Occasionally I’m reminded of the extent to which GST technicalities pervade our lives.
This morning’s newspaper carried an item about an 18th birthday party which has been cancelled following the intervention of police and a local secondary school because they were concerned it might be an after ball party which could get out of control. The party was scheduled to be held this coming weekend and it appears the decision to cancel it has just been made.
This got me thinking. What if the organiser of the party has already paid deposits to various businesses for goods and services to be supplied during the party? When I’ve been involved in organising private parties I’ve usually been required to pay deposits to book the venue, equipment hire, DJ’s or bands or security for instance. Often the suppliers have a cancellation policy and if you cancel at the last minute your deposits are not refundable.
The interesting GST issue here is whether the business hanging on to the deposit has to account for GST to the IRD on it or do they get to keep the whole lot? The answer isn’t as straightforward as you might think.
This is timely. The IRD this month published an interpretation statement called IS 10/03 on the GST treatment of deposits. I’m not going to get into all the detail here. You can look at it on the IRD website.
What this document confirms though is that in many situations the payment of a deposit to a supplier (especially where the deposit is non-refundable) will trigger a liability for that supplier to account for GST on the entire contract price when the deposit is paid. This isn’t always the case but often will be where the supplier is GST registered.
Later, if the contract is cancelled there are special rules in the GST Act which come into play. The general rule is that the supplier is able to claim back the GST they paid to the IRD when the booking was made and deposit paid because the supply will not now take place.
The refund to the supplier could include the GST on the actual deposit amount withheld by the supplier. A few years ago the IRD confirmed their view that GST on forfeited deposits from cancelled contracts will not generally attract GST because no “supply” has actually taken place. GST is supposed to be a tax on “supplies”.
So, the supplier could get to keep the deposit and the GST portion.
I should stress, this isn’t always they case. The IRD reckon there are situations where the deposit is subject to GST even though the contract has been cancelled. It’s going to depend on the terms of the contract.
The terms of the contract will also impact on whether the event organiser can get their deposit or at least the GST part of it back from the supplier. Even if the deposit is non-refundable there could be situations where the GST portion at least is still refundable. It will all depend on what the parties agreed when the bookings were made.
Confused? I’m not surprised. It’s all pretty technical. But, these are the sorts of subtle GST rules parties to commercial contracts have to deal with whether they are large corporates, small sole traders or teenagers organising a birthday bash and yet how often do we consider this level of detail when we’re making or receiving a booking for something?