Reported Decision : (2005) NSW ConvR 56-099 New South Wales Court of Appeal CITATION : ETO Pty Ltd v Idameneo (No 123) Pty Ltd [2004] NSWCA 368 HEARING DATE(S) : 24 August 2004 JUDGMENT DATE : 5 November 2004 JUDGMENT OF : Beazley JA at 1; Giles JA at 2; Bryson JA at 54 DECISION : Appeal dismissed with costs. CATCHWORDS : Vendor and purchaser - Law Society form of contract - five parcels of land - supply of four of the parcels not a taxable supply for GST purposes - supply of fifth parcel was a taxable supply - contract said sale was a taxable supply - cl 13.9 of contract provided for vendor to pay purchaser one-eleventh of price if sale not a taxable supply - how clause operated when sale partly a taxable supply - clause not construed distributively, with apportionment of GST which would have been payable if supply of all parcels were taxable supply - contract took all or nothing approach and did not operate unless sale not at all a taxable supply. D LEGISLATION CITED : A New Tax System (Goods and Services) Tax Act 1999 (C'th) PARTIES : ETO Pty Ltd - Appellant Idameneo (No 123) Pty Ltd - Respondent FILE NUMBER(S) : CA 41150/03 COUNSEL : C J Bevan & R Horsley - Appellant D Pritchard & E Muston - Respondent SOLICITORS : Robilliard Plowman Heart - Appellant Massey Bailey - Respondent LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT 5201/03 FILE NUMBER(S) : LOWER COURT Young CJ in Eq JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41150/03 ED 5201/03 BEAZLEY JA GILES JA BRYSON JA Friday 5 November 2004 ETO PTY LTD v IDAMENEO (No. 123) PTY LTD Judgment 1 BEAZLEY JA: I agree with Giles JA. 2 GILES JA: By a contract for sale dated 30 April 2003 the respondent agreed to sell and the appellant agreed to purchase five contiguous parcels of land at Eastwood in Sydney. The purchase price was $3,900,000. The contract took up the 2000 edition of the Law Society and Real Estate Institute form of contract. This appeal raises an aspect of the operation of cl 13 of the contract, specifically cl 13.9, in adjusting between the vendor and the purchaser the burden of the goods and services tax ("GST") payable under the A New Tax System (Goods and Services) Tax Act 1999 (C'th) ("the Act"). GST and transfer of land 3 The contract should be construed in the light of the operation of the Act. I describe only so much of the operation of the Act as may assist in understanding how the issue between the parties arose and the question on appeal. 4 At the heart of the Act, and subject to various special rules, GST is payable on a taxable supply (s 7-1) by the person who makes the supply (s 9-40) at the rate of 10 per cent of the value of the taxable supply (s 9-70). The value of the taxable supply is generally ten-elevenths of the consideration for the supply (s 9-75(1)). The value of the taxable supply plus the GST will equal the price for the supply. For tax purposes the price is GST inclusive. 5 "Supply" is helpfully explained in s 9-10 as meaning "any form of supply whatsoever", with non-exhaustive specification of a number of forms of supply thereafter. 6 By s 9-5 of the Act - "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." 7 A transfer of land is a form of supply. It is a taxable supply if paras (a) – (d) of s 9-5 are met and the supply is not GST free and not input taxed. 8 Division 30 of the Act includes supplies involving a transfer of land which are GST free and therefore not taxable supplies. They are - (a) subdivided farm land, more specifically supply of potential residential land subdivided from land on which the supplier has carried on a farming business for at least five years made to an associate without consideration or for consideration less than the GST inclusive market value of the supply (s 38-475); and (b) farmland supplied for farming, more specifically where the supplier has carried on a farming business on the land for at least the preceding five years and the recipient of the supply intends to carry on a farming business on the land (s 38-480). 9 As well, GST free supplies include the supply of a going concern, which may involve a transfer of land. Section 38-325 provides - "(1) The supply of a going concern is GST-free if: (a) the supply is for consideration; and (b) the recipient is registered or required to be registered; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. (2) A supply of a going concern is a supply under an arrangement under which: (a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and (b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier)." 