Contributed by Michael Patane, Executive Director, Bourke Legal
Almost 17 years after the introduction of the GST there continue to be commercial disputes in relation to the interpretation and application of GST and indemnity clauses. A number of the cases involve whether the price was to be GST-inclusive or GST-exclusive, whether the parties agreed that the going concern provision applied to the supply, whether the margin scheme applied to the supply or the effect of GST “cascading”. Some of those cases include:
- A & A Property Developers Pty Ltd v MCCA Asset Management Ltd  VSC 653 — whether GST was to be added to the price
- Duoedge Pty Ltd v Leong & Anor  VSC 36 — whether the supplier was unjustly enriched, and
- Booth v Cityrose Trading Pty Ltd  VCAT 278 — whether an additional amount for GST was payable by the recipient.
Under the GST Act, the general liability to pay GST on a taxable supply rests with the supplier and not the recipient. There is no automatic statutory gross-up for GST, it is to be remitted by the supplier. Whether the GST is recoverable by the supplier from the recipient is a contractual matter for the parties.
The recent decision in McEwans Australia Pty Ltd v Brisbane City Council  QDC 347 is a further illustration of a dispute involving the interpretation of a GST indemnity clause and the process the court undertakes in interpreting contractual matters. The issue was whether the Brisbane City Council (BCC) was required to reimburse a GST increasing adjustment assessed to McEwans, and the GIC, as damages.
McEwans was a property developer who acquired two properties:
- The Levitt Road Land which was acquired under the margin scheme. No input tax credit (ITC) was claimed in relation to the Levitt Road Land. Under s 75-20 of the GST Act, ITCs cannot be claimed in respect of the acquisition of land under the margin scheme.
- The Ross Road Land which was acquired as a taxable supply. An ITC was claimed in relation to the Ross Road Land.
In the present case, land was required by BCC for a sports centre and the parties agreed the land would be transferred to BCC and its value would be offset against the developer’s financial contribution for sub-divisional approval (Infrastructure Offset). The value of the land exceeded the amount of the financial contribution and a balance was payable by BCC to McEwans.
The sports land consisted of part of the Levitt Road Land (no ITC claimed) and part of the Ross Road Land (ITC claimed). McEwans was of the view no GST was payable on the transfer to BCC on the understanding it was a GST-free supply of infrastructure charges.
The ATO did not accept McEwans’ view in relation to the transfer of the land and issued an assessment for:
- (a) $250,881 for GST on the transfer on the basis the margin scheme applied
- (b) $161,116 as a GST increasing adjustment in accordance with s 75-22 of the GST Act. This adjustment related to the ITC claimed by McEwans on the relevant part of the Ross Road Land previously acquired by McEwans and later transferred to the BCC
- (c) $63,720 for GIC on the total outstanding GST of $411,997.
Relying on the GST and indemnity clauses under the infrastructure agreement, McEwans sent BCC a tax invoice for $411,997 in respect of the transfer of the land and claimed the amount of $63,720 as “interest charges”. BCC paid the GST amount of $250,881 but did not pay the increasing adjustment or “interest charges”.
The agreement included a general GST clause in cl 4. Clause 4.1 provided that the terms in cl 4 that were defined in the GST Act took their meaning from the GST Act. The agreement was silent as to whether the GST defined terms applied to the other clauses of the agreement.
The specific provision that required interpretation was cl 6.1(b)(ii) relating to the Infrastructure Offset and Agreed Balance:
“(ii) The parties agree that GST shall not apply to the Infrastructure Offset nor any amount payable for the provision of the proposed Lot 90 under the Conditions of Approval, however, if for any reason Commissioner for Taxation does not accept that the Infrastructure Offset and any amount payable for the provision of the proposed Lot 90 under the Conditions of Approval is a GST free payment of infrastructure charges, the Council, the Applicant and the Owner agree in accordance with Division 75-5 of the GST Law, that the Margin Scheme shall apply to the provision of proposed Lot 90 under the Conditions of Approval. 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.” (emphasis added)
The question was whether the term “GST”, as referred to in cl 6.1(b)(ii), should be interpreted by reference to the “GST law” or by reference to its ordinary meaning or popular usage.
McEwans submitted that cl 6.1(b)(ii) imposed a separate obligation on BCC to pay the disputed amount, apart from the other GST provisions in cl 4. The increasing adjustment was, or was part of, “GST associated with the receipt of the Agreed Balance”. There were two questions, firstly whether the increasing adjustment was “GST” for the purposes of the clause, and secondly, if it was, was it “associated with the receipt of the Agreed Balance”.
