership fee for the use of the widgets where widgets are returned in a condition that is not in compliance with the contract terms, and is a taxable supply under section 9-5 of the GST Act. Question 3
Do you receive a security deposit as defined by section 99-1 of the GST Act: • Where the deposit is paid at the start of the contract term from vendors who order above X widgets, and • Where vendors already under contract, are required to provide a deposit on re-ordering widgets? Answer 3 Yes. The deposit is paid in advance at the start of the scheme, is held at risk to secure the performance of an obligation to return the widgets as detailed in section 99-1 of the GST Act. The deposit amount is reasonable considering the risk of forfeiture. The scheme commenced on: DDMMYYYY
You are Company A and are registered for GST as of the DDMMYYYY. You manufacture widgets. Instead of selling the widgets to vendors you run a widget deposit system. The widget deposit system has been in effect since YYYY. How the widget deposit system works: • Vendors join the scheme and pay a monthly membership fee to you. • As a part of the membership, you will provide widgets to a vendor. • A deposit is required for the use of widgets under this scheme. There are three types of deposit arrangements, two of which involve your business directly and are addressed in this ruling, and one that occurs between the vendor and the end user that is beyond the scope of this ruling (excluded): End-of-membership deposit: The vendor receives widgets and is required to pay a deposit at the end of the membership period for any widgets that are not returned. Bulk order / reorder deposit: When a vendor orders widgets in quantities exceeding a specified threshold, a deposit is payable at the time of ordering. This deposit is refundable at the end of the membership period, based on the number of widgets returned.
Customer deposit (excluded): The end user pays a $X deposit to the vendor to use a widget. The widget can be reused multiple times by the end user. When the widget is returned, the vendor refunds the deposit. The vendor then makes the widget available for the next end user. • If a deposit has been paid to you on a vendor receiving an allocation of widgets under the bulk order deposit scheme, any widgets in a condition meeting the terms of the contract can be returned to you by the vendor for a full refund. • The vendor returns the widgets to you either at the end of their membership or when they have too many in stock.
A New Tax System (Goods and Services Tax) Act 1999 section 9-5 A New Tax System (Goods and Services Tax) Act 1999 section 9-10 A New Tax System (Goods and Services Tax) Act 1999 section 9-15 A New Tax System (Goods and Services Tax) Act 1999 Division 99 A New Tax System (Goods and Services Tax) Act 1999 section 99-1 A New Tax System (Goods and Services Tax) Act 1999 section 99-5
Question Do you receive a security deposit at the end of the contract term from vendors that subscribe to your service as defined by section 99-1 of the GST Act when you provide containers to a vendor under a container depositary scheme? Summary No. For an amount to be considered a valid security deposit under section 99-1 of the GST Act it needs to be paid in advance, the deposit needs to be held at risk, and require the performance of an obligation. As no deposit is provided at the start of the scheme to secure the performance of an obligation to return the containers to you, the payment at the end of the contract is not a security deposit. Detailed reasoning Section 9-5 of the GST Act provides that a supply is taxable where: You make a taxable supply if: (a) you make the supply for * consideration; and (b) the supply is made in the course or furtherance of an * enterprise that you * carry on; and (c) the supply is * connected with the indirect tax zone; and (d) you are * registered, or * required to be registered. However, the supply is not a * taxable supply to the extent that it is * GST - free or * input taxed.