10 Division 40 of the Act includes supplies involving a transfer of land which are input taxed and therefore not taxable supplies. Apart from long term leases, a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (s 40-65(1)), save for commercial residential premises or new residential premises as defined (s 40-65(2)). 11 On a transfer of land, therefore, whether the transfer is a taxable supply may depend on a number of matters, some in the nature of the land, some to do with the status and past or current activities of the transferor, and some to do with the status and current activities, or with the intention, of the transferee. 12 A supply may be in part a taxable supply and in part not. Section 9-80 of the Act provides - "(1) If a supply (the actual supply ) is: (a) partly a taxable supply; and (b) partly a supply that is GST-free or input taxed; the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents. (2) The value of the actual supply, for the purposes of subsection(1), is as follows - Price of the actual supply x 10 10 + Taxable proportion where: taxable proportion is the proportion of the value of the actual supply that represents the value of the taxable supply (expressed as a number between 0 and 1)." 13 This fiendish provision results in apportionment of the value of the supply between the value of the taxable supply and the value of the non-taxable supply. 14 Assuming a taxable supply, the amount of GST may be affected by Division 75 of the Act, dealing with margin schemes. As applied to a transfer of land, the supplier of a freehold interest in land or a stratum unit may "choose to apply the margin scheme in working out the amount of GST on the supply" (s 75-5(1)). If the margin scheme is applied, the amount of GST on the supply is one-eleventh of the margin for the supply (s 75-10(1)), the margin being the amount by which the consideration for the supply exceeds the consideration for the supplier's acquisition of the land or unit (s 75-10(2), subject to valuation see s 75-10(3)). The GST will be less because the value of the taxable supply is less, by virtue of the marginal rather than full value on which it is calculated. But the supplier "cannot choose to apply the margin scheme" if the supplier acquired the land or unit through a taxable supply on which the GST was worked out without applying the margin scheme (s 75-5(2)). 15 On a transfer of land, therefore, the amount of GST may depend on whether the supplier can and does choose to apply the margin scheme. 16 Again, there may be apportionment where the margin scheme applies. If the land or unit supplied is only part of what was acquired, the consideration for the supplier's acquisition of that part is the corresponding proportion of the consideration for what was acquired (s75-15). 17 By s 29-70 of the Act, generally the supplier is obliged to issue a tax invoice for a taxable supply and give it to the recipient of the supply. Regulation 29-70.01 of the A New Tax Scheme (Goods and Services Tax) Regulations 1999 states the information that must be contained in a tax invoice. The regulation recognises that a supply may be in part a taxable supply and in part not - "(6) If the tax invoice is for 1 or more taxable supplies and any of the following supplies: (a) a supply that is GST-free or input taxed; (b) … the tax invoice must: (c) clearly identify each taxable supply; and (d) contain the following information: (i) the total amount of GST payable; (ii) the total amount payable." 18 The recipient of a supply may have an interest in its GST status. The recipient will generally pay less for a supply which is not a taxable supply, because the supplier will not have included GST in the price. Apart from that, the recipient is entitled to an input tax credit for a creditable acquisition (s 11-20), acquisition being the other end of a supply, but only if (amongst other things) the supply to the recipient is a taxable supply (s 11-5(b)). The input tax credit is in the amount of the GST payable on the supply of the thing acquired (s 11-25). The amount of an input tax credit may be valuable to the recipient because it can be set off against GST payable by the recipient as supplier. Clause 13 of the contract 19 The particulars on the first printed page of the contract described as the "Property" - "The land, the improvements and all fixtures and the inclusions, but not the exclusions." 20 The particulars then provided a description of the "Land", by the addresses "11 & 13 Clanalpine Street, 14 Trelawney Street, and 4 and 4a Rutledge Street Eastwood" and reference to an annexure which set out for those parcels the lots in a deposited plan and the folio identifiers. 21 Inclusions and exclusions in the particulars were left without completion. 