How does GST work?
In a sale of commercial property, the GST liability for a taxable supply could be substantial due to the high value of the commercial property. Where GST is payable for a sale of commercial property, many vendors believe that they always have the right to claim the GST amount from the purchasers. Unfortunately, it is not the case.
Under the A New Tax System (Goods and Services Tax) Act 1999 (the “GST Act”), a supplier is liable to pay GST on its taxable supplies. However, the GST Act does not grant the supplier a statutory right to charge an additional amount on account of GST to the recipient of its taxable supply. Instead, the GST Act leaves the supplier to recover such GST amounts from recipients under the contractual arrangements between them. For this reason, if the terms of the commercial property sale contract are silent or ambiguous on the GST arrangement, the vendor may not be able to charge the GST amount from the purchaser.
Where do disputes arise?
There have been many cases involving disputes between parties to commercial property transactions since the enactment of the GST Act. Some of the common contractual disputes between parties include, for example:
- whether amounts stated in the contracts are inclusive or exclusive of GST;
- whether the vendor is contractually entitled to recover an additional amount for GST from the purchaser;
- whether there is an enforceable obligation on the vendor to refund a GST component to the purchaser where the supply is not taxable;
- whether the GST clause is void because of uncertainty and therefore needs to be severed from the contract.
How do I avoid a dispute over GST?
The above disputes can be largely avoided if you have included a well drafted GST clause in your contract. The most basic operation of a GST clause is to enable the supplier of a taxable supply to recover an additional amount from the recipient to cover the supplier’s GST liability on the taxable supply. One of the most common areas of dispute has been whether the consideration stated in the contract is:
- GST-inclusive; or
- GST-exclusive and subject to a GST gross-up.
Merely stating amounts are “GST-exclusive” does not necessarily give rise to a right to gross-up. Parties to contracts should remember that the expression “exclusive of GST” does not create an implied obligation on the purchaser to pay the GST. Similarly, merely stating amounts are “GST-inclusive” does not create an implied obligation on the vendor to refund a GST component to the purchaser where the supply is not taxable. Therefore, if agreed by the parties, vendor’s right to gross-up and obligation to refund should be expressly stated in the GST clause to avoid potential disputes.
Sometimes, the vendor and the purchase may agree to apply certain GST treatments to a supply (e.g. supply of a going concern, which means the transaction is GST-free). However, if such agreed treatment is later determined by the ATO to be incorrect, it raises the question on which party is responsible for the penalties or interest imposed by the ATO. This is another question that should be negotiated and agreed by the parties in the GST clause, especially where the parties’ agreed treatment involves a high level of uncertainty.
Given the complexity of GST treatments in commercial property transactions and the associated risks to relevant parties, it is crucial to seek legal and tax advice before signing a contract. A good GST clause will ensure that your GST position is adequately documented and protected.