By Russell Cocks, Solicitor
First published in the Law Institute Journal
GST needs to be at the forefront of every property lawyers mind when dealing with the sale (supply) of real estate.
If the transaction relates to ‘residential premises’ then GST does not apply, but it does apply if those ‘residential premises’ are ‘new residential premises’ or are not ‘premises’ – that is, vacant land. The guiding presumption in the residential environment is that GST does not apply unless the property falls into one of the specific categories.
Conversely, when dealing with commercial real estate sold during the course of an enterprise, GST ordinarily applies unless the transaction is the sale of a ‘going concern’ or a ‘farming business’. Thus the guiding presumption in the commercial environment is that GST does apply unless the property falls into one of the specific categories.
The final consideration is, if GST is a factor in the transaction, does the margin scheme apply and, if so, do the parties want to use the margin scheme?
More than a decade after the introduction of GST most practitioners have a fair understanding of GST and the introduction of the 2008 standard contract now requires the parties to address the GST issue at the start of the transaction by imposing a presumed GST outcome in default of use of the boxes to prescribe a different outcome. However, even if practitioners have a good understanding of GST, it is still possible for disputes to arise based on the faulty understanding of the parties to the transaction.
Booth v Cityrose Trading P/L (ACN 077934671) [2011] VCAT 278 arose because the vendor sold ‘new residential premises’ and sought to recover GST in addition to the price. The purchaser argued that the contract either did not provide for the addition of GST to the purchase price or, if it did so provide, that the contract should be rectified. The contract was pre-2008 and included, as was common at that time, a very poorly worded special condition that the tribunal concluded did mean that GST was to be added to the price. However the tribunal considered the surrounding circumstances of the transaction and concluded that at the time the contract was signed, which was the relevant time for determining the intention of the parties, the director of the vendor who signed the contract on behalf of the vendor did not intend that GST should be added, as his evidence was that he had not thought about GST. This is despite there being evidence that the vendor’s manager did intend the contract to be plus GST when he gave instructions for preparation of the auction contract. Presumably, if the manager had have signed the contract, then GST would have been payable and the decision appears to be limited to its facts. An alternative basis for the decision based on misleading and deceptive conduct also confirms the importance of all of the facts, not just the written word, and that courts will hold parties to their agreement even if the contract needs to be rectified to achieve that outcome.
Duoedge P/L v Leong & Anor [2013] VSC 36 also arose due to a misunderstanding by the parties as to the GST consequences of the contract. The property was existing ‘residential premises’ and therefore GST exempt. The purchaser intended to undertake a commercial redevelopment of the site and the parties incorrectly concluded that this meant that GST did apply. The undoubted intention of the parties was that the price was GST inclusive and the plus GST box was struck out. The vendor provided a tax invoice and it was intended that the vendor would account to the Australian Taxation Office for the GST and that a refund of the GST would be made by the ATO to the purchaser. However the vendor made annual GST returns and so when the purchaser sought a refund after three months the ATO had not received the GST from the vendor and inquired into the transaction, concluded that it related to existing residential property and denied the purchaser’s claim for a refund on the basis that it was not a taxable supply.
The purchaser sought a refund from the vendor and, despite success in the Magistrates’ Court, lost on appeal. The court interpreted the contract as allocating risk in respect of payment of GST and, in this case, allocating that risk to the vendor. It followed that, if no GST was payable, the vendor was entitled to keep the GST. Dixon J. suggested that the purchaser would be able to ‘recover’ the GST by the application of the margin scheme to any resale, as the ATO had concluded that the purchase was on a no-tax basis, thereby qualifying the purchaser to sell on the margin scheme.
The ‘winner’ here was the vendor who had an extra 10%. But the purchaser would get that money back on resale by applying the margin scheme, so the purchaser was no worse off.
The ‘loser’ was the ATO, which would ultimately get less money from the purchaser’s resale, but that was because the original sale was not taxable. The vendor’s gain simply arose from the false expectation of the parties that GST was payable on the original transaction. The ATO lost something it did not want.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.