A recent decision of the Victorian Supreme Court, in the case of Cityrose Trading Pty Ltd v Booth, highlights the need for suppliers to ensure that all of their transaction documents (including contracts, agreements and deeds) include adequately drafted pricing provisions and GST clauses.
The case related to the sale of land in Victoria for $2.25 million under a contract which included a GST clause. A dispute arose as to whether the GST clause obliged the Purchaser (Mr Booth) to pay an additional $225,000 to the Vendor (Cityrose Trading) on account of GST.
Justice Emerton held that the GST clause was void for uncertainty. Subject to any further arguments from the parties, Her Honour proposes to declare that the clause is severed from the Contract.
Subject to any appeals, the decision means that the GST clause does not apply and the Vendor is not entitled to an additional amount on account of GST.
While the case involved a real estate transaction, the issues raised are relevant for all transaction documents under which a supplier intends that the consideration be expressed GST-exclusive, with GST (where applicable) being payable as an additional amount pursuant to a GST clause.
The Purchaser entered a contract to buy the property on 20 May 2006. The contract included a table which set out the "Particulars of Sale" in the following terms:
PURCHASE PRICE: $2,250,000
DEPOSIT: $225,000 on the signing hereof
The contract also included a Special Condition relating to GST which read as follows:
7. Goods and Services Tax
7.1 For the purposes of this special condition:
(a) ‘GST’ means GST within the meaning of the GST Act;
(b) ‘GST Act’ means A New Tax System (Goods and Services) Act 1999;
(c) Expressions used in this special condition which are defined in the GST Act have the same meaning as given to them in the GST Act.
7.2 The consideration payable for any taxable supply made under this contract represents the value of the taxable supply for which payment is to be made;
7.3 Where a taxable supply is made under this contract for consideration which represents its value, then the party liable to pay for the taxable supply must also pay at the same time and in the same manner as the value is otherwise payable the amount of any GST payable in respect of the taxable supply.
The Vendor (in its capacity as trustee of a GST registered trust) was liable for GST on the sale of the property.
The Purchaser was not informed until just before settlement that the Vendor required payment of an additional $225,000 on account of GST under Special Condition 7. The Purchaser paid this amount at settlement, under protest, with the amount held on trust by the Vendor's solicitors pending the outcome of an earlier tribunal decision (heard before the Victorian Civil and Administrative Tribunal).
As noted above, Justice Emerton found in favour of the Purchaser. Her Honour proposes to make the following declarations:
Special Condition 7 in the contract of sale is void for uncertainty and is severed from the contract of sale.
The parties to the contract of sale did not conclude any bargain for the payment of GST and the purchase price of $2,225,000 in the Particulars of Sale is therefore to be understood to be inclusive of any GST payable on the sale.
Why is the GST clause uncertain?
Under the GST Act, the words "value", "price" and "consideration" each have a defined meaning.
Generally speaking, the "price" for a supply is the amount of a cash payment that includes GST. The "value" of a supply is 10/11ths of the "price". For example, if the price for a supply is $110, the value is $100. GST is applied at the rate of 10% based on the "value" of the supply.
The GST clause in the contract states that the "consideration" payable for the supply represents the "value", which was likely intended to mean that the consideration excludes GST.
Justice Emerton held that in the context of the clause, the word "consideration" is coterminous (i.e. interchangeable) with the word "price". However, on this basis, the clause does not make sense, as the consideration payable cannot represent both the "price" and the "value" in a GST context (given the different meaning of those terms in the GST Act).
In her judgement Justice Emerton states:
In my view, the language used is so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention. Put another way, the competing constructions are equally 'open' (or not) and the Court is unable by legitimate means to divine what the parties should be taken to have intended as to whether Special Condition 7 rendered the purchase price GST-inclusive or GST-exclusive.
Justice Emerton also noted that the conclusion that the price includes GST is consistent with the specification of the Purchase Price and the Residue in the Particulars of Sale. If an additional amount was payable on account of GST, as contended by the Vendor, the Residue would have been understated.
Implications for supply contracts
As noted above, the implications of this decision are not limited to real estate contracts. Where possible, suppliers should ensure that their pricing provisions and GST clauses are drafted carefully so that GST can be recovered as an additional amount (if applicable).
It should be noted that whilst "standard" precedent GST clauses are commonly inserted into transaction documents, there is no "one size fits all" solution. The pricing and GST provisions in a document may need to be tailored to suit the GST treatment of the supplies being made under that particular document.