Cancelled Land Sales and GST – What Happens to the Deposit?

In a property market where deals are falling over more frequently, a common question arises: what happens to the GST on a deposit when a land sale agreement is cancelled?

Inland Revenue has provided timely guidance in Questions We’ve Been Asked QB 25/18, released on 15 July 2025.

No GST on Forfeited Deposits

If a land sale agreement is cancelled before settlement, there is no “supply” for GST purposes. This means that GST is not payable on the deposit, even if the deposit is forfeited.

The reason is that GST only applies to taxable supplies. When the contract does not proceed to settlement, there is no supply of land or services. A forfeited deposit is treated as compensation for breach of contract, not consideration for a supply.

If GST Has Already Been Returned or Claimed

In some cases, GST may have already been accounted for when the deposit was received. Where that occurs, an adjustment must be made:

• Vendors must reverse any output tax that has been returned;
• Purchasers must reverse any input tax that has been claimed.

These adjustments must be included in the GST return for the period in which the cancellation becomes known.

Buyer vs Seller Default – Does It Matter?

• If the buyer defaults, the vendor may retain the deposit. GST still does not apply.
• If the vendor defaults, the deposit is typically refunded. Even if it is not refunded (e.g. because of liquidation), GST still does not apply, as no supply occurred.

Zero-Rated Sales

Where the agreement was expected to be zero-rated (i.e. a supply of land between two GST-registered parties), no GST adjustments are required if the sale is cancelled before settlement. This is because no taxable supply has occurred.

Why This Matters

This guidance provides helpful clarity for developers, vendors, purchasers, and advisers. It reinforces the principle that GST only applies to actual taxable supplies, not to failed transactions or forfeited deposits resulting from cancellations.

If you are involved in property transactions, it is important to understand the GST implications when agreements do not proceed. Correct GST treatment can help avoid unnecessary adjustments and compliance issues.

Need Help?

If you have questions about the GST treatment of a cancelled sale or would like support reviewing a transaction, please contact us. We are here to assist.