22 The price of $3,900,000 was stated without apportionment between the parcels. 23 Beneath the particulars, just after the statement of the price, were the words - "NOTE: subject to clause 13, the price INCLUDES goods and services tax (if any) payable by the vendor". 24 On the second printed page of the contract, beneath a heading "Choices" and following a number of alternative boxes on other matters, was - " GST information (A New Tax System (Goods and Services Tax) Act 1999) (Clause 13) This sale is taxable supply (sections 9-5 and 195-1) ? NO ? yes Commercial residential premises (sections 40-70 and 195-1) ? NO ? yes New residential premises (sections 40-70 and 195-1) ? NO ? yes Subdivided farm land (sections 38-475 and 195-1) ? NO ? yes Farm land supplied for farming (sections 38-480 and 195-1) ? NO ? yes Sale is the supply of a going concern (sections 38-325 and 195-1) ? NO ? yes Margin scheme applies to property (division 75 and section 195-1) ? NO ? yes" 25 Only the one box was completed, the yes box stating that the sale was a taxable supply. A note at the head of the first printed page said that a choice "printed in block capitals" applied unless a different choice was marked. The other no boxes were therefore taken to have been completed. 26 The operative agreement on the fourth printed page of the contract was relevantly - "The vendor sells and the purchaser buys the property for the price under these provisions … ." The clauses of the printed contract were then set out 27 Clause 13 in the printed contract provided - " 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. 13.3 If under this contract a party must make an adjustment, pay an expense of another party or pay an amount payable by or to a third party (for example, under clauses 11,14 or 20.7) - 13.3.1 the party must adjust or pay at that time any GST added to or included in the amount; but 13.3.2 if this contract says this sale is a taxable supply, and payment would entitle the party to an input tax credit, the adjustment or payment is to be worked out by deducting any input tax credit to which the party receiving the adjustment is or was entitled and adding 10%. 13.4 If this contract says this sale is the supply of a going concern - 13.4.1 the parties agree the supply of the property is a supply of a going concern; 13.4.2 the vendor must, between the contract date and completion, carry on the enterprise conducted on the landing a proper and business-like way; 13.4.3 if the purchaser is not registered by the completion date, the parties must complete and the purchaser must pay on completion, in addition to the price, and amount of 10% of the price ('the retention sum'). The retention sum is to be held by the depositholder and dealt with as follows: · if within 3 months of completion the purchaser serves a letter from the Australian Taxation Office stating the purchaser is registered, and the registration took effect from a date on or before the time of the supply, the depositholder is to pay the retention sum to the purchaser; but · if the purchaser does not serve that letter within 3 months of completion, the depositholder is to pay the retention sum to the vendor; 13.4.4 if the vendor, despite clause 13.4.1, serves a letter from the Australian Taxation Office stating the vendor has to pay GST on the price, the purchaser must pay to the vendor on demand the sum of 10% of the price. 13.5 Normally , the vendor promises the margin scheme will not apply to the supply of the property. 13.6 If this contract says the margin scheme applies to the supply of the property, the vendor promises the margin scheme will apply. 13.7 If this contract says this sale is not a taxable supply, the purchaser promises that the property will not be used and represents that the purchaser does not intend the property to be used in a way that could make the sale of a taxable supply. 13.8 If this contract says this sale is not a taxable supply, the purchaser must pay the vendor on completion in addition to the price an amount of 10% of the price if this sale is a taxable supply because of - 13.8.1 a breach of clause 13.7; or 13.8.2 something else known to the purchaser but not the vendor. 13.9 If this contract says this sale is a taxable supply and does not say the margin scheme applies to the property, the vendor must pay the purchaser on completion an amount of one-eleventh of the price if – 13.9.1 this sale is not a taxable supply; or 3.9.2 the margin scheme applies to the property. 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." 