Igloo Homes v Sammut Constructions [2004] NSWSC 1213

New South Wales Supreme Court

CITATION : Igloo Homes v Sammut Constructions [2004] NSWSC 1213 HEARING DATE(S) : 10/11/04 - 11/11/04 JUDGMENT DATE : 15 December 2004 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Purchaser obliged to pay stated price in contract plus GST

CATCHWORDS : TAXES AND DUTIES - miscellaneous taxes - Goods and Services Tax (GST) - operation generally and in relation to contract for sale of land to developers - CONTRACT- construction of particular contract - no question of principle - EQUITY - rectification - question of fact about whether common intention established - VALUATION OF LAND - dictum concerning need to know whether a comparable sale was effected under the margin scheme LEGISLATION CITED : A New Tax System (Goods and Services Tax) Act 1999 (Cth) Real Property Act 1900 CASES CITED : Maggbury Pty Limited v Hafele Australia Pty Limited [2001] HCA 70; (2001) 210 CLR 181 North v Marina [2003] NSWSC 64; (2003) 11 BPR 21,359 PARTIES : Igloo Homes Pty Ltd - Plaintiff Sammut Constructions Pty Ltd - Defendant FILE NUMBER(S) : SC 3201/04 COUNSEL : AS Martin SC; SA Wells - Plaintiff K Tapsell, solicitor - Defendant SOLICITORS : Salmon & Co - Plaintiff Watkins Tapsell - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

CAMPBELL J

15 DECEMBER 2004

3201/04 IGLOO HOMES PTY LTD v SAMMUT CONSTRUCTIONS PTY LTD JUDGMENT HIS HONOUR: PART A - INTRODUCTION Nature of the Case 1 The dispute in this case concerns whether the purchase price stated in four contracts for the sale of land is a sum which is inclusive of Goods and Services Tax ("GST"), or exclusive of GST. The plaintiff, who is the purchaser under each of those contracts, contends that the purchase price is inclusive of GST. The defendant, who is the vendor under each of the contracts, contends that the purchase price is exclusive of GST. 2 The plaintiff puts its contention in two different ways. The first is as a matter of construction of the contracts. The second is by seeking rectification of the contracts. A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("the ANTS (GST) Act 1999") 3 An explanation of certain aspects of how the law relating to Goods and Services Tax affects the sale of real estate is needed to follow the facts of this case. 4 Section 9-10 of the ANTS (GST) Act 1999 says that a "supply" is any form of supply whatsoever, including an assignment of real property. Section 9-5 of that Act provides that: "You make a taxable supply if: (a) you make the supply for consideration; and (b) the supply is made in the course or furtherance of an enterprise that you carry on; and (c) the supply is connected with Australia; and (d) you are registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed." 5 Section 9-40 imposes a liability on a person to pay the GST which is payable on any taxable supply that that person makes. The general rule concerning the amount of GST payable is contained in sections 9-70 and 9-75: " 9-70 The amount of GST on taxable supplies The amount of GST on a taxable supply is 10% of the value of the taxable supply. 9-75 The value of taxable supplies (1) The value of a taxable supply is as follows: Price x 10 11 where: price is the sum of: (a) so far as the consideration for the supply is consideration expressed as an amount of money – the amount (without any discount for the amount of GST (if any) payable on the supply); and (b) so far as the consideration is not consideration expressed as an amount of money – the GST inclusive market value of that consideration." 6 There are various exceptions to this general rule, one of which relates to the "margin scheme" concerning a taxable supply of real property. Section 75-5(1) allows a person who makes a taxable supply of real property by selling a freehold interest in land to choose to apply the "margin scheme" in working out the amount of GST on the supply. Section 75-5(2) says that that choice is not open to a person who has acquired the freehold interest through a taxable supply on which the GST was worked out without applying the margin scheme. Section 75-10 provides that (subject to some exceptions not presently relevant): "(1) If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply. (2) The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest … in question. …" 7 In broad terms, if a land developer acquires land for the purpose of its enterprise, acquires it through a taxable supply, and is registered for GST purposes, that acquisition is a creditable acquisition (sections 11-5, 11-10, 11-15). The developer is entitled to an input tax credit for that acquisition, in an amount equal to the amount of GST which was payable on the supply of the land (sections 11-20, 11-25). Usually, a supplier of any taxable supply must issue a tax invoice (section 29-70), which a person who makes a creditable acquisition must hold before it can claim the input tax credit in connection with that acquisition (section 29-10(3)). 8 Exceptions to these rules are that an acquisition of a freehold interest in land is not a creditable acquisition if the supply of the interest was a taxable supply under the "margin scheme" (section 75-20), and a person who makes a taxable supply which is solely of real property under the "margin scheme" need not issue a tax invoice (section 75-30). 