This means that if you provide something (a supply) for consideration and satisfy the remaining elements in section 9-5 of the GST Act, you make a taxable supply. However, the supply must be for consideration. Section 9-15 of the GST Act provides: Consideration (1) Consideration includes: (a) any payment, or any act or forbearance, in connection with a supply of anything; and (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. A payment in connection with the supply of widgets could be consideration, however not if the payment amount was a deposit as a security. Section 99-1 of the GST Act provides that GST does not apply to deposits as security: GST does not apply to the taking of a deposit as security for the performance of an obligation (unless the deposit is forfeited or is applied as consideration). GST is not attributable prior to forfeiture. Section 99-5 of the GST Act specifies that a deposit as a security is not consideration as defined in section 9-15 of the GST Act provided it is not forfeited or applied as all or part consideration for a supply:
Giving a deposit as security does not constitute consideration (1) A deposit held as security for the performance of an obligation is not treated as • consideration for a supply, unless the deposit: (a) is forfeited because of a failure to perform the obligation; or (b) is applied as all or part of the consideration for a supply. (2) This section has effect despite section 9 - 15 (which is about consideration). According to the contract, the end-of-membership deposit is an amount that is paid at the end of the term of the agreement: The deposit amount will be invoiced at the time of sign-up and becomes due when the subscription is ended and the containers aren't returned in accordance with the Agreement. In the Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation (GSTR 2006/2) provides guidance on the meaning of a security deposit. Characteristics of a 'security deposit' under Division 99 18. To fall within the provisions of Division 99, the amount received by the supplier must be a 'deposit'.
19. The term 'deposit' is not defined in the GST Act. However, judicial decisions have indicated that the term 'deposit' has a particular meaning in a commercial context. 19A. In Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd [2008] HCA 22; 2008 ATC 20-028; 68 ATR 158 (Reliance Carpet) the High Court noted at paragraphs 22 to 27 of the decision that the term 'deposit' had several aspects. These aspects include that a deposit: could be counted towards the payment of the purchase price; be brought into account in assessment of damages; be a token provided by the purchaser as 'an earnest to bind the bargain'; and provide a form of security for performance by the purchaser. 20 For a payment to be considered a 'security deposit' for the purposes of Division 99, it should have the following characteristics: • be held as a security for the performance of an obligation: see paragraphs 21 to 30; • the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit: see paragraphs 31 to 50;
• be at risk of forfeiture upon failure to perform the obligation: see paragraphs 51 to 64; and • be a reasonable amount:8 see paragraphs 65 to 108. When a deposit is paid at the end of the term of the contract, it is not indicative of a deposit that is paid to provide a form of security for the performance of an obligation. There is no amount at risk of forfeiture, no reason to compel a behaviour on behalf of the vendor. When the deposit is paid at the commencement of the term of the contract, the deposit exists to compel the vendor to return the widgets or risk forfeiting the deposit. GSTR 2006/2 provides clarification on the requirement that the deposit is 'held' as a security: Held as security 21. For Division 99 to apply, the deposit must be 'held' as security for the performance of an obligation. However, the GST Act does not explain the concept of a deposit that is 'held'.
22. A deposit is 'held' when it is paid to a person in the capacity of stakeholder. Normally, in commercial situations, the supplier will be the holder of the security deposit. It makes no difference who holds the deposit, provided it is 'held' for the benefit of the supplier to secure the recipient's obligations. [...] Example 1: Deposit held by a stakeholder 25. Dale enters into a contract to purchase an apartment from Wayne. By mutual agreement with Wayne, Dale pays a forfeitable deposit to a third party, Tim, to hold on trust awaiting settlement. Tim is not paid any fees or commission from this deposit until it is either applied at settlement or is forfeited upon a breach of contract by Dale. 26. The deposit is a security deposit for the purposes of Division 99. The deposit is held by Tim as a stakeholder for the benefit of Wayne until it is applied at settlement In your case, the end-of-membership deposit is not held by any party for you as a security. The deposit would need to be paid to a person in the capacity of a stakeholder. In this case, no payment is made to any stakeholder securing the obligation of a performance.
