Container Homes Designer Domain Pty Ltd and Commissioner of Taxation (Taxation)

[2023] AATA 1815

Container Homes Designer Domain Pty Ltd and Commissioner of Taxation (Taxation) [2023] AATA 1815 (27 June 2023)

Division:                  SMALL BUSINESS TAXATION DIVISION

File Numbers:         2022/5953

Re:Container Homes Designer Domain Pty Ltd

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member R Olding

Date:27 June 2023

Place:Sydney

1.The applicant’s grounds of objection are extended to include that the applicant did not contract to sell container homes to, but rather acted as agent for, King Island Links Pty Ltd to procure the homes.

2.The decision under review is set aside and substituted with a decision allowing the applicant’s objection in full.

...........................[SGD]............................

Senior Member R Olding

CATCHWORDS

TAXATION – GOODS AND SERVICES TAX – whether payment upon entry into contract a deposit – whether applicant acting as agent for customer – held applicant not acting as agent but payment not a deposit – decision set aside

LEGISLATION

A New Tax System (Goods and Services Tax) Act 1999 (Cth), Division 99

Taxation Administration Act 1953 (Cth), s 14ZZK

CASES

Coates v Sarich [1964] WAR 2

Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41

Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22

Re Hoobin; Perpetual Trustees Executors and Trustees Association of Australia Ltd v Hoobin [1957] VR 341

Reid Motors Ltd v Wood and Another [1978] 1 NZLR 319

REASONS FOR DECISION

Senior Member R Olding

27 June 2023

WHAT IS THIS CASE ABOUT?

1. Under Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), a “deposit held as security for the performance of an obligation” is not treated as consideration for a supply unless it is forfeited because of failure to perform the obligation or applied as part of the consideration for a supply.[1]

   [1] Section 99-5.

2. The applicant, Container Homes Designer Domain Pty Ltd (“Container Homes”), entered into an arrangement for King Island Links Pty Ltd (“King Island Links”) to be supplied with 20 customised container homes at $37,300 per unit. Upon entry into the arrangement, King Island Links paid $373,000 (“the Payment”), being 50% of the agreed total price for the units, to Container Homes. Subsequently, King Island Links unilaterally withdrew from the arrangement without taking delivery of any of the homes but stated Container Homes could retain the $373,000.

3. Was the Payment a deposit held by Container Homes as a security for the performance of King Island Links’ obligations under the arrangement and was it forfeited for failure to perform those obligations? If the answer to those questions is “yes”, Domain Homes is liable for GST attributed to the tax period under review. If not, Domain Homes is not liable for GST attributed to that tax period.

   DECISION UNDER REVIEW AND BURDEN OF PROOF

4. The decision under review is the Commissioner’s decision disallowing Container Homes’ objection to the Commissioner’s assessment of Container Homes’ net amount for the March 2016 quarterly tax period.

5. Container Homes has the burden of proving the assessment is excessive and what the assessment should have been: Taxation Administration Act 1953 (Cth), s 14ZZK.

6. The Commissioner has confined the issue in dispute to whether the Payment was a deposit held as security for the performance of an obligation for the purposes of Division 99, such that GST became payable upon forfeiture of the amount in the March 2016 tax period. Thus, Container Homes will discharge the burden of proof if it proves the Payment was not a deposit held as security for the performance of an obligation. Container Homes will also discharge that burden if it proves it did not make a taxable supply of the homes[2] because, as it asserts, it merely acted as agent for King Island Links.[3]

   [2] Section 99-10.

   [3] The agency argument did not appear in Container Homes’ objection. However, with the consent of the Commissioner, I agreed to extend the grounds of objection to cover this ground.

7. The parties referred to the issue whether the Payment was a “deposit” as shorthand for the statutory question of whether it was a “deposit held as security for the performance of an obligation”. I adopt the same convenient abbreviation of the issue in these reasons.

   THE 7 MAY 2015 DOCUMENTS

8. The Tribunal had before it documents dated 7 May 2015.[4] I adopt that descriptor deliberately. The documents on their face bear the features of a contract. However, Mr Bassem Halaseh, a director of Container Homes, who appeared for and gave evidence on the company’s behalf, denied they constituted a contract.

