Security deposit or part payment? Check the GST treatment

Start with the agreement for the goods or services you're supplying. Property, progressive construction, trust-money and special industry arrangements need a separate assessment.

Read the agreement and actual practice together

Ask what obligation the money secures, whether it is genuinely at risk of forfeiture, whether the amount is reasonable and how it will be applied when the transaction proceeds. A contract label can conflict with the way a business actually handles cancellations.

The ATO's GSTR 2006/2 on deposits held as security discusses these characteristics. Simply renaming an instalment "security deposit" doesn't establish Division 99 treatment. Nor should you change forfeiture terms for tax purposes without considering whether the contract is appropriate and enforceable.

Compare two clearly stated arrangements

Both fictional arrangements below involve a $220 receipt connected with a proposed wholly taxable supply. The security-deposit example assumes a qualified adviser has confirmed that the agreement and conduct satisfy Division 99. The advance-payment example assumes it is ordinary part consideration, not a progressive supply with separate rules.

Event	Genuine security deposit	Advance part payment
Receipt of $220	Special deposit rules: no GST attribution merely from holding it as qualifying security	Apply ordinary cash/non-cash attribution; a payment can trigger GST
Transaction proceeds	Trace when the money is applied as consideration; check GST in that period	Apply the payment against the invoice without counting it again
Transaction is cancelled and money returned	Record the return and match the original deposit	Review the cancellation and any GST adjustment or correction needed
Money is forfeited	Check the forfeiture event and special attribution rules	Review the contractual change; do not assume it becomes a qualifying security deposit retrospectively

The columns are alternatives. The security-deposit classification is an explicit assumption, not a conclusion from the $220 amount. Original ASBG worksheet; all example figures are fictional.

The ordinary accounting-method rules still matter for advance payments. On non-cash GST accounting, an invoice or part payment can trigger attribution of the whole taxable supply under the ordinary rule. On cash accounting, attribution generally follows amounts received. That is why a small advance cannot always be analysed by taking one-eleventh of the cash alone.

Keep a deposit register that can be reconciled

Record the customer, contract and version, total agreed price, receipt date, amount, deposit classification and the evidence for it. Add the conditions for repayment or forfeiture and the expected fulfilment date.

When the job goes ahead, link the deposit to the final invoice. When money goes back, link the actual bank refund. If it is forfeited, retain the notice and facts establishing the event. Ask the bookkeeper which liability or customer-credit account will keep outstanding deposits visible in your software.

A register that still shows a deposit after the final invoice has been paid needs investigation. So does an invoice reduced by a deposit that the bank never received. Those checks are useful before deciding the GST treatment.

Separate tax documentation from customer communication

The customer needs to know whether an amount is refundable, when it will be applied and what remains payable. The records also need to establish when a tax invoice or adjustment note is required. Avoid issuing contradictory documents that describe the same receipt as both refundable security and an immediately earned service fee.

The tax-invoice guide explains the usual document fields. It doesn't decide whether a particular deposit arrangement is taxable at receipt. Have the adviser settle that classification before changing the invoice template across the business.

Review exceptions before the BAS is finalised

Give your registered tax agent the actual contract, cancellation policy, correspondence and money trail. Ask them to confirm classification, attribution at each event and any adjustment documentation. Include unusual partial refunds, deductions for damage and retained amounts that exceed the original deposit.

Keep the answer with the register so next quarter's preparer can follow it. The BAS guide places that check within ordinary reporting.

Continue with the next question

• Cash or accrual GST accounting: compare the timing
• Adjustment notes when a sale changes: the GST paper trail

Key takeaways

• Classify the arrangement using the contract and conduct, not its name.
• Follow receipt, application, refund and forfeiture as separate events.
• Reconcile the deposit once and retain the tax decision behind it.

Where to get help

Use GSTR 2006/2 with a registered tax agent; contract questions may also need a lawyer. The Bookkeeping and BAS hub connects the reporting and record-keeping guides.