For GST purpose, it is crucial to determine the time of supply (basic tax point) as it simply means that when a taxable person should account for GST.

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Peregrine Wiggins
5 years ago
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1 Our Ref: GST To all our valuable clients & Associates Time of Supply (Basic Tax Point) Deposits Payment For GST purpose, it is crucial to determine the time of supply (basic tax point) as it simply means that when a taxable person should account for GST. Section 11(2) of GST bill 2009, the time of supply of goods shall be- (a) At the time of removal of the goods if the goods are to be removed; (b) If the goods are not to be removed, at the time when the goods are made available to the person to whom the goods are supplied; or (c) At the time when the supply becomes certain or 12 months after the removal, whichever is the earlier. [This clause may change to special rules on the time of supply] On the other hand, Section 11(3) of GST bill 2009 has spelt out that the time of supply of services shall be at the time when the services are performed. The above mentioned time of supply for goods and services we normally are referred as Basic Tax Point (BTP) in the GST era. Whereas, Section 11(5) also has spelt out that if the tax invoice is issued within 21 days after the basic tax point, then the time of supply is the time when the tax invoice is issued of which we normally referred as Actual Tax Point. Nevertheless, we need to take note of events before BTP such as payment received and/or tax invoices issued before the basic tax point. In such circumstances, we need account for GST to the extent covered by the tax invoice or payment received. [Section 11(4)] In summary, Time of Supply (ToS) rules is as follows:- i) Tax invoice is issued more than 21 days after BTP; ToS = BTP date ii) Tax invoice is issued within 21 days after BTP; ToS = Tax invoice date iii) Events before BTP; Tos = payments received and/or tax invoice issued, whichever is earlier. So, the question is when a deposit will consider as a payment for guarantee or surety purposes and not form part of the consideration in the GST context [Section 2 Definition of Consideration ] In determining whether a deposit transaction giving rise to a supply exists (whether it triggers time of supply):- (i) (ii) Firstly we need to examine whether a tax invoice had been issued. In the case when a tax invoice (inclusive of official receipts of which also used as tax invoices) has been raised, the time of supply will be clocked-in. [Sec 11(4)] Secondly, the legal arrangements entered into between the parties must be considered. Where there is a binding contract, such a transaction is assumed. Where there is no contract, the existence of a transaction giving rise to a supply will be established where there are reciprocal obligations between the parties.

2 To do a further in-depth study, we re-examine the arrangements into 3 categories:- (a) A deposit payment made under an unconditional contract; (b) A deposit payment made under conditional contract; (c) A deposit payment made when no legal contract exists. A. A deposit payment made under an unconditional contract This is a straight forward position. That is, deposits paid under contracts where agreement has been reached between the parties on all terms and only performance of the contract remains to be concluded. In other words, there are no conditions or other matters (i.e. government authority likes obtaining state government s consent to transfer property etc) In an Australian case named FCT v Reliance Carpet Co Pty Ltd (2008), the Court held that the forfeited deposit was consideration for a taxable supply and subject to GST. In this case, Reliance Carpet entered into a contract on 10 January 2002 to sell its commercial premises to a buyer with a 10% deposit payment received. On 10 July 2003, the purchaser failed to pay the balance of purchase price and therefore the seller, Reliance rescinded the contract and forfeited the deposit. B. A deposit payment made under an conditional contract A conditional contract simply means there is a provision in an agreement that contemplates that the legal effect of, or the parties obligations under, the agreement will be altered in some way on the occurrence or non-occurrence of the contemplated contingency. In many older GST/VAT cases said that conditions were simply classified as conditions precedent or conditions subsequent. However, in recent years, many tax authorities suggest that the more appropriate method of analysis is to focus on the nature of the condition to determine whether the condition prevents the formation of a binding contract or whether the conditions suspends some right or obligation until the condition is satisfied. As such, a conditional offer or conditional acceptance would not result in a binding contract. An agreement that subject to the drawing up of a formal contract is not binding contracts if it can be inferred that parties did not intend to be bound until the formal agreement had been signed. [Carruthers v Whitaker case 1975] In Malaysia context, it is common that the real estate agent will let the property buyer to sign the letter of offer to purchase a commercial property and pay an earnest deposit of 2%. Thereafter, the buyer is normally be given a period of 14 days to 21 days to ask his conveying lawyer to draft out the sale and purchase agreement. Upon the buyer signed off the sale and purchase agreement, he is required to pay the balance of 10% purchase price and usually the sale and purchase agreement has stated that the buyer is given 3+1 months to obtain banking facility. Therefore, we are of the opinion that the date of sale and purchase agreement (S&P) signed and the 10% of the purchase consideration will trigger the time of supply. If this being the case, the seller (GST Registrant) has to account the GST amount based on 10% of its total purchase consideration, regardless the actual handover keys etc may take place in a later date.

