When does GST apply to a customer deposit?

Two different kinds of payment

In its ruling GSTR 2006/2 the ATO says a security deposit under Division 99 is treated as not being consideration for a supply unless it is forfeited or applied towards the consideration. GST on it is attributed to the period in which that happens.

The ATO says a payment that is not intended to act as an earnest to ensure the contract is completed is not a security deposit, and gives an initial instalment of an agreed price as an example of a part payment. A part payment is consideration under the ordinary rules.

Sources[1]

The name does not decide it

The ATO says labelling a payment a deposit does not make it a security deposit, and that it is a question of fact based on the contract and the parties' intention. It lists characteristics: held as security for performance, contract and conduct consistent with that, at risk of forfeiture, and a reasonable amount. It also says pre-contract payments, before there is a contract, are not security deposits, and that how a deposit is treated in your accounts can be evidence of whether it has been applied.

Sources[1]

Ordinary payments: cash or non-cash

The ATO's attribution ruling says that if you account on a cash basis, you attribute GST to the period you receive consideration, but only to the extent received, using one eleventh of the amount. If you do not use the cash basis, you attribute all the GST on a taxable supply to the earlier period of when any consideration is received or an invoice is issued.

Fictional example: an ordinary $2,200 GST-inclusive part payment is received for an $11,000 fully taxable job. Assume no earlier invoice or payment and no special progressive-supply rule. A cash-basis business attributes $200 GST on that receipt. A non-cash business attributes the job's full $1,000 GST in that period; if an invoice had triggered it earlier, the earlier period would apply.

Sources[2]

Genuine security deposits

Our fictional example is a $550 refundable bond for hired scaffolding that is held as security and is at risk of forfeiture. If it is refunded, the ATO treats it as not being consideration, so no GST arises. If it is forfeited and the underlying supply is taxable, GST of $50 (1/11 × $550) is attributed to the period of forfeiture. The ATO's examples show that if the contemplated supply would have been GST-free, the forfeited deposit is also GST-free.

Sources[1]

Decision and record checklist

This is our recommended check, not a clause that turns a payment into a security deposit. Special attribution rules, such as for progressive or periodic supplies, need separate checks and are outside this guide.

[ ] Is there a contract in place when the money is paid?
[ ] Does the contract say what obligation the payment secures?
[ ] Can the payment be forfeited if that obligation is not performed?
[ ] Is the amount reasonable for that purpose?
[ ] Or is it simply the first instalment of the price?
[ ] Do I account for GST on a cash basis?
[ ] Date received, amount, invoice number, job and how it was recorded in the accounts
[ ] Date the payment was applied, refunded or forfeited
[ ] Accountant has confirmed the treatment

Sources[1][2]

Common questions

Is there GST on cash deposits?

It depends on the type of payment and your accounting basis. A genuine security deposit is not consideration until forfeited or applied, while an ordinary part payment is attributed under the usual rules, to the extent received if you account on a cash basis.[1][2]

Is GST applicable to security deposits?

Not when the deposit is paid. The ATO says a security deposit is treated as not being consideration for a supply until it is forfeited or applied towards the consideration, and GST is then attributed to that period.[1]