GSTR 2006/2 provides clarification on the performance of an obligation: Performance of an obligation 27. A security deposit is held to secure, or to act as a guarantee, for the performance of the recipient's obligations under a contract. The nature of the obligations is usually dependent upon the intentions of the parties, as evidenced by the terms and conditions (express or implied) of a contract and the conduct of the parties. 28. In a purchase contract, the supplier ordinarily seeks to secure, by way of a security deposit, the recipient's obligations to complete the contract and pay the contracted purchase price. Upon the recipient performing its obligations, the supplier is obliged either to apply the deposit for the recipient's benefit, usually by applying it towards the total purchase price of the supply, or by returning it to the recipient. 29. However, if the recipient fails to perform their obligations, then the security deposit is at risk of forfeiture.
30. Under a hire arrangement, the recipient's secured obligations are typically satisfied by returning the hired goods in a satisfactory condition at the agreed time and paying any additional or outstanding hire fees. The supplier either returns the deposit upon the return of the goods, or keeps all or part of the deposit if the goods are not returned, returned late, or returned damaged. Under the end-of-membership deposit scheme the deposit is not made to a stakeholder where the amount is held for your benefit, and thereby no guarantee of performance of the recipients obligation to return the widgets at the end of the contract term. The requirement to pay the 'deposit' at the end of the term is more of a deposit in name only. In relation to a deposit in name only, GSTR 2006/2 provides: The deposit must be a deposit in more than name only 37. The fact that a certain payment is labelled a 'deposit' does not make it a security deposit at law. Whether a particular payment is a security deposit is a question of fact, determined by looking at the terms of the contract and the intention of the parties to the contract.
Although contractual intention terms the amount a 'deposit' when looking at the mechanics of the contract, the performance and execution of the deposit clause demonstrate that the amount is a deposit in name only. Another characteristic of valid security deposit is that it must be held at risk of forfeiture. GSTR 2006/2 provides: Forfeiture Deposit subject to forfeiture 51. A fundamental requirement of a security deposit is that the parties to a contract clearly understand at its commencement, either through an express term, or by implication, that the deposit may be forfeited if the recipient fails to perform the secured contractual obligations. It is necessary, in the Commissioner's view, that there be a mutual intention by the contracting parties to make the deposit subject to forfeiture. If this intention is not present, the deposit is not a security deposit. Under the end-of-membership deposit scheme there is no risk of forfeiture where a deposit has not been held, thereby not satisfying paragraph 20 point 3 of GSTR 2006/2. The final element of a valid security deposit is that the deposit amount needs to be reasonable. GSTR 2006/2 states: A deposit must be reasonable
65. For a deposit to be a security deposit for the purposes of Division 99, the amount of the deposit must be reasonable. If the amount is set too high, the courts exercising equitable jurisdiction will not regard the amount paid as a deposit. [...] What is a reasonable amount for a purchase contract? 67. It is the Commissioner's view that the principles applied by the courts under the rules of equity are equally applicable to determine what is reasonable under a purchase contract for a deposit to be a security deposit for the purposes of Division 99. 68. If the amount is unreasonable, it is not a security deposit merely because the parties label the amount a deposit or agree that it is to be subject to forfeiture. [...] A reasonable amount for a hire arrangement 88. The question of reasonableness for a security deposit under a hire arrangement is a question of fact. It is to be determined by looking at the arrangement entered into and the intention and conduct of the parties at the time of entry into the contract.
89. As the deposit in a hire arrangement is security against the late return of, non-return of, or damage to the hired goods, it may be reasonable for the deposit to be considerably higher than an amount which may be reasonable under a purchase contract. This is because the supplier carries a risk of the goods being damaged or the goods not being returned by the recipient. 90. What is reasonable as a deposit in a hire arrangement is always dependant upon the facts and circumstances of each particular arrangement. It is the Commissioner's view that an amount is reasonable if it acts as an inducement to return the hired goods without undue wear and tear and does not include the hire fee within it. Example 10: Hire of equipment 91. John hires some trestles, valued at $400, for two weeks from Bob's Equipment Hire Services Ltd (BEHS). He pays a hire charge of $110, which is subject to the ordinary GST attribution rules. He also pays $220 as a security deposit knowing that all or part of this sum will be forfeited if he does not return the trestles. 92. In the circumstances the deposit is reasonable and is a security deposit.