9 Thus, if land is sold to a developer when the vendor does not elect to apply the "margin scheme", the vendor must pay GST of one-eleventh of the total consideration payable for the supply, but the developer is entitled to receive a tax invoice for the total consideration, and is entitled to an input credit for that one-eleventh of the total consideration. Alternatively, if land is sold to a developer when the vendor elects to apply the "margin scheme", the GST payable on the sale by the vendor is calculated as one-eleventh of the margin, ie of the difference between the consideration for the acquisition of the land and the consideration for which the vendor sells it. Thus, assuming that a vendor of land had not received it as a gift, less GST would be payable on a sale of land to a developer under the "margin scheme" than would be payable on a sale of land to a developer not under the "margin scheme". However, the developer who purchases land under the "margin scheme" cannot claim an input tax credit. Ordinarily, the amount of GST which a vendor of land must pay, and whether the purchaser will be entitled to an input tax credit for the amount of GST paid, will be factors which affect the price for which the land is sold. (I mention, incidentally, that this means that before a sale of real estate can be treated as a comparable sale for the purpose of valuing a parcel of land, the valuer should know and take into account whether or not the sale of the allegedly comparable land was under the margin scheme.) PART B - CONSTRUCTION Terms of the Contracts 10 The four contracts relate to lots 13, 14, 15 and 16 David Road, Barden Ridge, being lots 13, 14, 15 and 16 in plan registered number 1046722. Each contract was in the standard form of contract for the sale of land, 2000 edition, with certain additional special conditions. Apart from some minor differences which do not affect the outcome of this case, the special conditions in all four contracts are the same. 11 The table on the front of each contract states that the price is $562,500, the deposit is $25,000, and the balance is $537,500. Immediately underneath the table on the first page of the contract the printed form says: "NOTE: Subject to clause 13, the price INCLUDES goods and services tax (if any) payable by the vendor." 12 Clause 13 of each contract (which is part of the standard printed form) includes the following provisions: "13 Goods and services tax (GST) 13.1 In this clause, enterprise, input tax credit, margin scheme, supply of a going concern, tax invoice and taxable supply have the same meanings as in the GST Act . 13.2 Normally , if a party must pay the price or any other amount to the other party under this contract, GST is not to be added to the price or amount. … 13.10 On completion the vendor must give the purchaser a tax invoice for any taxable supply by the vendor by or under this contract." (emphasis in original) 13 Clause 1 of the standard form contract provides that, in the contract, the term "normally" means "subject to any other provision of this contract". 14 The second page of the printed form in each contract makes provision for certain information to be given relevant to goods and services tax, by checking a set of boxes. In each contract the item which said, "This sale is a taxable supply" had the "yes" box checked, and the item which said, "Margin scheme applies to property" had the "No" box checked. 15 Each contract included several pages of typed special conditions, which appeared under the bold heading "Further Provisions". That heading had under it in bold "These further provisions are essential terms of this contract". Amongst the "Further Provisions" in each contract was a clause which read: " STAMP DUTY and OTHER CHARGES … (a) In addition to the purchase price the purchaser must pay to the vendor on completion an amount equal to any goods and services tax (GST), value added tax or other tax of a similar nature which is payable or may be payable by the vendor in connection with the sale of the property to the purchaser. (b) A notice served on the purchaser prior to completion as to the amount payable under clause … will, in the absence of manifest error, be conclusive evidence of that amount." 16 In some of the four contracts the numbering and formatting of this clause was different to in others, but each clause included a provision identical in wording to para (a) in the clause just quoted. 17 The contracts relating to lots 13, 15 and 16 also contained, under the "Further Provisions" heading, a clause numbered 17 reading: "This provision and all the attached Further Provisions hereto constitute the clauses known as Further Provisions to this contract. If there is any conflict between the Further Provisions and the standard conditions of the Printed Form of the Contract, the Further Provisions prevail." Arguments and Decision on Construction 18 Read as a whole, these clauses of the contract (other than Further Provision 17 of the contracts relating to lots 13, 15 and 16) have the effect that the purchaser is required to pay, on completion, the balance of $537,500, plus an additional amount equal to the amount of GST which is payable by the vendor in connection with the sale of the property. In circumstances where it is a term of the contract that the sale is a taxable supply, and the margin scheme does not apply to the property, the amount of that GST, in relation to each of the four contracts, is ten percent of ten