On 3 September 2009 the defendant entered into a contract of sale to purchase property for a price specified in the contract as “$916,000 GST inclusive”. The contract was in the standard REIV form (in Victoria) and the particulars of sale stated “GST: (refer to general condition 13) – the Price includes GST (if any) unless the words “plus GST” appear in this box.’ The box contained a hand written strike through its centre.
The defendant was the director of a company which intended to develop the land – that company was later nominated as the purchaser. On 28 October 2009, at the company’s request, the vendor provided it with a tax invoice showing a purchase price of $832,727.27 plus GST of $83,272.13. On 10 November 2009 the contract settled.
The company commenced its development on the land and in 2010 lodged a BAS claiming an input tax credit of $83,272. The ATO revised the BAS and rejected the claim to an input tax credit on the basis that the property was the supply of residential premises and therefore was not a creditable acquisition. The company requested that the vendor refund the GST component of the sale. The company knew that the vendor had not remitted GST on the sale to the ATO.
The findings of the magistrate
The magistrate found that the vendor should refund the GST amount to the company. In doing so, the magistrate found as follows:
- it was arguable that the language used in the contract of sale was ambiguous or susceptible to more than one meaning and the Court was entitled to take into account ‘surrounding circumstances’ to interpret the contract
- a reasonable observer would conclude that the parties contracted on the basis that the price included GST – a reasonable observer would not have concluded that the purchase price included GST “if any”.
- at the time of executing the contract, both the vendor and the purchaser believed that GST was applicable to the sale
- there was an implied term int the contract that if the purchaser paid to the vendor a total price that included provision for GST of $83,272.73, and it was later discovered that GST was not assessable on the transaction, the GST component was refundable to the purchaser on demand – the claim was described by the Magistrate as “money had and received”
- the vendor would be unjustly enriched if it retained $83,272.73
- the contract should be rectified to given effect to the intention of the parties
Reasoning of the Judge on appeal
Justice Dixon allowed the vendor’s appeal, being satisfied that the Magistrate erred in law for the reasons set out below.
It was not open to the magistrate to find that there was an implied term of the contract that, if GST did not apply to the sale, Duoedge would refund the GST amount of $83,272.73 and then to rectify the contract to give effect to the implied term.
The Judge found that the language used in the contract with respect to GST had a plain meaning. In a comforting statement for those real estate practitioners in Victoria (and to those involved in drafting the standard form REIV contract), his Honour observed as follows (at -):
What the parties needed to negotiate was the allocation of the risk that GST might need to be remitted to the ATO if the sale was a taxable supply. This is a common consideration as the printed terms of the standard form of contract in use in Victoria for property transactions makes clear.
The plain meaning of this contract is that the GST risk lay with the vendor. That this was the contractual intention appears from at least two places. It is clear from the particulars of sale that the agreed contract price was GST inclusive, although adding those words after the price is not the correct way to complete the standard form of contract. The absence of the words ‘plus GST’ in the box confirms the handwritten addition of the words ‘GST inclusive’. The parties have expressed the intention that the purchaser has no obligation to make a further payment in respect of any GST assessment that might later follow. In other words, the parties plainly intended that the risk that GST might need to be remitted to the Tax Office lay with the vendor. If the transaction did not involve a taxable supply, that risk was abated to the benefit of the vendor, who retains the full price that it contracted to receive for the property. Objectively assessed, this is what the terms relating to GST show to be the intention of the contracting parties. This construction is neither uncertain, nor ambiguous. To reverse the allocation of that risk to the purchaser, the words ‘plus GST’ are added to the box.
The Judge also found that the position of the purchaser was “opportunistic”. This is because the purchaser would receive the benefit of the refund of part of the purchase price, plus also the benefit of being able to use the margin scheme for the sale of the developed units – because of this, the . In light of this, the Judge found that it was not open to the magistrate to find that the vendor would be unjustly enriched if it retained the GST amount.
The Judge found that the magistrate had not directed himself properly as to the principles for rectification. In this context, the Judge observed that the magistrate was satisfied that the parties were under a mistaken impression that the sale was a taxable supply – and that this was no more than a common “belief”. This was not an actual agreement. Accordingly, the findings were not to the effect that the common intention of the parties was that the actual price was $832,727.27 – and there was no evidence that the true intention was that the agreed price was $832,727.27 and that it was grossed up to $916,000 because the parties believed that the sale was a taxable supply and the vendor was liable to remit the GST to the ATO
Accordingly, the evidence of a “common belief” fell short of the requisite finding for rectification, namely that there was a common “agreement”.
This case illustrates the difficulties which GST can cause in drafting contracts. Also, the case illustrates the importance of the facts and the evidence adduced at trial.
If the parties’ true intention was that the price was negotiated with GST in mind (and an entitlement to an input tax credit), the result does appear harsh. This is because commercial parties tend to negotiate on the basis of GST-exclusive amounts, on the assumption that the GST will be a “wash”. If this was the case, the vendor has received an extra $83,272.73 because of a mistake made by both parties as to whether the supply was taxable. The purchaser is not able to recover an input tax credit and is effectively out of pocket. As observed by the Judge, it is true that, over time, the purchaser may indirectly recover that benefit through the ability to use the margin scheme when the developed units are sold. However, that recovery would likely be over time and would be dependent upon the development being successful and the sales being made.
The importance of the facts is illustrated by the following cases which all dealt with the proper construction of a GST clause in a contract and also the issue of whether rectification could be ordered. Interestingly, and perhaps unfortunately, it appears that none of these decisions were provided to the Supreme Court in the recent decision.
The issue was whether the the purchaser was bound to pay, in addition to the stated purchase price, an amount on account of GST. The Tribunal found that the special conditions in the contract required the purchaser to pay an additional amount on account of GST. However, rectification of the contract was ordered to remove the special conditions so that the purchase price specified in the contract of sale was the price stipulated in the contract, and no more.
This case is similar to the decision under discussion. The contract provided for a GST-inclusive price and the vendor was obliged to provide the purchaser with a tax invoice if the supply was a taxable supply. At the time of contract, the vendor was registered for GST. Before settlement, the Commissioner cancelled the vendor’s registration and the sale completed. The purchasers unsuccessfully brought proceedings seeking orders that the vendors were obliged to remit GST and to provide the purchasers with a tax invoice (so that the defendants could claim an input tax credit).
This case involved the construction of the contract where five contiguous parcels of land were sold but only one parcel was a taxable supply.
The contract of sale provided that the purchase price payable was exclusive of GST. The purchaser unsuccessfully sought rectification of the contract on the basis that the common intention of the parties was that the purchase price should be inclusive of GST.