We saw in part one of this topic, the reason why GST clauses in contracts are so litigated.
Under the GST Act, the supplier incurs the liability to pay GST but the supplier has no statutory right to pass on that GST liability to the purchaser – this needs to be done as part of the contractual relationship. How this contractual relationship is recorded is critical and many of the commercial disputes involve a contest about the terms of the contractual relationship.
When it comes to getting a 10% advantage because of a poorly worded contract, people will jump at the opportunity.
GST Issues arising across the life of a contracts
There are a number administrative issues that must be considered across the life of a contract. They include:.
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Does the payment of a deposit trigger a GST liability. What percentage of pre-payment constitutes a deposit?
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How are periodic and progressive payments treated for GST purposes?
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Has non-monetary consideration been picked up for GST purposes?
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What is the GST treatment of retentions?
Deposits
Normally, taxpayers accounting on an accruals basis have a GST liability when any of the consideration is received. Division 99 of the GST Act; however, allows that the payment of a “deposit as a security” does not trigger the GST liability until it is either applied to the sale or forfeited.
In most cases, this is easy to identify as the amount is usually about 10% and is clearly identified as a deposit.
For any number of reasons, however, sometimes the amount is significantly more than 10% of the total price. Whether or not such a pre-payment would satisfy the meaning of a “deposit as a security” for GST purposes is a moot point.
The Commissioner is reluctant to accept larger pre-payments as deposits, meaning a GST liability could be triggered. If the contract allows for a pre-payment (however described) of more than 10%, you should consider the GST implications.
Periodic and progressive supplies
Often contracts which have a long lead time will allow for progressive payments to be made.
As discussed above, any payment could give rise to the full GST liability.
In specific circumstances, it is possible for the supplier (and indeed the purchaser) to match their GST liability to the payments made rather than have the full GST liability up front.
Non-monetary consideration
Non-monetary consideration can arise across a range on contracts (for example, tenement acquisitions where shares form part of the consideration). There are also particular transactions arising in the context of development lease arrangements entered into between government agencies and private developers. These arrangements typically have the following features:
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the private developer undertaking a development on land owned by a government agency in accordance with the terms of a written agreement between the developer and the government agency, and
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the government agency ultimately supplying the land by way of freehold or grant of a long-term lease to the developer subject to the developer undertaking the development in accordance with the terms of the written agreement. That is, the developer becomes entitled to transfer of the freehold or grant of a long-term lease when the development is completed.
There are a number of GST issues to consider.
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the relevant principles for identifying and characterising the various supplies that are made for consideration under a development lease arrangement, including:
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whether the grant of a short-term lease or licence by the government agency to allow the developer to undertake the development on the land is a supply for consideration
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whether, in completing the works on land owned by the government agency, the developer makes a supply of development services to the government agency for consideration, and
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whether the sale of the freehold or grant of the long-term lease of the land by the government agency is a supply for consideration, and whether any consideration the developer provides for supply of the land includes undertaking of the development works on land owned by the government agency.
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the extent to which the consideration for particular supplies made under a development lease arrangement includes consideration that is not expressed as an amount of money, that is, non-monetary consideration.
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how the value of any non-monetary consideration provided for supplies made in the context of a development lease arrangement may be determined, and
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the attribution of the GST liabilities and input tax credit entitlements which may arise under development lease arrangements.
Retentions
In general, typical commercial building and construction contracts contain a provision by which the client is entitled to withhold (or ‘retain’) a certain amount from each progress payment they make to the builder.
The purpose of retaining these payments is for the client to secure the proper performance of the works by the supplier.
The client may use part or all of the retained sums to offset the supplier’s liability in the event the supplier does not carry out the works in a proper and workmanlike manner or fails to carry out rectification of defects within the period required under the contract.
Like all things tax, the GST treatment can be tricky but, generally speaking, GST is not payable on retention amounts until such time as the retention is released. Typically, if not all of the retention is released, not all of the GST liability will arise.
Conclusion
This article highlights some of the GST issues which can arise with contracts. It is important they be considered properly noting every contract, as well as the facts are different.
As you can appreciate, this is a very high-level look at the issues. The GST treatment will always depend on the exact nature of the facts and circumstances.
Should you need help in addressing any GST matters relating to contracts, please reach out to us.