28 Some "additional provisions" formed part of the contract, that is, conditions additional to the printed contract. They referred in a number of places to "this contract", and included that in the contract "'taxable supply' has the meaning given to that term in the GST Act". Clause 13.1 already provided that taxable supply and a number of other expressions had the same meanings as in the Act in that clause. The intention must have been to extend the express adoption of the statutory meaning, but why or why only as to taxable supply is not clear. The additional provisions otherwise did not address the impact or burden of GST. The proceedings below 29 Completion of the contract could not be achieved because of differing views over GST. The vendor said that the supply of the parcels other than 4a Rutledge St was not a taxable supply, because it was a sale of residential premises within s 40-65 of the Act and was input taxed. The vendor proposed to give the purchaser a tax invoice on that basis. The purchaser said that the supply of all the land was a taxable supply. The purchaser wanted a tax invoice stating GST on the basis that all the parcels gave rise to a taxable supply. 30 The difference in views is readily understandable. If the vendor was correct, s 9-80 of the Act would apply and the vendor would pay less GST, not $354,545 (one-eleventh of $3,900,000) but only 10 per cent of the value of the taxable supply of 4a Rutledge Street. This was not just good luck for the vendor. If the price had been struck on the basis that the supply of all the land was a taxable supply, the purchaser would probably have paid too much for the five parcels. The purchaser would only be entitled to an input tax credit in the lesser amount of the GST paid by the vendor. From the purchaser's viewpoint, it wanted either the larger input tax credit or a rebate on the price pursuant to cl 13.9 of the contract. 31 The purchaser brought proceedings for specific performance of the contract. The proceedings were heard by Young CJ in Eq. His Honour noted that there was no dispute that the contract should be completed, and determined "the issues of principle which divide the parties". 32 His Honour held that the tax invoice to be given by the vendor to the purchaser should refer to the GST actually payable, so that assuming the supply of 4a Rutledge St was the only taxable supply the tax invoice would state the lesser amount. He further held, on the same assumption, that the vendor was not obliged to make any payment to the purchaser pursuant to cl 13.9 of the contract. His Honour considered that the contract was one sale, and that it was in part a taxable supply in that 4a Rutledge St was a taxable supply and that "if the sale is not within the category of not a taxable supply then the 13.9.1 does not apply [sic]". 33 His Honour did not decide whether the supply of the parcels other than 4a Rutledge St was a taxable supply, or the value of the taxable supply of 4a Rutledge St. He made declarations and an order for specific performance, with the intent that the Master should decide those matters in giving effect to the order. The question on appeal 34 After the decision in the proceedings below the parties agreed that the supply of the parcels other than 4a Rutledge St was not a taxable supply. Their agreement followed, and accepted, a ruling issued by the Commissioner of Taxation. Whether the ruling was correct does not arise for our consideration. The parties also agreed upon the value of the taxable supply of 4a Rutledge St. It was no longer in issue that the tax invoice should refer to the GST actually payable. The contract was completed on the basis of a value of the taxable supply of 4a Rutledge St of $557,500 and GST actually payable of $55,750, with a tax invoice stating the latter amount. A fund representing the GST for which the vendor would have been liable if the supply of all the parcels had been a taxable supply was put aside. The amount was not expressly stated, but was taken as $298,795, being $354,545 less $55,750. 35 The notice of appeal claimed, and the thrust of the purchaser's initial submissions was, that by force of cl 13.9.1 of the contract the vendor was obliged to pay the $298,795 to the purchaser. In the course of submissions, in the face of the stipulation in cl 13.9 of one eleventh of the price, the purchaser contended that the vendor was obliged to pay it $354,545. The vendor protested that this was a new claim and that, had it been made below, it would have raised that the clause was penal. The purchaser undertook only to enforce any judgment it obtained to the extent of $298,795 plus appropriate interest, and the vendor said that in those circumstances it did not raise penalty. 