Buying a property is always exciting but equally challenging and tricky. One should not get carried away with a perfectly landscaped garden or the prime location of the property. A recent Federal Court decision drew light to the relevance of GST liabilities associated with properties.

Quick Facts

In Sunchen Pty Ltd v Commissioner of Taxation [2010] FCA 21, the buyer initially purchased a property for residential purposes.

If the property were to be transformed into a commercial use by the buyer, giving rise to a GST liability to the seller, the buyer would indemnify the seller for the GST burden. These terms were clearly provided for in the contract.

The conflict arose when the buyer, who was already GST registered, claimed an Input Tax Credit (ITC), which was denied by the ATO.

Point of law

The law looks at the dominant use of the property in determining whether its owner qualifies for ITC. Where the dominant purpose is residential, ITC will not apply.

In Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83, the Supreme Court of New South Wales held that the intentions of the buyer were reasonably relevant in determining the main use of the property.

In summary

The buyer’s intention and the seller’s expectations do not always synchronize. A seller may belabour under the false notion that the property qualifies for ITC, thus removing GST liabilities. The buyer’s intended use on the other hand may make it a taxable supply, attracting GST.

The ATO outlined similar concerns in the Toyama case – the seller may be unaware of the buyer’s intention. This may adversely impact on the seller’s GST liability. Contractual remedies may not always be available or helpful for any misrepresentation that may be made.

The moral of these cases is clarity – both in drafting a clear contract and in showcasing clear intentions and consideration.

Therefore, prudent buyers and sellers should investigate GST issues before entering into contracts. If this is ignored, the seller may end up with not just a rose garden and marble flooring but with a GST liability as well.

Times like these are ripe for starting up a charity.

This is thebrighter side of a financial crisis where redundancy and not-so-voluntaryretirement are becoming commonplace and demands for charitable services areincreasing.

Establishing a charity can be quite straightforward as long as thedominant purpose of the charity is for the benefit of the community and ischaritable in nature.  Education,health, science, religion, environment, social and community welfare are someexamples of well-accepted charitable purposes.

Eligibility

How does an organisation qualify for formal recognition as a charity? Inaddition to showing a dominant charitable purpose, the other eligibilitycriteria include:

·       being an appropriately formed institution,fund, foundation, trust or association. The organisation’s rules can be ofvital importance.

·       being non-profit. If the charity ispermitted to pay or make available any portion of its property or fundraising forthe benefit of any trustee or member, it will not qualify.

·       obtaining an ABN.

·       fulfilling the criteria forobtaining Tax Concession, Income Tax Exempt or Deductible Gift Recipient statusfrom the Australian Taxation Office (ATO).

Benefits 

Obtaining Deductible Gift Recipient status is one of the most popularbenefits. This essentially means that a donation to the charity will entitlethe donor to an equivalent tax deduction. Clearly, this is a significantinducement for fundraising.  Once acharitable  organisation has IncomeTax Exempt status, it will be relieved of liability for tax or GST on theincome it raises and generates.

Additionally, reduced start-up fees are charged for companiesestablished for a charitable purpose. Charities can also take advantage ofexceptions to the company naming provisions under corporate laws.

Ultimately, it is up to the law to decide whether a charity is eligiblefor the benefits. Assessing what structure best suits the organisation’sobjectives, choosing trustees or directors, settling rules of engagement, fundraisingand other legal formalities all need to be addressed within the overarchingregulatory framework.  Reconcilingthe initial noble motivation for forming the charity with the laws that governcharities can often be a challenge.

Endorsement is the new approval process for charities that wish to gain or maintain income tax exempt status. Charitable institutions and charitable funds have different endorsement requirements. Among standard pre-requisites such as applying for an Australian Business Number and having a physical presence in Australia, one of the important requirements is the correct application of trust monies.

A charitable fund can only be endorsed if it is being used for the purposes for which it was established. If it is being used for other purposes it is not entitled to endorsement. In a recent case, it was found that the trustees ofthe Kalos Metron Charitable Trust Fund had willfully misapplied the trust monies. The trust funds were therefore not being correctly applied for the purposes for which the trust was initially established. This resulted in a loss of endorsement for the Fund.

Three years after the Fund was first established, the trustees had applied for an endorsement for income tax exemption. The basis of this endorsement was for public charitable purposes. This endorsement was short lived as the Tax Commissioner revoked the Fund’s endorsement.

He found that the trustees had deposited the Fund money into their personal accounts. The trustees had attempted to reduce their liability for a personal loan by doing so. Moreover, one of the trustees had paid money which was owed to the Fund, into the trust account of one of the trustees’ father’s accounting firm. The father of the trustee was subsequently entitled to the income from this account.

The matter reached the Administrative Appeals Tribunal (TACT v FCT[2008] AATA 275), which first ruled in favour of the trustees. However, on further appeal to the Federal Court, the Commissioner succeeded in his argument– namely, that the misapplication of the trust money failed to meet the endorsement requirement as the money was not applied for the purposes for which the Fund was established. 

