GST Case study one

I recently did some work with a client where we managed to free up his cash flow substantially by delaying the timing of the GST liability.

Background

A GST liability arises for non-cash (accruals) GST taxpayers at the earlier of when you issue an invoice (note: it does not have to be a “tax invoice” – another topic for another time) or receive any payment. That means if you receive any part payment, it can trigger the full GST liability. There are some exceptions for what are known as “periodic and progressive supplies” but these are not the norm.

However, GST is not payable on most deposits. The GST liability in these cases arises at the earlier of when the deposit is forfeited or when (as is usually the case) it is applied to the sale.

If it’s a “bona fide” deposit, no GST liability. If it’s a part payment, the entire GST liability is triggered. The Commissioner has a published view on what he thinks constitutes a deposit as distinct from a part payment. This is his ruling GSTR xxxxxx. He takes the view that it is abnormal for a deposit to be more than 10%.

Our circumstances

The client sells and installs high value custom made building products. Because the products are made to order, he charged a 50% deposit. If the customer decided not to go ahead, there was no way the product could be on-sold to another customer. Added to this, there is a long construction and delivery lead time.

Based on previous advice and their interpretation of the Commissioner’s ruling, the client was treating the payment as a part payment and remitting GST up front.

We reviewed all the circumstances, including the legislation and case law, and concluded that the payment should be correctly treated as a deposit. A private ruling was sought from the ATO who agreed that the first payment of 50% of the full price was, in fact, a deposit.

Outcome

Instead of remitting what was substantial GST upfront (which was funded by Letters of Credit from the bank), the client now remits the GST many months later when they receive the second payment (a further 30%) which is effectively on delivery of the goods.

This has freed up working capital and reduced the need for credit from the bank to meet GST liabilities.

Savings, significant, with complete certainty.