Special arrangements
Deposit
A deposit is an amount paid in advance. GST treatment depends on whether it is part payment of the price, in which case GST generally applies, or security that is only taxed if forfeited.
A deposit sounds like a single concept, but for GST there are two quite different types. One is a part payment of the price, where the customer pays a portion upfront and the rest later. The other is a security deposit, held to guarantee that something will happen, such as a bond held against damage or a deposit that secures a booking. The right GST treatment depends on which one it is.
If a deposit is a part payment of the price for a taxable supply, it is generally consideration for that supply. GST is attributed according to the usual timing rules: on a cash basis, when the payment is received, and on an accrual basis, when an invoice is issued or the payment is received, whichever comes first. This means a business can have to report GST on a deposit before it has delivered the goods or finished the work.
A security deposit is treated differently. If it is held only to guarantee performance and is returned when the customer meets the conditions, it is generally not consideration for any supply, and no GST applies. Typical examples are a rental bond or a refundable bond for hiring equipment. The money is held, not earned, and the business does not report it as sales.
If a security deposit is forfeited, the position changes. Where the customer fails to complete the purchase or breaches the contract and the supplier keeps the deposit, the forfeited amount is generally treated as consideration for a taxable supply when it is forfeited. GST is then payable on it, using the GST fraction if the amount is taken to be GST-inclusive. This is why a booking deposit in a tourism business that is retained after a cancellation can bring GST with it.
Documentation is a key issue. The contract should say whether a payment is a deposit towards the price or a refundable security. Receipts should describe it clearly. The ATO will look at the substance, not just the label, so a payment called a bond that is in fact treated as an upfront part payment may still be taxable on receipt.
Property transactions have their own rules. A deposit paid on a contract for the sale of real property is generally held in trust until completion, and GST on the sale is typically dealt with at settlement, though contract terms and the type of sale can change this. Registered buyers and sellers should confirm timing and the amounts with their conveyancer or tax adviser.
Since the outcome turns on the nature of the payment, this page is general information only. Confirm your circumstances with the ATO or a registered tax professional.
Worked example
A registered wedding venue takes a $2,200 payment from a couple as part payment of its $11,000 hire fee. As a part payment of a taxable supply, GST of $2,200 divided by 11, which is $200, is reported when received or invoiced. The couple also pay a $500 refundable security bond. It is returned after the event, so no GST applies to the bond.
Practical tips
- Label payments clearly as part payment of price or refundable security in contracts and receipts.
- Do not treat a part payment as a bond, because GST may apply as soon as you receive or invoice it.
- Remember a forfeited security deposit can become taxable at the time it is forfeited.