GST and deposits for goods purchased or hired

Editor: The Tax Office has issued a ruling on deposits that demonstrates just how complicated a supposedly simple law can get.
Unfortunately, the problem it highlights is that, sometimes, deposits that are too high are not 'deposits' for GST purposes. If it's not a deposit, the business may have to pay GST to the Tax Office on the full purchase price of the goods sold in their next BAS. That can create real problems.

Deposits and the GST Act
If a business receives a deposit, as such, there is normally no GST payable until the sale goes through or the deposit is forfeited.
However, if the amount paid is not a 'deposit':

* for suppliers that account on a non-cash basis, the whole of the GST is attributable to the tax period in which the 'deposit' is received; and

* for suppliers that account on a cash basis, GST is attributable on the amount of the 'deposit' received in the tax period.

A deposit must be reasonable
For a deposit to be what is called a "security deposit" for the purposes of the GST Act, the amount of the deposit must be reasonable.
It is the Commissioner's view that for a deposit that exceeds 10% in a purchase contract to be accepted as a security deposit, suppliers must be able to show that they are at a higher risk of significant losses in the event of default.

Example: Payment not a deposit as the amount is unreasonable
Mary wants to purchase a new mattress from Furniture Pty Ltd and chooses one that is priced at $660.
The salesperson advises her that she must provide a deposit of $220 before her order will be taken. It is made clear that if she cancels the order prior to delivery, she will forfeit the entire $220.
The payment is one third of the purchase price, which is considered unreasonably high in the circumstances given that it is a standard stock item. The ATO does not consider it to be a deposit.
If the supplier accounts on a non-cash basis, the GST payable of $60 is attributable to the tax period in which the amount is received. If the supplier accounts on a cash basis, the GST payable of $20 is attributable to the tax period in which the amount is received.

Management fees to service entity deductible
In a recent case, the Administrative Appeals Tribunal held that a taxpayer could claim a deduction for the payment of management fees of $1.165 million to a related company, even though:

* the payment reduced the taxpayer's taxable income in that year to nil;

* a written agreement about the arrangement was not executed until the following income year; and

* the majority of the fees were also paid in the following income year.

The directors of the taxpayer company were concerned about protecting the company's assets, as well as legitimately limiting tax.
As a result, they decided to establish another company that would provide management services to the taxpayer for a sizeable fee.
The taxpayer claimed a deduction in the 1996 income year for a fee of $1.165 million due to the service company, even though it only paid approximately $50,000 of that in that income year, and a written service agreement was not executed until November 1996.
Nonetheless, the Tribunal was satisfied that:

# the taxpayer entered into an oral agreement prior to the end of June 1996 committing it to pay the fee to the related entity;

# the fee payable was calculated at the end of June 1996, and that the taxpayer became obliged in June 1996 to pay the full amount, even though the whole amount was not paid over immediately; and

# a desire to protect assets was the taxpayer's principal motivation in agreeing to the establishment of the service company arrangement. Therefore, the management fees of $1.165 million were deductible in the 1996 income year.

 How will the new fuel tax system work?

From 1 July 2006,

•  all fuels used in commercial and household electricity generation and fuels used for heating will be effectively free of fuel tax; and

•  all fuels, including petrol, used on-road in vehicles with a gross vehicle mass of over 4.5 tonnes will be eligible for fuel tax credit equal to the difference between the fuel tax rate and the road user charge.
All fuels used off-road for all business purposes will become free of fuel tax over time.

FBT: Per km rates for vehicles other than cars
The following are the rates to be applied where the cents per kilometer basis is used to calculate the taxable value of a fringe benefit arising from the private use of a motor vehicle other than a car for the FBT year commencing 1 April 2006:

This method can only be used where there is extensive business use of the vehicle.

FBT: Benchmark interest rate
The benchmark interest rate for the FBT year commencing 1 April 2006 is 7.30% p.a – replacing the rate of 7.05% that applied in 2005/06.

FBT: Record keeping exemption
The small business record keeping exemption threshold for the FBT year commencing 1 April 2006 is $6,391, replacing the amount of $6,223 that applied in the previous FBT year.

Reducing Government Red-tape
The Government has announced a number of actions to reduce the regulatory burdens on business (in response to recommendations regarding these burdens), which include:

# an increase in the minor fringe benefits exemption threshold from $100 to $300, effective from 1 April 2007; and

# an increase in the fringe benefits reporting exclusion threshold from $1,000 to $2,000, effective from 1 April 2007.