   [4] T 63.

9. The documents comprise three pages in portrait configuration and nine pages in landscape.

10. The first of the initial three pages contains the date – 7 May 2015 – and the heading:

    Re: King Island Links

    Container Accommodation

11. Next, this sentence appears:

    Please find enclosed design requirements for container accommodation as previously discussed.

12. Thereafter, specifications for the units are set out in that and the following two pages.

13. None of those three pages is addressed to King Island Links. Nor do they include any reference to Container Homes. Rather, the first page is on a letterhead from another company which I assume, without deciding, is controlled by Mr Halaseh. Nothing turns on this as the statements which appear to be contractual are found not in these three pages but in the pages that follow.

14. The following nine pages are numbered “CHDD Page 15” through to “CHDD Page 23”. I assume CHDD is an abbreviation for Container Homes Designer Domain. Pages 1 to 14, if they exist, are not in evidence. Nor is their absence explained. Having regard to what is contained in pages 15 to 23, and the order in which it is contained, I infer the earlier pages, if they existed, also contained specifications but not the contractual terms relating to payments which, as indicated below, are found in pages 20 to 23.

15. Each of these pages has Container Homes’ logo on the bottom left side and opposite that, on the right side, the words “Signed and agreed to by the Client” followed by a signature. Mr Halaseh confirmed in his oral evidence that this was the signature of Mr Duncan Andrews, a director of King Island Links.

16. Pages 15 through to 19 inclusive contain specifications and fit-out options. It is from page 20 that clauses of an apparently contractual nature appear.

17. Page 20 contains these statements:

    DELIVERY

    
    

    Our delivery schedule for offered unit would be within 120 working days from the date of receipt of confirmed order along with advance, and approved Plans.

    TERMS OF PAYMENT

    50% advance along with P.O. & 40% balance against Draft copy of BL. 10% on satisfactory sighting of units.

    Total CIF Price to a port in Melbourne $37,300 Per unit with total units being 20. Not including GST.

18. Page 21 first repeats the terms of payment in the same terms as above, then continues:

    DELIVERY AND STORAGE

    The Seller shall arrange delivery of all containers according to the term of CIF of INCOTERMS 2000 of ICC, which shall be incorporated into the Agreement except otherwise stipulated in this Agreement.

    Delivery Time and Schedule as follows: 120 days after receiving deposit, and approved plans.

19. Next, still on page 21, two warranty clauses appear under the heading:

    GENERAL DESIGN AND CONSTRUCTION WARRANTY; PAINT WARRANTY

20. Broadly, and subject to exclusions, under the first warranty clause the “Seller” guarantees each container to be free of any deficiency for one year, while “decals” are guaranteed for seven years against cracking, peeling or fading.

21. Under the second warranty clause, the “Seller and Manufacturer” warrant the pre-treatment of steel and application of paint for three years.

22. Page 22 contains these clauses dealing with passing of title and risk:

    a.The full, unencumbered and unconditional title to the Containers will transfer from Seller to Buyer upon full payment of the purchase price of each Container is made by Buyer or any permitted assignee, transferee or nominee of Buyer. [sic]

    b.Risk of the Containers shall pass to Buyer upon receipt by Buyer of the Containers delivered to the Buyer at Seller’s manufacturing location or at Seller’s storage facility or to the designed [sic] destinations if so required by the Buyer at the agreed delivery terms.

23. Page 22 also contains a force majeure clause. It is not necessary to set this clause out in full. However, I note it contains several references to “this Agreement” as well as to “this Agreement and/or an applicable Purchase Order” and to the circumstances in which a “party” may “terminate” the agreement.

24. Page 23 contains the first reference to the name of the Seller. This appears as follows:

    Seller:

    BENEFICIARY BANK:

    Name: Container Homes Designer Domain pty (sic) Limited

    356/377 Kent street (sic) Sydney 2000 NSW Australia

    ACN: 152 992 099

    BANK NATIONAL AUSTRALIA BANK

    [followed by an account number, and other banking details.]