36 The question on appeal, as framed in a declaration claimed by the purchaser by amendment at the hearing, was thus whether the vendor was - " … obliged to make a payment to [the purchaser] under clause 13.9 of the contract on its completion equal to one-eleventh of the sale price of $3.9 million or such other amount as to the Court is determined to be appropriate." 37 The reference to "such other amount" was directed to the initially claimed $298,795. Although the submissions sometimes strayed, it was common ground that the question was to be answered as a matter of the effect of cl 13.9.1 on its proper construction. It follows from what I have said that, if it were held that the vendor was obliged to pay the $354,545, there would be no decision one way or the other as to penalty. Discussion 38 The contract provided that the price included any GST payable by the vendor, although that said nothing of whether GST was payable by the vendor or how much GST was payable. It provided for giving a tax invoice, as to which the same may be said. 39 The contract then allowed statements to be made in the boxes relevant to the provisions of the Act earlier described. This gave a starting-point for whether GST was payable by the vendor and how much GST was payable, a matter of common but potentially divergent interest for the reasons which gave rise to the parties' differing views. But it was not the end-point. Clause 13 then provided more specifically for adjustment between the vendor and the purchaser according to the GST in fact payable by the vendor. 40 Clause 13 began by affirming that the price was normally inclusive of GST, and gave promissory force to that position (cl 13.2). 41 Passing over the particular provision in cl 13.3 in relation to incidental payments, of which no mention was made in submissions, cl 13 then provided for adjustment as between vendor and purchaser if the starting-point statements were not correct. Rearranging their order, it did so as follows. 42 First, it dealt with the statement that the sale was or was not a taxable supply. If it was stated that the sale was not a taxable supply, it sought to protect the vendor from the purchaser's status or conduct, including non-disclosure, resulting in a GST liability (cl 13.7, 13.8). The protection included payment by the purchaser to the vendor, in the events in cl 13.8, of 10 per cent of the price if the sale was taxable supply. The evident assumption was that the price had been struck without a GST uplift on the basis that the supply of the property was not a taxable supply, and the evident purpose was that if the basis was falsified the purchaser should pay the vendor the amount of the GST which the vendor was liable to pay. If it was stated that the sale was a taxable supply, it sought to protect the purchaser from the vendor's enrichment if that were incorrect (cl 13.9). The evident assumption was that the price had been struck with a GST uplift on the basis that the supply of the property was a taxable supply, and the evident purpose was that if the basis was falsified the vendor should pay the purchaser the amount of the GST which the vendor was not liable to pay. 43 Secondly, cl 13 dealt with the statement that the margin scheme did or did not apply to the property. It enforced the default negative in the statement and made it promissory (cl 13.5), and if the statement was positive also gave it promissory force (cl 13.6). If the contract "does not say the margin scheme applies to the property", which would be so if the yes box was not completed and by the default negative would mean that the contract said that the margin scheme did not apply to the property, the evident assumption was that the price had been struck with a full GST uplift on the basis that the margin scheme did not apply. One would think the purpose was that if the basis was falsified the vendor should pay the purchaser the amount of the GST which the vendor was not liable to pay. The amount to be paid by the vendor to the purchaser, however, was not the amount of the GST which the vendor was not liable to pay. It was the full one-eleventh of the price. 44 Thirdly, cl 13 provided for giving a tax invoice on completion "for any taxable supply by the vendor by or under this contract" (cl 13.10). The assumption appears to have been that the true GST position would be known by completion, hence the payments in cll 13.8 and 13.9 were to be made on completion. 