McEwans Australia Pty Ltd v Brisbane City Council emphasises – again – the need to get tax advisers involved early to ensure the most appropriate GST treatment of transactions and contractual language that accurately reflects the intention of the parties. As this District Court of Queensland case demonstrates, choosing the wrong GST treatment meant both parties were worse off and the imprecise language opened a real can of worms.
The case concerned the sale of amalgamated land by McEwans Australia (Developer) to the Brisbane City Council (Council) that would be used by the Council as a sports ground. Interestingly, the fall-back GST position was that the amalgamated land was agreed to be subject to the margin scheme if the (hoped for) GST-free treatment was denied by the Commissioner. Part of the amalgamated land had previously been acquired by the Developer through a taxable supply and therefore an increasing adjustment arose for the Developer because the margin scheme was applied to the subsequent supply of the amalgamated land.
However, choosing to apply the margin scheme to the supply of the amalgamated land resulted in a lose/lose situation for both parties because:
- the Developer became liable for an increasing adjustment for the input tax credits previously claimed (costing it $160K); and
- the Council was not able to claim an input tax credit under the margin scheme for land that would be used as a sports ground (costing it $250K).
The Developer argued that it could recover the amount of the increasing adjustment and general interest charge under the specific 'Infrastructure offset' clause which stated:
Despite any other term, the Council shall pay, in addition to the Agreed Balance an amount equal to the GST that the Applicant will have to pay on account of GST associated with the receipt of the Agreed Balance.
Justice McGill held that the term 'GST' used in the 'Infrastructure offset' clause took its ordinary and natural meaning and referred to the GST payable in relation to the particular taxable supply of the amalgamated land. That is, GST calculated on the margin under the margin scheme provisions. Therefore, the Developer was not able to recover from the Council an additional amount to cover its increasing adjustment liability (or the interest – costing it another $60K). However, Justice McGill also held that the term 'GST', as defined in the GST Act, could extend to amounts used in working out an entity’s net amount (e.g. GST on taxable supplies but also increasing adjustments). Fortunately for the Council, the defined term 'GST' was held only to apply to the GST clause (as specified in the clause) and not the 'Infrastructure offset' clause.
So which meaning of GST applies in your contracts?