It’s 6pm and everyone is tired and emotional after a heated and acrimonious mediation between brothers Patrick and George. They’re arguing over a price for George’s shares in the family company that owns the old family farm in which Patrick, your client, owns two thirds of the shares and his brother George one third.

Patrick has operated the farm in his own business. George has never been paid a dividend and is threatening to bring an application to wind up the company alleging oppressive conduct.

To close the gap between them, you suggest to Patrick that he sell George a nearby block of land that Patrick owns but that George has always wanted. You know they’ll haggle over the price so suggest they accept a valuation from Harry Jones, a valuer you know both Patrick and George have dealt with and respect.

Everyone agrees, the deal is done and the mediation agreement signed. GST is not mentioned.

The sting

Eventually, the valuation turns up from Harry Jones saying that “the market value is $300,000 plus GST”.

Initially you assume GST is not an issue, because it is farm land and therefore GST free. But then you discover that while the land has been used by Patrick for quarrying and earthmoving purposes, it has not been used for farming for a couple of years and is therefore not GST free. Patrick is registered for GST, so this is an issue.

You explain this to the other side and, in preparation for settlement you offer a tax invoice for the GST inclusive price of $330,000.

George’s solicitor says “Hang on a minute – have a look at the valuation.All the comparable sales the valuer refers to justify a value of $300,000 and all those values come from the ENOS notices to the VG that include GST, so George isn’t going to pay GST a second time”. Your response is “But hang on, George is registered for GST so he’ll get back the GST anyway”.

“That’s not the point”, George’s solicitor says ominously, which you realise means he believes George will get the input tax credit on the $300,000 anyway, giving him a tidy discount.

Some research ensues and a 2013 decision of the Land and Environment Court is discovered (Storage Equities Pty Ltd v Valuer-General [2013] NSWLEC 137) where a dispute between a landowner and the VG narrowed down to whether the words “land value” in the Valuation of Land Act meant including or plus GST.

The formal definition in section 6A (to the extent relevant) is: “the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require …”.
The Company argued that these words did not detract from the fact that “the GST component, if any, of the price received from a property transaction” must be excluded.

Craig, J disagreed (paragraph 41) and said that ” to realise” means “to convert into cash or money” and that “the amount paid by the purchaser is the sum “realised” by the vendor on the transaction regardless of any component of that sum that the vendor may be liable to pay as a consequence of receiving it”.

You go back Harry only to be told that he knows nothing about GST but assumed you add it on.

So is the Storage Equities case determinative? Is there an argument that the words ‘Market Value” in the mediation agreement mean something different to “land value” as defined in the Valuation of Land Act?

It seems that, at general law, the foundation and still applicable case is the decision of the High Court in Spencer v. The Commonwealth of Australia (1907) 5 CLR 418 from which the often quoted (or the somewhat varied) words of Griffith CJ come (page 432) that: “… the test of value of land is to be determined … by inquiring: What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?”

So back to Patrick you go with the bad news that either he has to cop the GST assessment on $300,000 or go back to mediation or litigation with an argument you do not feel very confident about.

Take away points

No matter what the pressure always think carefully about GST.

A buyer has no obligation to top up for GST unless it is in the contract.

Until otherwise decided “Market Value” should be assumed to mean the GST inclusive value.

This article is general information only and should not be relied on without obtaining further specific information.

Author: Jim Main