People say that lawyers love "grey areas" and loopholes. I think this only applies to lawyers acting for clients who stand to win because of badly drafted contracts. The lawyers for the other side simply have to try to overcome the bad drafting.

The Goods and services tax (GST) has been with us for over 20 years, but we still see contracts where the GST treatment is wrong or badly expressed. This can have devastating consequences for whoever gets it wrong.

Where parties wish the GST to be added to the contract price, the contract should use specific words such as "plus GST".

Unfortunately, a common error here is to instead insert "exclusive of GST".

This cost a seller up to $1,475,000.00 in a case decided by the New South Wales Supreme Court.

The dispute was over a contract for the sale of a development site in Manly, which had a development approval for 75 home units, shops and offices. The price was $14.75 million. The buyer and seller both agreed that GST would have to be paid but claimed that other party had to pay it.

The contract specified that "the Purchase Price is exclusive of GST". It went on to say that the margin scheme applied and the buyer was not entitled to an input tax credit or any tax invoice from the seller.

The buyer argued that this meant that it only had to pay the $14.75M, and it was up to the seller to pay the Tax Office the GST of $1.475M from that amount. The buyer said that the payment of $14.75M was $13.275M for the purchase price plus an additional $1.475M for the GST the seller was required to pay to the Australian Taxation Office.

Not surprisingly, the seller argued that the buyer had to pay the $14.75M plus GST.

Sadly for the seller, the court ruled that "purchase price exclusive of GST" meant that the seller must pay Goods and services tax out of the sale price. The words "exclusive of GST" were not sufficient by themselves to have the additional effect of obliging the purchaser to pay the Goods and services tax.

In Queensland, the standard REIQ house and land contract provides that the purchase price "includes GST". This is pretty clear, but there are still several matters that the seller must consider before being happy to sign off on that basis.

Contracts for commercial property are different again.

The lesson here is to always consider the Goods and services tax consequences of your commercial transaction, and make sure that both buyer and seller are (pardon the pun) on the same page in relation to Goods and services tax.

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