45 As has been seen, the Act provides for a supply which is in part a taxable supply and in part not, and for the margin scheme where the land supplied is part only of the land acquired. There may be apportionment of the value of the supply or the consideration for the supply. However, the terms of the contract were unitary. It had one price for the property. It referred to "this sale" being or not being a taxable supply, and in many places cl 13 took up "this sale" or "the supply" of the parcels. It referred to the margin scheme applying to "the property" or "the supply of the property". In cll 13.4.4, 13.8 and 13.9 the payment was expressly a full 10 per cent of the price or one-eleventh of the price, not some reduced amount according to a partial taxable supply or according to lesser GST because of the margin scheme. 46 The purchaser first submitted that cl 13.9 should be read distributively, so as to apply if and to the extent that the sale was not a taxable supply. It said that, construing the contract in the light of the operation of the Act, there should be taken up the apportionment which the Act allowed, and that cl 13.10 recognised that GST might not be attracted by the supply of the whole of the subject-matter of the sale in the words "for any taxable supply". The result, on the purchaser's argument, was that the vendor was obliged to pay it the $298,795. 47 I do not think this can be accepted. To give cl 13.9 a distributive operation, more would be necessary than reading the words "and to the extent" into cl 13.9.1. The stipulated payment of one-eleventh of the purchase price would also have to be changed, lest the adjustment go too far in favour of the purchaser. A similar reading-in and change to the 10 per cent would be required in cl 13.8 (and probably also in cl 13.3). The changes would involve radical re-writing of the agreement expressed in cl 13, more than construction of the contract allows. 48 Further, the distributive operation would distort a contract which in many other places referred to the sale being or not being a taxable supply, as I have said in unitary terms. The contract did not say that the sale was to a particular extent a taxable supply or not a taxable supply. Looking only at cl 13.9, the first reference to the contract saying that "this sale is a taxable supply" was to an all or nothing statement, and when cl 13.9.1 postulated that "this sale is not a taxable supply" it must also have meant an all or nothing position. Similarly as to the margin scheme. 49 The purchaser then submitted that, on the words of cl 13.9 without embellishment, the requirement in cl 13.9.1 was satisfied in that, because only the supply of 4a Rutledge St was a taxable supply, "this sale" was not a taxable supply. On this argument, the vendor was obliged to pay the purchaser the $354,545. If that meant over-adjustment in favour of the purchaser, it was a consequence of an unsatisfactory contract of which the vendor could not complain. 50 It may equally be said, as the vendor submitted, that the requirement in cl 13.9.1 was not satisfied in that, because the supply of 4a Rutledge St was a taxable supply, "this sale" was a taxable supply. Similar alternative views would be open as to the margin scheme. It could be said to apply to the property in that one of the parcels had been acquired through a taxable supply under the margin scheme, or it could be said not to apply to the property in that one of the parcels had not been acquired in that way. 51 The contract took an all or nothing approach. It did not provide for a partial taxable supply or partial application of the margin scheme. It is nonetheless necessary to decide how it operates in the case of a partial taxable supply and to attempt to do so on a rational basis. In my view that basis is that, cl 13.9 referring to an all or nothing position, the negative in cl 13.9.1 is satisfied only by nothing. Payment is not triggered unless the sale is not at all a taxable supply, a result which makes sense because in that event the payment of the full one-eleventh of the price is appropriate. 52 The contract can be said to operate harshly against the purchaser, but the opposite result would operate harshly against the vendor. Clause 13 otherwise lacked refinement. The apparent assumption that the true GST position would be known by completion may have been unwarranted. There could be harsh operation one way or the other under cl 13.8, inappropriate adjustment in the case of the margin scheme was inevitable. The result 53 The sale was in part a taxable supply. Clause 13.9.1 was not enlivened. Young CJ in Eq made a declaration that the vendor "is not obliged to make any payment to [the purchaser] under cl 13.9 of the contract". It is sufficient to order that the appeal be dismissed with costs, and I propose that it be so ordered. 54 BRYSON JA: I agree with Giles JA. ****** ********** Last Modified: 11/09/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.