When entering into contracts, both parties need to be mindful of the impact that deficient GST clauses can have on who bears the cost burden of GST or, in fact, whether GST is even payable (e.g., margin scheme and going concern sales).
Consider the simple example of a supply where the vendor incorrectly assumes the supply to be GST-free or input taxed. In the absence of a robust GST clause, the vendor will be out-of-pocket 1/11th of the consideration received, taking a severe and unnecessary hit to its margins.
Recent case law in this area also serves to highlight:
- Courts are very reluctant to overturn the clear words of a contract, even where the result seems unfair at face value.
- Vendors need to be careful entering into 'GST inclusive' contracts simply because they believe a supply to be non-taxable.
- Purchasers are unlikely to obtain any relief simply because they had incorrectly assumed that a GST inclusive payment made would allow them to claim an input tax credit.
In the current price-sensitive market, clients should not underestimate the need for robust GST clauses in their agreements.