GST clauses are an essential feature of a contract as they allow a vendor/supplier to claim GST from its purchaser/customer. Despite their significance and the fact that these clauses are found in almost every contract, they are frequently ill-drafted, and insufficient consideration is given to the wording and whether it properly reflects and protects the GST position of the party.
When GST clause is missing
When a GST clause is missing from a contract then the vendor’s duty to pay GST and the purchaser’s entitlement to claim GST is reliant on GST legislation. Without such a clause the vendor does not have a contractual right to a GST reimbursement nor the purchaser the right to a GST credit.
The inclusion of the GST clause recognises that GST is a matter that the parties are conscious of and can make an informed assessment on.
When a GST clause is badly drafted, it may not be defended in court. As a consequence, one of the parties may end up incurring an additional 10% charge of the purchase price which may lead to further unintended charges such as stamp duty.
The following points should be considered when drafting a GST clause:
- The basis of the clause will depend on the parties entering the contract, so give careful consideration to the parties’ roles before drafting.
- Ensure that the contract is clear on whether the contract price is inclusive or exclusive of GST.
- Ensure that the specific requirements of the GST Act are considered. For example, ensuring that requirements that satisfy exemption have been included if the sale is being treated as GST free supply of a going concern.
- Include a provision which allows the price to be increased by 10% if it turns out that GST is applicable; and the vendor to issue a tax invoice to the purchaser at such time. This will provide the vendor with the opportunity to recover GST from the purchaser if it becomes payable (in addition to the contract price).
However, it is a good idea for practitioners to draft on the basis that the transaction is subject to GST until it is otherwise satisfied.