3 In addition, we are opined that the above GST treatment only apply when there is a freehold commercial property. However, in the event of leasehold commercial property, we are of the opinion that the time of supply will based the state government s consent date. This because the condition of obtaining the state government s consent can prevents the formation of a binding contract and the whole sale and purchase agreement can become void and null. In such circumstances, we say the seller is the stakeholder for the collection of the 8% of the purchase consideration. Besides, we also need to differentiate between the above said conditions (i.e. obtaining state government s consent) from a condition that suspends some rights or obligations under an already binding contract until the condition is satisfied. If a condition of the latter kind is not satisfied, the contract is or may be terminated, but in the meantime there is a binding agreement. For example, the actual handover of keys or vacant possession may take place in a later date. By using the above example, say after the buyer signed the S&P, in the event the buyer unable to obtain loan, the seller can forfeited such deposit and terminated the S&P. However, this incident will not alter the time of supply, ie government consent date. C. A deposit payment made when no contract exists In the absence of a binding contract, we need to consider whether there has in fact been a supply that is chargeable with GST. Has the payment received been made for a supply? In other words, it means such deposit payment, whether refundable or not, given in respect of the supply of goods and services shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply. [Section 2 of 2009 GST bill] Based on other jurisdictions, it simply means in order for a deposit payment triggers the time of supply, 2 conditions must be met:- (i) Form part of consideration; and (ii) Reciprocal obligations between both parties. A New Zealand case named Taupo Ika Nui Body Corporate v CIR (1997) mentioned that although the statutory definition of consideration in the GST Act is wider than the contract law meaning, the definition does not remove the contract law requirement for an element of reciprocity to be present within a transaction in order for the payment to be consideration for a supply. Therefore, there must be reciprocal obligations between the parties to make payment and to make a supply of goods or services for the payment. In Malaysia GST context, Section 11(4)., he receives a payment in respect of it, ( it herein referred as consideration of supply) the supply shall, to the extent covered by. An example of a payment made where there were no reciprocal obligations can be seen in the UK VAT decision in Nigel Mansell Sports Co Ltd [1991] BVC 718. In that case the taxpayer held a franchise for Ferrari motorcars. There was a long waiting list for such cars. The taxpayer had taken deposits from potential customers who wished to purchase a Ferrari. At the time

4 when the deposit was paid, the customer would specify the model, type, colour, etc of the Ferrari that the customer wished to purchase. When a car that corresponded to the customer s requirements became available, the customer might be sent an order form and would then be asked to pay a deposit of 10 percent of the purchase price. That deposit was taken to include the initial sum deposited. The issue was whether the time of supply arose when the initial payment was made. The UK Tribunal held that such initial payment did not constitute a payment in respect of any supply. Example 1 Hotel A received a booking from Mr B for a 3 nights stay. If Mr B cancels more than 72 hours before the date he supposes to stay, he can get back full refund. In this case, although he can cancel and get full refund as long as before 72 hours, such deposit payment still trigger the time of supply for GST. Example 2 Assume the same facts as in Example 1, but Hotel A immediately places the deposit received from Mr B into a separate account with a 3 rd party and claims that the 3 rd party is holding the money as stakeholder until the non-refundable period of 48 hours before the start of Mr B s booking has been reached. The time of supply will still be triggered on receipt of the deposit by Hotel A. Note that if it was agreed by all parties that Hotel A would pay the deposit directly to the 3 rd party to hold as stakeholder, then the time of supply would not be triggered. It is worth to remember that, by having received a deposit, a supplier cannot unilaterally decide that the deposit will be held by a 3 rd party as a stakeholder. There must be a contractual basis for the stakeholder relationship, i.e. all parties must agree to the stakeholder relationship. Some GST/VAT jurisdictions cases show that the essential requirement for a stakeholder relationship is the existence of an agreement between the parties. A person cannot establish himself or herself as a stakeholder unilaterally. These cases have listed out some requirements of a person to acting as stakeholder:- (i) A stakeholder s obligations are determined by agreement between the parties and the stakeholder. Under that agreement, a stakeholder is required to hold the funds until a defined event takes place. That event establishes who is entitled to the money. The parties have no proprietary interest in the funds until that event takes place; (ii) A person who holds money as a stakeholder does not act as agent for either party. A stakeholder, in their capacity as stakeholder, holds the funds for both parties and owes a contractual or quasi-contractual obligation to both parties. This is the case even if the person acting in the capacity of stakeholder is also acting in the capacity of agent for one or other of the parties; (iii) The consent of both parties is necessary to vary a stakeholder s obligations.

5 Example 3 Ms B is getting married in 18 months time. She pays a deposit of RM500/- to Good Taste Restaurant to secure the date for her wedding dinner. She was told by the function manager she can order/choose the wedding dishes as long as before 30 days from the wedding dinner date and pay the 50% of full dining costs. Although she yet to choose dishes and the total consideration yet to be fixed but the deposit of RM500/- paid to the Restaurant will still trigger the time of supply. If you wish to know more about the above issues or our services, please feel free to contact us.

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