elevenths of the total consideration for the supply of the land. 19 The standard conditions of the printed form of the contract, insofar as they dealt with whether or not the sale price was inclusive of GST, recognised the possibility that there might be another provision of the contract which required the incidence of GST to be other than that the stated price was inclusive of GST. The definition of "normally", and the use of the word "normally" in clause 13.2, has the effect that, if there was any such other provision, that other provision would prevail. The provision I have quoted at para [15] above is such a provision. In these circumstances, there is no conflict between the Further Provisions and the "standard conditions of the Printed Form of the Contract". Thus, in the contracts relating to lots 13, 15 and 16, clause 17 has no work to do, so far as the incidence of GST is concerned. 20 Mr Martin SC, for the plaintiff, seeks to draw some comfort from the fact that no notice, of the type referred to in para (b) of the clause which I have quoted at para [15] above, was served. That is an event occurring after the contracts were entered, which cannot affect its construction. As well, para (b) is an evidentiary clause, providing a means of proving what is the amount of GST which was payable by the vendor. There will be need for such proof only when (unlike the situation in these contracts) the vendor has elected to adopt the "margin scheme". If the "margin scheme" is not adopted, the terms of the contract itself which state the consideration, and the provisions of the ANTS (GST) Act 1999 itself, are enough to quantify the amount of GST payable by the vendor. 21 Mr Martin also drew my attention to the fact that the definition of "price" in the ANTS (GST) Act 1999 (quoted at para [5] above) is the value inclusive of GST. That fact does not decide the question of construction, concerning what purchase price is payable under each of the four contracts. He drew my attention to the principles in Maggbury Pty Limited v Hafele Australia Pty Limited [2001] HCA 70; (2001) 210 CLR 181 at [11] where Gleeson CJ, Gummow and Hayne JJ said: "Interpretation of a written contract involves, as Lord Hoffman has put it ( Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114. See also the remarks of Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350-352, and of Lord Bingham of Cornhill in Bank of Credit and Commercial International SA v Ali [2002] 1 AC 251 at 259): 'the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.' That knowledge may include matters of law … (cf Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at 282, per Lord Clyde." 22 While the definition of "price" in the GST legislation is a matter of law, and one which I will assume for the purposes of the argument was reasonably available to the parties to these contracts in the situation in which they were at the time of the contract, the parties' knowledge of that definition does not alter the meaning which the words of the contracts themselves otherwise have. 23 Mr Martin SC also submitted that any ambiguity in the contract, concerning who should pay the GST, should be resolved against the defendant, under the contra proferentem rule: North v Marina [2003] NSWSC 64; (2003) 11 BPR 21,359. In my view, there is no ambiguity in the contract which is in need of resolution. Hence, the contra proferentem rule (whatever it might mean) cannot be resorted to. 24 I conclude that the contracts, on their proper construction, stated a price on the front page which was exclusive of GST, and the Further Provision which I have quoted at para [15] above required the purchaser to pay an additional amount, concerning each of the four contracts, equal to the GST payable by the vendor. PART C - RECTIFICATION 25 The plaintiff is a company of which Mr Leslie Abboud is the sole director and secretary. Mr Abboud has been involved in property development for seven or eight years. Mr Abboud has also been a solicitor for 22 years. He acted as solicitor for the plaintiff in connection with the purchase of the properties the subject of these proceedings. 26 The defendant is a company which has four directors. Two of them, Allen Sammut and John Sammut, are the ones who made all decisions on the part of the defendant which are relevant to the present dispute. The defendant engaged Abbey Lawyers & Consultants as its solicitor in connection with the sale of the four properties. Ms Anna Pilgrim, who is not legally qualified but has significant experience with the legal work involved in conveyancing, was the person who for practical purposes had control of the file. She has carried out conveyancing work for the Sammut family for 15 or 20 years. 27 The type of rectification which the plaintiff seeks in the present case is rectification based upon all parties to the contracts having had a common intention which differed from what the contracts, on their true construction, required. It is common ground in the present case that Mr Abboud's beliefs and intentions concerning the four contracts are those of the plaintiff. It is also common ground that Mr Abboud caused the plaintiff to enter the four contracts with the intention that the price which was payable was the amount shown on the front page of each contract, and that he intended that amount to be an amount inclusive of GST. The issue in the case concerns whether the defendant entered the four contracts with the same intention as Mr Abboud had. Even though the only issue concerns the intention of the defendant in entering the contract, to decide what intention the defendant had it is necessary to consider how it came about that Mr Abboud had the intention that the price was one inclusive of GST. 28 Ms Janet Kayes is a real estate agent. She is the principal of Domain Nationwide Pty Ltd, and through that company carries on business as a real estate agent, operating from her home. She had on many occasions before 2004 acted as real estate agent in connection with transactions of the defendant. 