25. There is also on page 23 a heading “Insurance” under which appears this statement:

    Container Homes Designer domain (sic) Pty Limited Carries (sic) a public liability policy for 10,000,000 as Importer, Manufacturer, Designer & Installation

    For Public Liability and Products Liability

    [followed by insurer and policy details.]

26. Additionally, in what Mr Halaseh confirmed was Mr Andrews’ handwriting, the following appears immediately above Mr Andrews’ signature:

    50%     $ 373,000

    40%     298,400

    10%       74,600

    746000

    GST        74600

    820600

    Mr Halaseh’s evidence regarding the transaction and 7 May 2015 documents

27. The following summary is drawn mainly from Mr Halaseh’s oral evidence which was largely unchallenged.

28. Mr Halaseh emphasised that before going into this business he had transitioned from Centrelink support with the assistance of a small business course. He was not experienced in business. This evidence appeared to be offered by way of context to his treatment of the transactions Container Homes embarked upon. I accept Container Homes’ dealings with King Island Links were attended by a degree of lack of sophistication.

29. Initially, in his evidence Mr Halaseh stated that the “contract” contained in the 7 May 2015 documents was never sent or exchanged; that it was on his hard drive which he copied onto a USB for the Tax Office. Mr Halaseh seemed to take exception to the Tax Office examining the document and concluding it was a contract governing the terms of his relationship with King Island Links.

30. However, Mr Halaseh later stated the document was emailed to Mr Andrews’ agent, with whom Mr Halaseh had been dealing, and then returned, signed by Mr Andrews, to Mr Halaseh.

31. At first, Mr Hasaleh mainly dealt with the agent for Mr Andrews who was “shopping around” for the best price on container homes. Mr Halaseh made inquiries in various jurisdictions and determined that a supplier in India offered the best deal.

32. The Indian supplier wanted an upfront payment, but Mr Andrews was not prepared to make a payment directly to an Indian company instead agreeing to pay the amount to Container Homes. Thus, it was agreed King Island Links would pay the amount of $373,300 to Container Homes. That occurred on 7 May 2015, the day Container Homes entered into the arrangement with King Island Links. Container Homes in turn paid amounts to the supplier in India.

33. Mr Halaseh spent some months in India dealing with the supplier in connection with construction of the units. Mr Andrews also flew to India, confirmed he was satisfied with the supplier’s work and asked for delivery of four units. However, before that occurred, Mr Andrews told Mr Halaseh that King Island Links no longer wished to proceed with the purchase. Mr Andrews said to Mr Halaseh that Container Homes could keep the $373,300 already paid and the four units for which delivery had been arranged.

34. Container Homes entered the four units and paid GST at Customs, which it subsequently claimed as an input tax credit.

35. In earlier correspondence with the Tax Office, Mr Halaseh endeavoured to place these transactions in the context of his company’s broader business. He indicated that Container Homes dealt with container transactions in one of two ways. In respect of the first category, the customer would take delivery at the port in Australia and pay GST on importation to Customs; no GST would be charged by Container Homes to the customer. In the second category, Container Homes would take delivery at Customs and have the unit delivered to the customer. In those cases, Container Homes would charge GST on the sale to the customer.

    HAS CONTAINER HOMES PROVED IT WAS ACTING AS AGENT RATHER THAN SELLING THE HOMES TO KING ISLAND LINKS?

36. For the reasons that follow, I am not persuaded Container Homes has proved, as Mr Halaseh asserted, that the 7 May 2015 documents do not evidence a contract for the sale of the homes by Container Homes to King Island Links.

37. It is true that, while they are signed by Mr Andrews, there is no evidence of them being signed on behalf of Container Homes. However, Mr Halaseh’s own evidence is that the document was emailed to King Island Links and returned signed by Mr Andrews. There is no reason to consider Mr Andrews was signing other than on behalf of King Island Links.

38. As such, the documents at the least evidence an offer that was accepted by Mr Andrews signing where contemplated on the documents and returning by email to Container Homes. This is consistent with the language employed in the document where it refers to the parties and “this Agreement”. There is plainly consideration for the supply of the units and there is no suggestion that the parties did not intend to create legal relations.

