Expensive mistakes in GST clauses13 December 2016 Topics: Tax and revenue, Tax disputes
A recent decision of the Supreme Court of Victoria highlights the cost of not carefully drafting a GST clause – 1/11th of the purchase price to be exact. The case also illustrates the difficulties in using standard form contracts in slightly unusual circumstances.
When does the sale of an old house attract GST?
In A&A Property Developers Pty Ltd v MCCA Asset Management Ltd  VSC 653, there was confusion over the GST treatment of the sale of a house.
A&A entered a contract to sell an old house for $2.9m. The contract had a clause stating ‘The price includes GST (if any) unless the words ‘plus GST’ appear in this box’. In the adjacent box, the word ‘GST’ was inserted – but not ‘plus GST’.
The buyer apparently assumed that there was no GST on the sale. This was an understandable assumption given the property was neither ‘new residential premises’ nor ‘commercial residential premises’.
However, the seller assessed the property as uninhabitable. The result was that the sale was not input taxed, but subject to GST. To make matters worse, the seller also considered it could not apply the GST margin scheme, meaning the seller had to pay 1/11th of the price as GST.
The seller tried to argue that the insertion of ‘GST’ into the contract meant the same as ‘plus GST’. That would have meant the buyer had to pay $2.9m + GST = $3.19m.
What did the Court decide?
The Court concluded that ‘GST’ – rather than ‘plus GST’ – was insufficient for the seller to receive the additional amount equal to its GST liability.
In its reasons, the Court stated that ‘The contract provided a clear mechanism for the parties to give effect to an agreement that the purchaser must pay GST on the purchase price, but it was not employed in this instance. The inclusion of the letters ‘GST’ in the box did not shift the burden of the payment of GST to the purchaser.’
What are the lessons?
The decision highlights a number of key issues.
- The GST treatment should be considered before a purchase price is agreed. This significantly reduces the chance of a dispute.
- If the parties cannot agree on the correct GST treatment, or they are concerned that the ATO may take a different view, then the GST clause should be drafted to ensure that those competing interpretations can be handled.In this case, the parties could have acknowledged that they would self-assess the supply as taxable, but if it turned out that the supply was actually input taxed, then the GST component would be refunded. Alternatively, given the amount that was at stake because the buyer could not apply the GST margin scheme on its sales, the parties could have agreed a process for making a private ruling application to the ATO.
- The cost of not paying sufficient attention to the GST clause can be significant. In this case, a proper GST clause tailored to the parties’ particular circumstances could have made their intention clear – even if there was an error in using ‘GST’ rather than ‘plus GST’ on the front page.
Our clients’ experiences are generally that the cost of getting the GST clause correct upfront saves time and costs down the track – both with the other party and for any audit activity with the ATO.
Please contact a member of our team if you would like to discuss.