There has been a run of GST cases this year which have provided examples of where things can go wrong when the GST position for supplies is either not considered properly or the GST clause is not drafted in a way which provides the intended outcome for clients.
A properly drafted GST clause can avoid headaches and avoid unintended financial consequences for clients. How have some people have got it wrong and what is the result of those errors?
GST inclusive or exclusive consideration
A recent Victorian case considered a GST clause which was included in a contract for the sale of residential property.
The contract listed the purchase price without reference to it being GST inclusive or exclusive and the GST special condition stated that:
"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…”
In determining whether or not the purchaser had to pay an additional amount to the vendor the Victorian Supreme Court found that the GST special condition was uncertain and should be severed from the contract.
As a result the purchaser was not required to pay an additional amount on account of GST and the vendor would receive a net purchase price of $2,045,454 rather than $2,250,000.
GST free going concern
Our update "When it comes to tax, timing is everything” in April (follow the link here [insert link]) we looked at a case where the Administrative Appeals Tribunal looked at whether the requirements of section 38-325 had been met by the parties to a contract for the sale of various properties.
Directors of each of the parties to the transaction had sworn statutory declarations 5 years after the contracts had been entered into that, at the time of the contract and the settlement, the properties in question were "purchased as a going concern”.
The Tribunal applied prior court decisions to determine that the agreement required under section 38-325 needed to be made at or before the time of the supply. As a consequence of failing to incorporate an appropriate GST.clause into the contract the vendor was required to remit 1/11th of the purchase price to the ATO and was unable to obtain a reimbursement from the purchaser for the GST.
What can you do to help clients avoid being out of pocket?
When negotiating or preparing a contract for a client it is important that:
- all supplies are identified – contracts may involve supplies on the part of one or more parties so it is not safe to assume that there is only one supply that might be subject to GST;
- if there are multiple supplies, suppliers and recipients, that the GST position for each of these supplies is considered – this avoids unexpected financial consequences for a party;
- GST clauses are drafted in a manner which reflects the agreements between the parties as to payment of GST – it is much easier to have a discussion about GST with another party before a contract is signed rather than after a contract has settled;
- GST clauses are drafted in a manner which enables a vendor or supplier to recoup GST from a purchaser or recipient; and
your client’s position is covered where reimbursement of GST is contemplated.
This article first appeared in lexology.com.