39. That conclusion alone does not close out the possibility that Container Homes had entered into an arrangement with King Island Links to source and procure the supply of the units as agent for King Island Links. However, the difficulty with the submission is that it is unsupported by any evidence other than Mr Halaseh’s assertion and is at odds with the terms of the contract.

40. In that regard, there are no documents or communications in which King Island Links or Mr Andrews acknowledges, explicitly or implicitly, that Container Homes has the authority to bind King Island Links or otherwise act as its agent. Further, there is evidence from Mr Halaseh that the Indian supplier is or was pursuing Container Homes, not King Island Links, for further payment.[5]

    [5] Applicant’s undated “Reply to Respondent’s Statement of Facts Issues and Contentions” which Mr Halaseh confirmed in oral evidence, [29].

41. Further, the warranty provisions in the contract are inconsistent with Container Homes merely acting as agent for King Island Links in the procurement of the units. The provisions refer to both the “Seller” and the “Manufacturer”. In particular, the warranty for the steel pre-treatment and application of paint is stated to be given by the “Seller and Manufacturer”, evidencing a distinction between seller and manufacturer. This is consistent with the final page identifying Container Homes as the “Seller”. Why would a mere agent join in warranting work undertaken by a manufacturer selling to King Island Links?

42. Noting the distinction drawn between “Seller” and “Manufacturer” in the documents as already noted, the provisions dealing with transfer of title and risk are inconsistent with Container Homes being a mere agent for King Island Links. Since the provisions reference title and risk passing from the Seller – which can only mean Container Homes because, as already indicated, the “Manufacturer” must refer to a separate entity - those provisions only make sense if the contract is a contract of sale.

43. For completeness, I note the evidence does not support this being a case where Container Homes could be said to have acted as agent for an undisclosed principal. King Island Links’ involvement must have been known to the manufacturer in India because Mr Andrews visited the factory to view the work. In any case, there is no documentary evidence regarding legal relations with the supplier.

44. Further, Mr Halaseh gave evidence that he “called professionals from Australia to travel to India and assist in building the units” and “covered all these expenses hoping they would be reimbursed by King Island.”[6] That, too, is unlikely conduct for a mere agent. Additionally, if Container Homes was merely acting as agent for King Island Links, how was it to be remunerated for its efforts? The only prospect of Container Homes profiting from the arrangements would be through a margin on sale.

    [6] Applicant’s undated “Reply to Respondent’s Statement of Facts Issues and Contentions”, [16].

45. Mr Halaseh also said that he did not have the assets to fund a deal of this kind and thus, so the argument seemed to go, he could only be an agent. But Container Homes was put in funds by King Island Links to the extent of the Payment and was to have been paid 40% before the units left India. In any case, there is nothing to indicate King Island Links would fund the deal other than through the initial and subsequent payments.

46. In reaching these conclusions, it is not part of my reasoning that Mr Halaseh was other than an honest witness. He may well hold an honest belief that he was acting as agent for King Island Links. He may well consider that accounting for GST at Customs was appropriate.

47. However, the evidence, such as it is, points on balance to the nature of the deal being that Container Homes would acquire the units and sell them to King Island Links, with title passing from Container Homes to King Island Links in accordance with the contract. At the least, the evidence is insufficient to persuade me that Container Homes has discharged the burden of proving it was a mere agent.

    A DEPOSIT?

48. The High Court considered Division 99 in Commissioner of Taxation v Reliance Carpet Co Pty Limited,[7] noting various aspects of a deposit as understood in case law. In particular, that a deposit is regarded as “an earnest to bind the bargain.”[8]

    [7] [2008] HCA 22.

    [8] [2008] HCA 22, [22]-[27].

49. Importantly, a deposit may be forfeited by a purchaser irrespective of a vendor having sustained any loss. For instance, in the land conveyancing context, this means a vendor may forfeit a deposit paid by a defaulting purchase even though the vendor may proceed to sell the property to another buyer. The vendor is entitled to retain the forfeited deposit even if the vendor secures a higher price for the property in a subsequent sale and thus suffers no loss on account of the default.

