VAT on forfeited deposits revisited
02 March 2013
Posted by: SAIT Technical
By Gerhard Badenhorst (ENS Tax Ensight)
VAT to be levied there must be a supply of goods or services. This
article examines the VAT consequences of taking deposits and deposits
forfeited by looking at judgments by the ECJ and Australian courts.
Value added tax ("VAT”) is not a tax that is levied on revenue or
receipts. For VAT to be levied, there must be a supply of goods or
services by a vendor (section 7(1)(a) of the Value Added Tax Act, No 89
of 1991 ("the VAT Act”) refers). If there is such a supply, then the
VAT is payable on the consideration received by the vendor for the
supply made. The definition of "consideration” in section 1 of the VAT
Act further excludes a deposit, unless the supplier applies the deposit
as consideration for the supply, or if the deposit is forfeited.
can therefore accept that in principle, if no supply is made, then
there is no liability for VAT. This principle was applied by the
European Court of Justice ("ECJ”) in Case C-277/05, where the ECJ held
that a deposit paid by a client to an hotelier for the reservation of a
room is not subject to VAT when the client does not arrive and forfeits
The Full Federal Court of Australia came to a similar conclusion in September 2011 in the case of Qantas Airways Ltd v Commissioner of Taxation  FCAFC 113.
In the Qantas case the Full Federal Court was required to consider
whether Qantas received consideration for a taxable supply where a
person booked and paid for a domestic air ticket but either cancelled
the booking or did not turn up for the flight, and did not collect a
The Full Federal Court found that the only relevant supply
was the supply of air travel, and because the air travel was not
supplied, the amount retained by Qantas when the person cancelled the
booking or did not turn up for the flight, was not consideration for any
taxable supply as no supply was made.
The Commissioner for
Taxation appealed against the decision to the High Court of Australia.
The Commissioner argued that the passenger received a reservation of an
air ticket when he made the booking, and that the reservation was the
taxable supply for which Qantas received the payment as consideration.
High Court considered the terms and conditions of Qantas in some detail
and found that the conditions do not provide for an unconditional
promise to carry the passenger and baggage on a particular flight. The
conditions supplied something less than that. This was at least a
promise to use best endeavours to carry the passenger and baggage,
having regard to the circumstances of the business operations of the
airline. This undertaking by Qantas, that is, the promise to use best
endeavours to carry the passenger and baggage, was a "taxable supply"
for which the consideration, being the fare, was received. The High
Court consequently overturned the decision of the Federal Court and
found in favour of the Commissioner that the amounts retained by Qantas
when a person cancelled a booking or did not turn up for a flight were
subject to VAT.
The decision of the High Court was in line with its earlier decision in the case of Commissioner of Taxation v Reliance Carpet Co (Pty) Ltd.
In that case the taxpayer, Reliance Carpet, entered into a contract for
the sale of a commercial property which required a deposit of 10% to be
payable. The purchaser paid the deposit but failed to pay the balance
of the purchase price by the settlement date. The purchaser failed to
remedy its default and the deposit was forfeited as a result. Reliance
Carpet was assessed for VAT on the forfeited deposit.
Court also considered the sale agreement in detail and found that there
was a supply because the vendor entered into various obligations when
the contract was concluded, such as the obligation to maintain the
property in its present condition, to pay all rates, taxes, assessments,
fire insurance premiums and other outgoings in respect of the land and
to hold the existing policy of fire insurance for itself and in trust
for the purchaser to the extent of their respective interests. The
vendor also granted rights to the purchaser in relation to the land, and
the High Court held that the carrying out of the obligations and the
granting of rights in terms of the agreement comprised a taxable supply
for which the forfeited deposit was received as consideration.
determine whether an amount retained by a vendor comprises consideration
for a taxable supply, the terms of the underlying agreement between the
supplier and the recipient seems to be of critical importance. The
actual supply for VAT purposes may be totally different from what the
parties perceive to be the supply.