93. When John returns the trestles on time and in good condition, his deposit is refunded to him. The return of the deposit does not have any GST consequences for either BEHS or John. As has already been established, no deposit has been made with respect to the end-of-membership deposit, therefore the reasonable amount test is not applicable. Question 2 If the Commissioner's response to Question 1 determines the amount is not a security deposit defined by section 99-1 of the GST Act, is the amount payable at the end of the contract a taxable supply under section 9-5 of the GST Act? Summary Yes. The 'deposit' amount payable at the end of the contract represents: • Consideration for the taxable supply under section 9-5 of the GST Act where widgets which have been on-supplied by the vendors to the end user and not returned; or • Further consideration for the membership fee for the use of the widgets where widgets returned are not in a condition acceptable with the terms of the contract, and is a taxable supply under section 9-5 of the GST Act. Detailed reasoning
As mentioned in response to Question 1 above, where a supply is made for consideration and you are registered for GST and make the supply within Australia, that supply is a taxable supply under section 9-5 of the GST Act. As you are registered for GST, and make your supplies within Australia, the remaining element of making a supply for consideration needs to be determined in respect of the end-of-membership deposit payment. Section 9-10 of the GST Act defines a supply as: Meaning of supply (1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (a) a supply of goods; (b) a supply of services; [...]
When the contract has ended, you determine how many widgets are not in a condition acceptable with the terms of the contract. Once this is identified you are able to determine the payment amount of the vendor. This results in two scenarios, one where you have provided the widgets effectively to the end user via the vendor as the widget has not been returned, this is considered a supply of goods under section 9-5 of the GST Act. The second scenario you are charging an amount payable to the vendor in connection with the membership agreement for damaged widgets. The membership agreement is your initial supply and the payment made by the vendor for damaged widgets is in response to that agreement. Here we have established two supplies, the supply made of a widget, and the original supply under the membership agreement, meeting the definitions of section 9-10 of the GST Act. The last item to determine under section 9-5 of the GST Act is if consideration has been made for the supply. Section 9-10 of the GST Act defines a supply as: Consideration (1) Consideration includes: (a) any payment, or any act or forbearance, in connection with a supply of anything; and
(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. [...] Applying section 9-10 of the GST Act to the two scenarios, the 'deposit' amount payable at the end of the contract represents: • Consideration for the taxable supply under section 9-5 of the GST Act where widgets which have been on-supplied by the vendors to the end user and not returned; and also • Further consideration for the membership fee for the use of the widgets where widgets returned are not in a condition acceptable with the terms of the contract, and is a taxable supply under section 9-5 of the GST Act. Question 3 Do you receive a security deposit as defined by section 99-1 of the GST Act: • Where the deposit is paid at the start of the contract term from vendors who order above X widgets, and • Where vendors already under contract, are required to provide a deposit on re-ordering widgets? Summary
Yes. The deposit is paid in advance at the start of the scheme, is held at risk to secure the performance of an obligation to return the widgets as detailed in section 99-1 of the GST Act. The deposit amount is reasonable considering the risk of forfeiture. Detailed reasoning Under the contract, where the amount of widgets ordered by a vendor exceeds X widgets, a deposit of $X per widget is paid. This occurs at the commencement of the contract. For vendors already under contract, reordering widgets will require a deposit to be paid before delivery. Applying the same principles in question one above to the bulk order / re-order deposits: • Both the bulk order and re-order deposit amounts are held as a security for the performance of an obligation. • The contract, conduct and intent of the parties to the contract is consistent with the payment being a security deposit. The amount of $X per widget is paid by the vendor and held by you as a deposit at the commencement of the agreement.
• The deposit is at risk of forfeiture upon failure to perform the obligation, which is to return the widgets when required by the contract terms. • The deposit amount is a reasonable amount based on the economic risk of no return.