A recent Victorian Supreme Court decision, Millington v Waste Wise Environmental Pty Ltd  VSC 167 , confirms that a damages award should generally be calculated on a GST exclusive basis in circumstances where the plaintiff is entitled to a full input tax credit (GST credit) for a cost or expense. The case also highlights that a plaintiff may be entitled to claim interest for the period of time between when a plaintiff has incurred a GST expense and an input tax credit is claimed.
The defendant (Millington) caused damage to a garbage truck owned by the plaintiff (Waste Wise). The loss suffered included repair costs, assessment costs and loss of use of the vehicle. This totalled $49,628.18 inclusive of GST.
The plaintiff is GST registered and was entitled to an input tax credit of $4,168.26 (presumably in respect of GST on the repair and assessment costs). The defendant was nonetheless ordered to pay the full GST inclusive amount. The plaintiff was ordered to later separately pay $4,168.26 back to the defendant after claiming an input tax credit.
On appeal Justice Croft held that the damages should have been calculated on a GST exclusive basis. The appeal was successful on all three of the following grounds:
- The Magistrate failed to correctly apply the "compensatory principle". The correct amount of loss suffered by the plaintiff was the GST exclusive amount (having regard to the plaintiff's entitlement to input tax credits).
- The Magistrate failed to correctly apply the "once and for all rule". It is preferable for the plaintiff to receive a reduced one-off lump sum payment, rather than the plaintiff receiving a higher amount and later needing to reimburse the defendant.
- The Magistrate failed to correctly apply the law relating to mitigation of loss. While there is no positive duty on a plaintiff to claim an input tax credit to mitigate loss, it would be unreasonable for a plaintiff not to claim such credits and this should be taken into account in calculating an award for damages.
Justice Croft's decision is consistent with an earlier New South Wales Supreme Court decision which similarly held that a damages award should be calculated on a GST exclusive basis where a plaintiff is entitled to full input tax credits for a cost or expense (Gagner Pty Ltd v Canturi Corporation Pty Ltd  NSWCA 413).
Should the defendant pay interest on the GST amount?
Justice Croft noted that the Magistrate may have been trying to structure the original damages orders so that the plaintiff was not out-of-pocket as a result of paying GST to third party suppliers before having to wait to receive the benefit of an input tax credit.
His Honour noted that this cash flow cost could instead have been compensated through increasing the damages to add an amount of interest.
Will a damages award always exclude GST?
This decision, and the earlier decision in the Gagner Case, both involved circumstances where the loss suffered by the plaintiff related to a cost or expense for which a full input tax credit was available. This will not always be the case.
Justice Croft also noted that there may be instances where the GST position is not entirely certain and it is more appropriate for a damages award to be calculated on a GST inclusive basis. The case of Peet Limited v Richmond (No 2)  VSC 585 was cited as an example. In that case the Court considered it likely that the plaintiff would be liable for GST on services that had been rendered at an earlier point in time. The defendant in that case was ordered to pay a GST amount to the plaintiff within 30 days of receipt of a tax invoice from the plaintiff. The plaintiff was ordered to provide evidence to the defendant that the GST amount was in fact remitted to the ATO and to reimburse any amount received on account of GST that was not so remitted.
Unlike the Millington Case and Gagner Case which both involved acquisitions (costs that had been incurred by the plaintiff), the Peet Case involved GST issues for a supply of services that had been made by the plaintiff to the defendant for which the plaintiff was potentially liable for GST.
DLA Piper Comment
We consider the decision in the Millington Case to be a sensible outcome. The case highlights that all parties to a dispute should carefully consider the tax and GST issues that may arise from either a court decision or an out-of-court settlement.
The decision also highlights that, depending on the facts and amounts involved, it may be appropriate for a plaintiff to claim an amount for interest where there is a timing difference between the payment of GST amounts and the recovery of offsetting input tax credits.