50. Although the law relating to deposits developed in relation to land transactions, Division 99 is not limited to land transactions. I accept it is intended to also apply in analogous circumstances to supplies of things other than land. Even when legally represented, Container Homes did not submit otherwise.

51. It may be the feature that deposits may be forfeited even in the absence of relevant loss which led to the development of the law distinguishing a reasonable deposit from an unenforceable penalty. For example, it has been held that an amount styled as a deposit of 25% of the purchase price was, in the particular circumstances, an unreasonable sum and therefore not a true deposit.[9]

    [9] Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573.

52. This aspect assumes a central significance in this case because the alleged deposit is not the common amount of 10% or any amount of that order. It is 50% of the total purchase price for the homes.

53. It has been said that “[i]t would be most unusual for a deposit to be as high as 50% of the contract price.”[10] Nevertheless, I accept that while the percentage a deposit bears to the total purchase price is relevant, mere consideration of that aspect is not sufficient to determine whether an amount paid by the recipient of a supply is a true deposit.[11] The Courts have accepted that a seller at greater risk between contract and completion might justify a higher deposit on that basis.[12] Having said that, the Commissioner has not identified any case where a payment as high as 50% of the agreed selling price was treated as a true deposit.

    [10] Reid Motors Ltd v Wood and Another [1978] 1 NZLR 319, 327.

    [11] Re Hoobin; Perpetual Trustees Executors and Trustees Association of Australia Ltd v Hoobin [1957] VR 341, 347.

    [12] Coates v Sarich [1964] WAR 2, 6-7.

1. The Commissioner noted the additional risk borne by Container Homes in entering into the contract to supply the homes; a risk which, as the Commissioner pointed out, came home to Container Homes in this case when it was left liable to pay significant amounts to the supplier and unable to find a buyer for the four units of which it took delivery. The length of the contract, which provided for 120 days between acceptance and completion, may also be relevant in that regard.

2. The Commissioner also noted that the Payment was in fact retained by Container Homes. King Island Links did not seek to recover any part of the $373,000 from Container Homes. Additionally, the Commissioner noted that Container Homes itself referred to the amount as a “deposit” in invoices and in responses to audit queries.

3. Mr Halaseh responded by noting “deposit” did not necessarily mean a deposit to secure performance of an obligation. It could mean a deposit to a bank account. I do not find the submission that “deposit” could refer to a deposit to a bank account particularly persuasive in the current context. Nevertheless, as the Commissioner noted, the label adopted by parties is not determinative of whether a particular amount is a true deposit. It is not, however, an irrelevant consideration.

4. In respect of the invoices, Mr Hasaleh gave evidence, which I accept, that they did not issue at the time the Payment was made. He produced invoices later, after the default, as part of his efforts to seek recovery from King Island Links. The “invoices” do not display invoice numbers.

5. In any case, while an invoice bearing the date 5 May 2015 describes the Payment as the “deposit”, the next entry – “2^nd instalment” – is consistent with the Payment being an instalment of the purchase price and not necessarily a true deposit.[13] An invoice dated 10 December 2015, on its face calling for payment of the 40% instalment, also calls the Payment a deposit but repeats the description of the second payment due as “2nd Progress payment”.[14] An invoice for the final payment is in similar terms.[15] Those descriptions provide some support for the Payment being a deposit but in their context are far from conclusive.

   [13] TB 1 – 522.

   [14] TB 1 – 524.

   [15] TB 1 - 529.

6. Furthermore, this is not a case where the parties have consistently referred to the amount as a deposit. Indeed, as the extracts above show, where it is first referenced and appears most prominently in the contract, the Payment is called an “advance”.

7. More important, though, in my view, is the absence of any suggestion in the contract that the Payment would be forfeitable in the event of default regardless of whether Container Homes suffers any loss.

8. There is certainly no express term of the contract treating the amount as forfeitable in full in the event of default. Nor is there any provision or combination of provisions from which that would be a necessary inference.

9. The cases do acknowledge, at least in a real estate context, that a higher percentage deposit may be acceptable where the risks for the vendor are higher than usual. And there were obvious risks for Container Homes in this case. Further, the characterisation of a payment may, depending on the circumstances, be inferred from the use of the word “deposit” and the conduct of the parties.