It was argued the meaning of the term “GST” should be determined by reference to the meaning given to the term by the GST Act. The GST levied under the Act is the “net amount” as adjusted and the presence of an increasing adjustment affects the amount payable under the GST Act in the same way as the making of a taxable supply. “GST” is defined in s 195-1 of the GST Act as the tax that is payable under the GST Act as imposed by the relevant imposition Acts. Clause 4.1(a) of the agreement provided the words with the defined meaning in the GST law. The consequence of this line of argument was that an increasing adjustment was “associated” with the supply of the land under the margin scheme.
BCC submitted that the indemnity in cl 6 only related to the transfer of the land to BCC and nothing more. The definition of GST took its ordinary meaning as something associated with the amount paid on the purchase of the land by BCC.
As a contract of indemnity, any doubt or ambiguity in the interpretation of the clause should be resolved in favour of the indemnifier, namely BCC (Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at –).
His Honour (McGill SC DGC) commenced his consideration by noting a useful summary of the rules applicable to the interpretation of a commercial contract in the judgement of McMurdo P in Watson v Scott  QCA 267 at . His Honour accepted at  that summary as a correct statement of the law and also added reference to the three Justices of the High Court in Mt Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd  256 CLR 104 at –.
His Honour determined the interpretation of the relevant sentence in cl 6.1(b)(ii) was best achieved by looking at the contentious expression in the context of the sentence and agreement as a whole  and held:
(a) McEwans’ argument would have had more force if the relevant provision had required BCC to pay the GST associated with the land contribution, or associated with the provision to BCC of the land which constituted the infrastructure offset, or simply to follow the words of cl 4.3, the GST associated with the supply of the land offset by McEwans. 
(b) The clause 4.1 interpretation of the words defined in the GST law was applicable only to cl 4. The difficulty is that the interpretation of “GST” as defined in the GST Act is not consistent with the popular or common meaning of that expression, something which is shown even by the use of that term in the GST Act. 
(c) In its popular usage, GST means 1/11th of the consideration for a taxable supply, which in practice will equate to 1/10th of the consideration of the taxable supply if expressed as an amount “plus GST”. 
(e) McEwans sought to be insulated by BCC from the claw back aspect of s 75-22(1) as well as have BCC pay the GST levied on the transaction under the margin scheme. There was nothing in the Agreement itself which indicates an intention for the indemnity to extend that far. 
(f) For the reasons in BCC’s submissions, the ordinary and natural meaning of the words used in cl 6.1(b)(ii) was that what was payable by BCC under the clause was the GST of $250,881 imposed on the transfer of the land calculated by reference to the formula in the margin scheme. Such an interpretation is supported by the application of the principle in Andar Transport (supra). 
(g) In relation to damages claimed for the GIC, a repayment plan was negotiated by McEwans with the ATO to cover the GST liability. BCC submitted there was no evidence McEwans was not able to make payment of the extra amount to the ATO from its own resources and that it would not be appropriate to award damages. If there was a breach of contract because of a delay in payment, the matter would be appropriately dealt with by the statutory entitlement to interest in the Civil Proceedings Act 2011 (s 58). The amended infrastructure agreement did not contain any provision for payment of interest on monies not paid on time under the contract. [40–41]
(h) If it was necessary for McEwans to borrow money to pay, the cost of borrowing that money would probably be recoverable as damages or be a matter to be taken into account when assessing interest under s 58. If there had been some delay in making payment which was payable under the contract, interest under s 58 at the rate at which McEwans in fact borrowed the money would be allowed.
While a view may be taken that McEwans was always required to repay the ITC to the Commissioner, the case is illustrative of the need to understand:
(a) the particular transaction (or chain of transactions)
(b) the needs of the client and the client’s economic required result
(c) the history of the real property in question
(d) the operation of the GST Act on the immediate transaction and any claw back in relation to prior transactions, and
(e) the legal principles that courts follow to determine the construction and interpretation of a contract. The contract is paramount.
Be aware that the rights and liabilities of parties under a contract are determined objectively, by reference to the text of the relevant provision, context, the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract.
In determining the meaning of terms of a commercial contract, it is necessary to ask what a reasonable business person would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
The principles of construction applicable to contractual indemnities may require any ambiguous contractual provisions to be determined in favour of the indemnifier.
Further, the cases do evidence that the courts will also consider business or commercial efficacy as noted by Dixon J in the Duoedge case.