In a decision handed down on 21 November 2008, the Victorian
Supreme Court found that there were three possible interpretations
of a GST clause in a land sale contract. The difficulties created
in this case by a poorly drafted GST clause have already led to
significant delays and costs for the vendor, purchaser and real
estate agent involved.
Mr Booth (Booth) contracted to purchase real
property from Cityrose Trading Pty Ltd (Cityrose)
for a price of $2,250,000. The contract was silent on whether the
price was inclusive or exclusive of GST. Special Condition 7 of the
contract addressed GST and provided that terms used in the contract
had the same meaning as in the A New Tax System (Goods and Services
Tax) Act 1999 (Cth) (GST Act). Special Condition 7
"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;
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 parties accepted that the supply of the property under the
contract was a taxable supply but a dispute arose as to whether the
contract required Booth to pay GST in addition to the stated
The GST Act relevantly:
imposes GST of 10% on the "value" of a "taxable
supply" (section 9-70)
provides that the "value" of a taxable supply is
10/11ths of the "price" (section 9-75) and the
"price" is generally the "consideration" for
the taxable supply, and
provides that "consideration" includes any payment in
connection with a supply (section 9-15).
Whelan J found that Special Condition 7 was difficult to
interpret because the terms "consideration" and
"value" have different meanings under the GST Act.
Therefore, Whelan J found that the phrase used in Special Condition
7 - "for consideration which represents its
value" - was contradictory.
Both the selling agents, Kay & Burton, and the purchaser,
Booth, argued that the effect of Special Condition 7 was that Booth
must pay "value" plus GST, which then equalled the
"price", in this case $2,250,000. Thus, the purpose of
Special Condition 7, it was said, was to notify the purchaser
(Booth) that the "price" had a GST component. Whelan J
held that this interpretation was problematic as it essentially
gave no meaning to the first part of Special Condition 7.
Cityrose argued that Special Condition 7 equated consideration
under the Contract with "value" under the GST Act. So the
$2,250,000 consideration under the Contract was
the "value" under the GST Act and not the
"price". Further, Cityrose argued that the Special
Condition imposed an additional liability (over and above the
$2,250,000) because the liable party must "also" pay the
amount of GST. Whelan J held that this interpretation was also
problematic as it did not accord the term "consideration"
with its defined meaning under the GST Act.
Whelan J stated that a third construction was possible, being
that Special Condition 7 was so unclear as to be meaningless and
should be severed from the Contract.
Whelan J made no decision as to the correct interpretation, but
referred the matter back to VCAT for a final decision.
Why is this case important?
This case is a reminder for all parties involved in a
transaction, including vendors, purchasers, real estate agents and
lawyers, of the importance of using properly drafted GST clauses
that are appropriate to the specific transaction. The parties need
to be very clear on whether specified prices are inclusive or
exclusive of GST and thus whether a vendor can recover an amount in
addition to the specified price on account of GST.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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