Over the years, several goods and services tax (GST) disputes have been brought before the Courts and they continue to this day. Some disputes involve the Commissioner, but many involve the parties to the transaction.
Disputes involving the Commissioner generally involve the question of whether GST is payable or whether the margin scheme can apply. Disputes involving the parties to the transaction generally do not involve the question of whether GST is payable, but rather as to who is to bear the ultimate liability for GST. That is, is the price specified on the Offer and Acceptance inclusive of GST or exclusive of GST?
The lesson for anyone contemplating any transactions involving property is clear - make sure all parties understand the GST consequences.
If the GST is a deal breaker, the deal probably shouldn't be done. The pain and expense of litigation is not worth it. Ask us before you commit to any property transactions.
IS THE SALE OF PROPERTY INCLUSIVE OR EXCLUSIVE OF GST?
Under the GST Act, the supplier incurs the liability to pay GST, but the supplier has no statutory right to pass on that GST liability to the purchaser – this needs to be done as part of the contractual relationship. How the contractual relationship is recorded is critical as many commercial disputes involve a contest about the terms of the contract.
In his paper to the Property Symposium in 2017, Chris Sievers noted that commercial disputes involving GST and real property predominately fall within the following categories:
- the construction of the terms of the contract;
- whether the terms of the contract accurately reflect the agreement between the parties; and
- whether one party acted to the prejudice of another party or in breach of an obligation owed to the other party.
Four cases highlight the need for both buyers and sellers to be aware of the GST issues of the transaction. All cases were between the parties to the transaction and did not involve the Commissioner of Taxation. They show that small differences can result in different and costly outcomes.
|1. TAM VS MANNALL
The New South Wales Supreme Court found that the sellers could not add GST to the price of the business premises even though it was their understanding (and the understanding of the auctioneer) that the sale price of $2.8m was to be exclusive of GST. In the case, Mr and Mrs Mannall contended that the GST liability should be on top of the amount paid by Dr Tam as that was the apparent condition of the auction.
These proceedings concern an uncompleted contract for the sale of vacant shop premises in Burwood Road, Burwood. The property had, for more than eighty years, housed a well-known family retail business, Mannall's Ladies Wear.
The problem was that, at the conclusion of the auction, a standard contract of sale was signed which provides that the price is inclusive of GST. With more than $250,000 up for grabs, you can appreciate that there were a lot of witnesses for both sides that had very clear but differing recollections of the auction. The court said that this provided a good example of the “uncertain testimony of slippery memory”.
In the end, the Mannalls failed to discharge the burden of proof. They had to remit 1/11th of the $2.8m and Dr Tam was (presumably) entitled to the GST input tax credit.
2. ASHTON VS MONTELEONE
A week later in the same court, a different outcome.
In this case, the court held that the vendor was entitled to add 10% to the agreed price in circumstances that were almost identical to Tam v Mannall. The difference was, however, the court was satisfied that Mr Monteleone (the buyer) knew that the price was exclusive of GST, even though the contract signed by both parties suggested that the price (just over $1m) was inclusive of GST.
The difference in the outcome of this case seems to be largely one of the credibility of the witnesses. The court noted that Mr Monteleone was “an unsatisfactory witness who could not substantiate the evidence... He was prepared to say anything that he thought would advance his case. His evidence was marked by implausibility.”
3. AFC HOLDINGS P/L VS SHIPROCK HOLDINGS P/L
The NSW Supreme Court (again) has ruled that on the correct construction of a special condition in a contract for sale of land, the price payable under the contract was not GST inclusive and that, in addition to paying the amount specified in the contract as the purchase price, the purchaser was required to reimburse the vendor for GST payable by it.
The court held that dispute between the parties turned on the correct construction of one of the special conditions. Shiprock says that the special condition required AFC to pay, in addition to the purchase price, the amount of GST payable by Shiprock in respect of the supply by it under the sale contract. AFC says that the special condition simply records the fact that the amount payable by the purchaser includes an amount payable by the defendant in respect of GST.
The court held that the purchaser was required to reimburse the vendor for GST payable by it.
4. CITYROSE TRADING PTY LTD VS BOOTH
This case further highlights the danger of a poorly drafted GST clause (when will we learn?). The GST gross up clause in the contract for sale of land was so poorly drafted that the Court held that the clause was void for uncertainty and declared that the clause was severable from the contract.
This was a costly mistake for the vendor who, as a consequence, was unable to collect a GST gross up payment from the purchaser and was left to fund the GST liability arising from the sale of the land out of its own pocket.
The decision highlights the importance of clear drafting for GST in a contract. Poor drafting increases the risk of a dispute later arising between the parties and can result in a direct financial loss to one of the parties.
LESSONS FOR ALL OF US
These cases are ongoing examples of “party to party” disputes over GST which do not include the ATO in the proceedings. They highlight the all-too-common problems of parties to contracts not understanding their GST liability or mixing their GST clauses.
It is critical that you understand the GST consequences of any proposed transaction before any agreement is finalised. You may not think you have a GST liability, only to find out after the event that you do. There goes any profit on the deal.
We have specialists that can assist and make sure that any GST issues are identified and the best outcome is obtained.
This article is issued as general commentary - please contact us about your specific circumstances.