29 The four lots which are the subject of the contract, adjoin each other. The defendant had purchased the four lots for $350,000 each. By mid January 2004, the lots had the benefit of a development approval permitting the construction of eight townhouses on them. 30 Before submitting the property for sale, the Sammuts did a calculation of how the profitability of the sale would be if there were to be a sale of all the land for $2.4m. That calculation, which is in evidence, proceeds on the basis that GST would be paid on the "margin scheme", and would be an amount of approximately $91,000. It has not been established whether or not it was correct to do this calculation on the basis that the Sammuts would be entitled to apply the "margin scheme". What matters, for present purposes, is that they actually did the calculation on that basis. 31 In January 2004, on a day on or prior to 11 January, the Sammuts asked Ms Kayes to find a purchaser for the land. On 11 January 2004 she prepared a letter which was intended to be a covering letter for an Agency Agreement with Sammut Constructions. However, she did not deliver that letter at that time. At first, she proceeded without any formal Agency Agreement. On 30 January 2004 Allen Sammut gave some plans and other details concerning the land to Ms Kayes. 32 On 3 February 2004 Ms Kayes had a conversation with Mr Abboud. He had expressed interest to Ms Kayes about purchasing the land for $300,000 per townhouse site (ie $2.4m in all) if the figures stacked up. One of the matters which Mr Abboud wanted to check on was how GST would affect the sale. He told her that he would see his accountant the following Friday about that. 33 Mr Abboud's account of his conversation with Ms Kayes concerning sale of the land is as follows: ABBOUD: "What is the asking price for the land and what do you feel is the selling price for each dwelling?" KAYES: "I was told by the vendor John Sammut that he wants $2,400,000 inclusive of GST. This equates to $300,000 a site inclusive of GST. This GST you pay is refunded when you lodge your quarterly return with the ATO, it equates to one eleventh of the total price you pay. He said they should sell for more than $650,000 each. He believes they will cost $250,000 each to build with a superior fitout. I will provide you with recent sales in that area." ABBOUD: "I have to do my homework and get back to you. This is residential land so why can't we use the marginal scheme?" KAYES: "Mr Sammut said he already paid the GST and the property is a development site, and since he is in the business of developing properties, the land must be treated as a taxable supply. Anyway, you will get a refund of the GST you paid after settlement." 34 Though in his affidavit he initially put this conversation as occurring in late January 2004, he accepted in cross-examination that it could have happened in early February 2004. It seems to me more likely than not that he had a conversation with Ms Kayes concerning the price of the land on 3 February 2004. 35 Mr Allen Sammut has a practice of having with him during the day a computer-like device which he refers to as an IPAQ, which contains a calendar. He uses that calendar as a diary. It records a conversation with Ms Kayes on 3 February 2004 as follows: "Called to say she has an offer at $2.4m and that he just wants to check on GST." 36 Also on 3 February 2004 Ms Pilgrim sent to Ms Kayes draft contracts for sale. Those drafts attached all the necessary information and certificates to one of the contracts only, as that information and those certificates would be identical for all four contracts. Drafts for the conditions of sale relating to all four contracts were supplied, though there were some blanks in those drafts. 37 The draft contracts which Ms Kayes received on 3 February 2004 did not identify the purchaser, or the price. Each of them included the provisions of the standard printed form (including clause 13), and each of them included Further Provisions, including the clause which I have quoted at para [15] above. The part of the form which required boxes to be checked concerning whether the sale was a taxable supply, and whether the "margin scheme" applied to the property had the "yes" box checked concerning whether the sale was a taxable supply for lots 13, 14 and 16. There was no box checked for that item regarding lot 15. None of the contracts had a box checked concerning the item "Margin scheme applies to property". Concerning both of those items, the check box for "NO" had the word "NO" in block capitals, while the choice for "yes" was printed in lower case. A provision on the front page of the contract said "a choice printed in BLOCK CAPITALS applies unless a different choice is marked". That provision would lead to the conclusion that the "margin scheme" did not apply to the property, and that, so far as lot 15 was concerned, the sale was not a taxable supply. Clause 13.5 of the standard conditions was "Normally, the vendor promises the margin scheme will not apply to the supply of the property". Thus, the draft in both these respects would lead a careful reader to the conclusion that the margin scheme was not to apply. 