10. Container Homes did, as matters transpired, suffer a loss on account of King Island Links’ default. King Island Links consented to Container Homes retaining the amount following its default. That conduct is consistent with the Payment being a true deposit. However, it is also explicable on other bases, such as avoiding further disputation in the face of the detriment suffered by Container Homes as a consequence of King Island Links’ default.

11. The amount involved in this case is substantial. As a deposit, it would be extraordinary as a percentage of the selling price. The contract most prominently describes the Payment not as a deposit but as an advance. The potential commercial consequences of characterising a payment as a deposit rather than an advance or part payment – forfeitable in the event of default regardless of whether the seller suffers any loss – are serious. The Tribunal should not rush to infer that the Payment was a deposit without a sound foundation for doing so.

12. In my view, the inconsistent, if not incidental, descriptions of the Payment as a deposit and the conduct of the parties are not a sufficient foundation for such an inference to be drawn. In that regard, it is important to recall that the character of the Payment must be determined at the time it was made, not unduly coloured by the events that subsequently transpired.

13. The matter may be tested in this way: Assume Container Homes was able to sell the abandoned homes to another buyer for a comparable price so that it suffered no significant loss. Assume King Island Links sought to recover the Payment or part of it. If the Payment is a true deposit, King Island’s action would fail. In that context, would it be likely that a court would infer the payment of 50% of the agreed price was intended to be forfeited, even though Container Homes suffered no loss on the basis of the inconsistent use of the word “deposit” by the parties and in the face of its primary description in the contract as an advance?

14. In view of the matters outlined above, I am persuaded the Payment is not properly characterised as a deposit. I reach the view that the evidence is sufficient to discharge Container Homes’ burden of proof with some hesitation because of the potential for pages from the contract to be missing from the evidence. However, for several reasons, I am persuaded on balance that is not fatal to Contain Homes’ case.

15. First, the use of the expression “advance” to refer to the time for the Payment to be made, where it first and most prominently occurs in the payment schedule, suggests it is more likely than not that any further pages would have been devoted to specifications and not contain a clause that would give an extraordinary and inconsistent meaning to the expression “advance” to encompass forfeiture. The language of the contract is otherwise conventional for a contract of this kind; there are no expressions giving meanings wholly inconsistent with their conventional usage, which seems unlikely in an unsophisticated document adopted by a small business.

16. Secondly, this conclusion is also consistent with the conduct of Container Homes, which did not set aside the Payment as a deposit to be retained, instead immediately transferring funds to the supplier in India. If the Payment were a security deposit, and particularly in view of the extraordinary percentage of the price, it would be expected King Island Links would have required it be set aside, for example in a lawyer’s trust account.

17. Thirdly, this is not a case where the applicant has provided a contract to the Commissioner in support of its case, where it might be thought that has occurred in a selective way. Contrary to my conclusion above, Container Homes denies the document is a contract at all.

18. For these reasons, I am persuaded on balance that the Payment was not a deposit held as security for the performance of an obligation for the purposes of Division 99.

    DISPOSITION OF REVIEW

19. It follows from the conclusion that the Payment is not a deposit that the assessment is excessive.[16] The objection decision therefore must be set aside and substituted with a decision allowing the objection in full.

    [16] Having regard to the reasoning of the High Court in the Reliance Carpet case at [2008] HCA 22, [37] and in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41, the Payment may have been consideration for a taxable supply comprising Contain Homes’ entry into obligations under the contract. However, it is not necessary or appropriate for me to express a view on that. Even if the payment was consideration for such a supply, and if the time limit for amending assessments has not expired, any GST payable would not be attributable to the tax period before the Tribunal.

I certify that the preceding 72 (seventy-two) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding

........................................................................

Associate

Dated: 27 June 2023

Date of hearing:	16 June 2023
Advocate for the Applicant:	B Hasaleh, Director
Advocate for the Respondent:	A Donohoo
Solicitors for the Respondent:	ATO Litigation and Legal Services