Uncertain GST clause deleted from contract – Why you must understand your contracts
By Michael Nibaldi, Lawyer, MST Lawyers
A recent Victorian Supreme Court decision in Cityrose Trading Pty Ltd v Booth and Anor has shown the importance of having properly drafted GST clauses in contracts. In this case, the GST clause was held to be so uncertain and ambiguous that it was declared void and deleted from the contract, resulting in the vendor having to shell out for the GST.
After a property in Sorrento was passed in at an auction, a contract of sale was entered into between Cityrose Trading Pty Ltd (the vendor) and Booth (the purchaser) for the purchase of the property. The purchase price was $2,250,000. There was however no mention of whether GST was included in the purchase price, resulting in a dispute as to which party would pay the GST.
The vendor had included a GST clause in the contract of sale and argued that it should be able to rely on that clause to make the purchaser pay GST. Unfortunately for the vendor, the clause was so poorly drafted that it did not make sense, no matter how it was interpreted.
The GST Clause
The GST clause stated that words in the clause, which were defined in the GST Act, were to be given the same meaning as given to them in that Act. The GST clause read:
“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.”
Don’t worry if you couldn’t understand it, neither could the Supreme Court. The issue arose because value, as defined in the GST Act, essentially means consideration multiplied by 10/11. The GST clause stated that consideration represents value, resulting in a circular definition that was not capable of having meaning.
The Supreme Court held that the GST clause was void because it was so uncertain and accordingly, the price paid for the property was determined to be GST inclusive. Because of a technicality in the GST clause, the vendor ended up effectively losing 10% of the sale price.
This case shows the importance of properly drafting and understanding clauses, no matter what the contract is. GST clauses especially should be tailored to suit each specific situation to ensure they can be relied on.
Whether you are a purchaser or vendor, if you don’t completely understand a GST clause in a contract you are about to sign, you should make sure to obtain advice so you know just what you are committing to.