38 Mr Abboud, however, was not a careful reader. While he looked at the draft contracts which were supplied to him, he did not read the text of the clause which I have quoted at para [15] above. He says in his affidavit that he read only the front and second pages of the contract, and the sewerage diagrams annexed to them. I do not accept that evidence to its full extent. He read, as well, at least some of the Further Provisions, and made a note in his own handwriting on one of the drafts replacing a rate of 12% per annum for liquidated damages with a lower rate. I accept, however, that he did not appreciate the effect of the clauses requiring the purchaser to pay an additional amount equal to the GST payable by the vendor in connection with the sale of the four properties. 39 Mr Allen Sammut's diary note of 10 February 2004 records that Ms Kayes: "Called to say GST was sorted out with his [Mr Abboud's] accountant and to make an offer of $2.0m/ informed her it was not enough…He then increased to $2.1m. Told her it was not good enough says she will try to get him up to $2.2m." 40 I accept that Mr Abboud, around this time, communicated to Ms Kayes an offer to pay "2,200,000 including GST". 41 On 11 February 2004 Ms Kayes rang Mr Abboud. According to Mr Abboud, she said: "I have spoken to Sammut and his last figure is $2,250,000 inclusive of GST. From the purchase price you will receive back from the ATO around $200,000 and this will then mean each site will in reality only cost $255,000. If you spend $250,000 to build them, a sale price of $650,000 each would leave you $145,000 profit less the GST you have to pay on the selling price." 42 One of the peculiarities in this case is that all the principal actors, apart from Ms Pilgrim, lived in the same street, Kangaroo Point Road, Kangaroo Point. On 11 February 2004 Ms Kayes delivered to the letterbox of the home of Mr Allen Sammut an Agency Agreement form, whose blanks she had filled out. That form included the items: "Price at which the property is to be offered ( including GST if any ) $2,400,000 … Agent's opinion as to current estimated selling price (or price range) $2,300,000." 43 It contained provision for agent's remuneration to be paid at the rate of 2%, which in the event of a sale at the agent's estimate of selling price would equate to $46,000. Ms Kayes signed that document. Mr John Sammut signed it the next day, and it was returned to her. She subsequently crossed out the references to remuneration, and replaced them with a reference to a remuneration of 1.5%, and $33,000. 44 On 11 February 2004 Ms Pilgrim wrote to Ms Kayes, again enclosing draft contracts. Mr Allen Sammut's note of 11 February 2004, in his electronic diary, includes, under the entry "Barden Ridge" (which was the way Mr Sammut referred to this property) the entry: "Agreed to sale at BR at $2.250m + GST subject to exchange straight away". 45 Ms Kayes put the letter from Ms Pilgrim, together with the draft contracts, into Mr Abboud's letterbox on the evening of 11 February 2004. While Mr Abboud made some alterations to the draft contracts, he still did not notice the provision in the Further Provisions relating to GST. 46 On 12 February 2004 Ms Kayes delivered to Mr Abboud a sales advice note, dated 12 February 2004, which recorded "Sale Price $2,250,000 (inclusive of GST)." 47 Ms Pilgrim made a note on 12 February 2004, in one of the files relating to the four properties, "call to John Sammut sale price is PLUS GST". That note is ringed around with red biro, and the word "PLUS" is underlined in red. Another file contains the note, in red biro, "12-2-04 call to John Sammut. Sale Price $562,500-00 Plus GST." 48 Ms Pilgrim's account of the conversation which led to the two file notes which she made on 12 February 2004 is as follows: JOHN SAMMUT: "Janet Kayes has a purchaser for our four lots, can you chase her up to see if they are genuine and when can we expect an exchange." PILGRIM: "We furnished Janet with four fresh contracts on 11 February, but we are not aware of the purchaser or the price. Do you know who the purchaser is?" JOHN SAMMUT: "No I do not know who the purchaser is. The sale price is $562,500.00 per lot, making a total of $2,250,000.00. PILGRIM: "Is the price inclusive of GST or plus GST." JOHN SAMMUT: "Plus GST." 49 On 12 February 2004 Ms Kayes wrote a letter to the Sammut brothers. It said: "We wish to confirm offer and acceptance on the above site. We have forwarded complete Contracts and Sales Advice with full details to the solicitors acting for the purchasers and Sammut Constructions Pty Ltd. We wish to confirm offers which were conveyed to you prior to your acceptance of the final offer as follows: * 10/2/04 offer $2,000,000 for total site * Offer rejected on 10/2/04 * 11/2/04 offer $2,200,000 * Counter offer from you of $2,250,000 * Counter offer accepted of $2,250,000 with an 8 week settlement. GST Inclusive ($281,250 per T/H site) Thank you for enabling me to act on your behalf." (emphasis added)