Pty Ltd v Leong and OCMC Pty Ltd [2013] VSC 36

Background

On 3 September 2009, Mr Simon Leong (Mr Leong) entered into a contract to purchase from Duoedge Pty Ltd (the Vendor) a property at 196 Hull Road, Mooroolbark which had planning permission for a development of eight residential units (the Property). Mr Leong later nominated his company, OCMC Pty Ltd as the purchaser (the Purchaser).

The Contract was in the form of the standard Real Estate Institute of Victoria Contract of Sale of Real Estate and the Contract price was stated as “$916,000 GST inclusive”. The particulars of sale stated that the price includes GST (if any) unless the words “plus GST” appear in the box. The box contained a handwritten strike through its centre.

On 27 October 2009, at the Purchaser’s request, the Vendor provided a tax invoice for the sale of the Property, which stated that the sale price was $832,727.27 for the Property and the GST was $83,272.73. The Contract settled on 10 November 2009. Although the Vendor provided a tax invoice to the Purchaser, the Vendor did not remit any GST collected on the sale or otherwise account for its receipt.

The Purchaser commenced its development on the Property and in 2010 submitted a BAS for the 2009 fourth quarter that claimed a GST input tax credit of $83,272. The ATO disallowed the claim of $83,272 on the grounds that the acquisition was of second hand residential property and therefore, not a creditable acquisition under Sub-Division 40-C of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). Despite submissions by the Purchaser to the contrary, the ATO held that the supply of the Property was not a creditable acquisition. On 17 May 2010, the Purchaser informed the Vendor of the ATO’s decision and requested an immediate refund from the Vendor of the GST component of the sale. The Purchaser was unable to obtain the refund and subsequently commenced proceedings in the Magistrates court to recover the GST paid.

Mr Leong and the Purchaser were successful in the Magistrate’s court in recovering one eleventh of the Contract price by reason of the Magistrate finding an implied term of the Contract for the refund and ordering rectification of the Contract. The Vendor appealed the decision to the Victorian Supreme Court.

Issues

The issues on appeal were whether the Magistrate erred in:

  •  concluding the Contract was ambiguous such that the court was entitled to have regard to the evidence of the parties’ pre-contractual and post-contractual intentions
  •  finding that there was an implied term of the contract that, if GST did not apply to the sale, the Vendor would refund the GST
  • concluding the Purchaser had suffered a loss
  •  allowing for rectification of the Contract on the basis that both parties believed that GST was applicable to the transaction.

Decision

Was the Contract Ambiguous?

Justice Dixon considered that the language of the contract used in respect of GST had a plain meaning. The parties had expressed the intention that the Purchaser had no obligations to make further payment in respect of any GST assessment that might later follow. In other words, the parties plainly identified that the risk that GST might need to be remitted to the ATO lay with the Vendor. Therefore, as the transaction did not involve a taxable supply, the risk of the GST liability was abated to the benefit of the Vendor, who retained the full price that it contracted to receive for the Property. This construction was neither uncertain nor ambiguous.

Was there an implied term in the Contract?

Justice Dixon found the Magistrate erred in implying a term into the contract that the sum of $83,272.72 was refundable to the Purchaser. This was because such an implied term was contradictory to the express terms of the contract that the GST risk lay with the Vendor and the price was expressed to be $916,000, not $832,727.27. His Honour held that the contract was effective without an implied term.

Did the Purchaser suffer a loss?

Justice Dixon held, contrary to the finding of the Magistrate, that due to the impact of the margin scheme on the Purchaser’s GST liability on completing the development, the Purchaser had suffered no loss from its rejected claim of an input tax credit.

Section 75.5 of the GST Act permits application of the margin scheme to reduce the GST payable on a taxable supply of real property. Where a margin scheme applies, the quantum of GST payable is assessed on the margin, that is, in simple terms, the difference between the purchase price and sale price of the Property. The subsequent sale of the developed units was a taxable supply in respect of which the Purchaser was liable to remit GST. The court conducted an analysis of the Purchaser’s GST liability comparing the situation where the Purchaser could successfully claim an input tax credit and the situation where the Purchaser applied the margin scheme and found the total GST payable by the Purchaser to be exactly the same.

Should rectification of the Contract be allowed?

It was clear to Justice Dixon that the Magistrate had confused the distinction between implication of a term and rectification of a contract as stated by Justice Mason in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 “the difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed had they turned their minds to it- it is not a term they have actually agreed upon”.

While the Magistrate was satisfied that the parties were under a mistaken impression that the sale was a taxable supply, Justice Dixon held that this was no more than a common belief, not an actual agreement. Accordingly, it was not open to the Magistrate to rectify the written contract and in so ordering, the primary court had erred. The appeal was successful and the Vendor was permitted to retain the $83,272 component of the Contract Price.

Discussion

This decision serves as a timely reminder to Purchasers to ensure that they understand the GST position of the supply of property at the time they enter the Contract to purchase. GST is a tax payable by the supplier, so ultimately the GST risk lies with the Vendor. However, Purchasers need to understand:

  •  the consequences (including as to cash flow) of the different GST treatment of the initial supply to them, and
  • that a tax invoice issued by a Vendor is no guarantee the supply is a taxable supply.

Parties should also ensure that the Contract clearly and unambiguously states what happens if the GST treatment of the supply changes.