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Business Financials – What is the tax on a Security Deposit paid on a Factory Lease
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Published on Thursday, 08 September 2016 10:46
Question emailed - I have paid a security deposit for our warehouse lease. I have put the deposit to an asset account, is this correct and should I use CAP or GST, as GST was also included?
Answer – The payment is recorded as an asset with a not reportable coding like N-T, to a Security Deposit asset account, often in the Fixed Asset section, as it will be longer than 12 months, correct. Use Spend Money / Write Cheques to record to the asset account.
Until the deposit is refunded, or used in payment toward your lease you can’t claim any GST back for it and the seller doesn't send any GST off to the ATO. It is a good idea to make the account type for the Asset account “bank”. To read more about the tax treatment of Security Deposits see here on the ATO law website.
At end of lease the money is returned to you, so you do a Receive Money using the business bank account at the top where is was received and allocate below to the Security Deposit asset account with GST.
If you default on your lease and the owner uses the security deposit in part or full payment of your outstanding liability to them, you would pay the bill from the Security Deposit account (which is why we said to make the account type bank, though this can also be changed before entering), with GST code.
What is a security deposit?
For the purpose of the GST law, a security deposit is an assurance held as security for the performance of an obligation.
A security deposit must also:
o be forfeitable by the payer if the payer defaults on the agreement
o not be unreasonably large (usually no greater than 10% of the total purchase price), though each case must be individually assessed, and
o not be treated as payment for a supply unless it is:
§ forfeited because of a failure to perform an obligation, or
§ applied as all or part of the payment for a supply.
What is a part-payment?
A part-payment is an amount that is paid to reduce the balance of the full amount due to be paid under a contract. However, it is not forfeited if the payer defaults on the contract.
As a part-payment is not a deposit held as security, the payment is treated as a payment for a supply when it is received. If the supply is taxable, you must report and pay the GST as outlined below.
You do not pay GST on a security deposit unless the deposit is:
o forfeited, or
o applied as a payment for a supply.
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