Almost every contract contains a GST clause. These clauses have an important function in a contract since they allow, among other things, a supplier to recover GST from its customer (remembering that it is the supplier who must remit GST on the transaction to the Australian Taxation Office). Despite their importance these clauses are often poorly drafted, and the parties – and in some cases even their lawyers – give little thought as to whether the wording of the clause appropriately protects the party’s GST position.
A recent Victorian Supreme Court decision illustrates why it is critical that GST clauses should be clear and unambiguous.
The Case of Cityrose v Booth
In Cityrose Trading Pty Ltd v Booth & Anor  VSC 504, Cityrose Trading Pty Ltd (the vendor) sold a property in Sorrento, Victoria, to Mr Booth (the purchaser). The sale of the property was subject to GST and the contract for sale of the property listed the sale price as $2,250,000. The contract contained the following GST clause:
“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.
A dispute arose between the parties, since the vendor assumed from the wording of the contract that the price was $2,250,000 plus $225,000 GST, and the purchaser expected that price was $2,250,000 including GST.
The issue at the heart of the case was whether the vendor was entitled to recover from the purchaser the additional GST amount under this GST clause.
The Supreme Court considered the meaning of the clause and concluded that “the language used in [the GST clause] is so obscure, and so incapable of any definite or precise meaning, that the Court is unable to attribute to the parties any particular contractual intention”. Accordingly, it was held that the GST clause was void for uncertainty, with the consequence being that the $2,250,000 purchase price was treated as GST-inclusive and the vendor was unable to recover the additional amount from the purchaser.
Once again, the lesson from this and other similar cases is to ensure that the GST clause in your agreements adequately protects you and is both clear and unambiguous. GST clauses are not as simple as most businesses expect and, in view of potential consequences, they certainly warrant more attention than they get!
This article was written by Jonathan Ackerman of Ackerman Consulting who provides Source Legal and its clients with advice on GST and other tax matters. For more information or assistance, please contact Stanislav Roth at firstname.lastname@example.org.
A copy of the article can be downloaded here.