Article

GST Q&A ‘ GST and deposits

Is GST applied on security deposits paid for the hiring of a facility?

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Question

My question relates to deposits paid by Council to hire a facility.  Currently, when Council pays a deposit, GST is also paid.  It is my understanding that GST is not applied when a deposit is paid, but rather calculated after the service has been granted and the final balance is paid.  Some clarification would be appreciated.  Thanks.

Answer

Genuine security deposits are not treated as consideration for GST purposes, until such time that the deposit is either forfeited or applied as all/part of the consideration for the supply. Assuming the amount being paid is a genuine deposit, the deposit is not subject to GST (this is often referred to as ‘outside scope’, and technically it is not GST-free).

See Division 99 of the GST Act, and also GSTR 2006/2.

Division 99 contemplates two types of security deposit, referred to in GSTR 2006/2 as follows:

’15. One type of arrangement involves a contract for the purchase of real property, goods or services (a ‘purchase contract’), where the recipient pays a deposit to secure their obligations under the contract.

16.The other type of arrangement in which a security deposit may be paid involves a contract for the hire of goods, where the supplier requires a deposit (or bond) to be paid to secure the payment of periodic rental instalments and/or the return of the goods on time and in good condition. In this Ruling, we will refer to lease, rent, hire-only and bailment arrangements as ‘hire arrangements’.’

Paragraph 20 of the Ruling goes on to set out the features required for a deposit to be a security deposit covered by Division 99, namely:

’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: see paragraphs 65 to 108.’

With regard to what is a reasonable security deposit for hire arrangements, see paragraphs 88 to 93 of the ruling:

‘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.’

Trust this helps.

Disclaimer: Information provided in this article, while correct at time of publishing, is subject to change.