Edmonds J overruled the Tribunal’s decision and found that the trustees had intentionally applied the Fund monies for a different purpose, thus having breached the trust. Additionally, the misapplication involved here was of a significant sum. The Tribunal on the other hand had found that ‘very small’ sums as well as a genuine transaction were involved between the trustees and the father.

His Honour emphasized that the opportunity of an endorsement for an income tax exemption was a privileged one. This in turn demanded ‘strict adherence’ which was not to be taken lightly. The severe approach here implied that the trustees could not be pardoned for a lack of their failure to notice that the monies were being misapplied. More so, compensation by the third party of the misapplied monies to the Fund was not enough to rectify the breaches or forgive the trustees.

Cases such as this have triggered the Commissioner’s closer scrutiny of such funds. Trustees have been warned that they need to follow the requirements of endorsement rules with due diligence and conscientiously apply the trust funds for the purposes for which they were established.

Courts will view each case based on its facts and circumstances but will pay close attention to isolated instances and breaches, particularly if the breach was intentional and significant. The ATO and legal practitioners are trying to play an instrumental role in cultivating awareness amongst trustees to realize the difference in the purposes of setting up a charitable trust fund and using its money for personal investment purposes. 

You will no doubt have at least a passing familiarity with the broader effects of the Bankruptcy Act 1966 and the insolvency provisions of the Corporations Act 2001. 

You may also be familiar with the effect of bankruptcy or liquidation upon an individual’s right to hold a builders licence under the Queensland Building Services Authority Act. 

More than likely you have had a client or two that has had the unfortunate situation where they have fallen victim to insolvency (and seen the consequences for them and their families). 

In essence, any individual who holds a building licence that also becomes bankrupt or is a ‘person of influence’ in a company placed into liquidation will be deemed an ‘excluded individual’ by the QBSA. 

They will no longer be entitled to hold a builders licence or be director of a company with a building license. This naturally places an awful burden on those in the building trade. 

Most business people are able to avail themselves of the benefits of the various insolvency regimes and then carry on business in some modified form (often for the benefit of creditors). 

Many often reinvigorate their business and prospects through a Deed of Company Arrangement or a Part X Personal Insolvency Arrangement. 

However, subject to a few exceptions, builders are unable to effectively utilise these benefits of the statutory regime.

Their ability to ‘trade on’, often the most effective resolution of a cash flow crisis is severely limited by these provisions in the QBSA Act.

We have recently been involved in the Scheme of Arrangement approved by the creditors of Opes Prime Stockbroking Ltd. 

Of particular interest in that process is the decision of Justice Finkelstein in the Federal Court which gave final approval to the Scheme. 

The decision in effectvalidated arrangements between debtors and their creditors that had a bindingeffect on third parties. 

Previously there had been doubt over whether any such arrangements couldbind third parties – much court authority suggested it could not (basedprimarily on ‘privity of contract’ arguments). 

However the Court held in this case that the Scheme couldbind third parties to the arrangements.

The advantage of the decisionis that previously many arrangements between debtors and their creditors often fell down due to third party guarantees and the inability to bind third parties to the arrangements. 

This difficulty can now be overcome with a suitably drafted Deed of Arrangement.

At Sajen legal we have had recent good results with informal arrangements.  

These are designed specifically to assist those in the building trade and for whom the retention of their licence is vital to their business future is vital. 

In particular we have utilised a ‘creditors’ trust’ as a substitute for a Deed of Arrangement.

This has the benefit of all parties beingable to give effect to an agreement to permit the debtor company/individual to trade on.

It also helps ensure a return to creditors without the detrimental effect of the builder being classified an ‘excluded individual’ by the QBSA.

In simple terms these trusts operate as follows:

1. a registered liquidator is appointed as trustee of a unit trust established for the purposes of carrying out the debtor’s proposal;
2. the creditors swap their debt for units in thetrust which are issued on a pro rated basis;
3. the trustee can take security for the debtor’s obligations under the trust deed (a mortgage over real property, fixed and floating charge or both); and
4. the debtor enters into an agreement with the trustee in terms that permit the debtor to trade on while at the same time requires him or her to make ongoing contributions

(whether of capital or income or both as circumstances permit). 

Given that the debt previously existing is substituted for a fresh set of obligations it makes it easier to maintain capital requirements of the QBSA and even refinance. 

This strategy can, anddoes, result in a win win for builder and creditor alike. 

Often in circumstances this is the only alternative to a liquidation with no return to creditors and the debtor being prevented from any future business operation.

Naturally an agreement of this nature requires the goodwill of a builder’s creditors. 

In circumstances wherea builder has chosen to leave creditors in the dark, or refused to meet thereality of their situation until it is too late, it is unlikely creditors willbe able to be convinced of the merits of such an arrangement. 

However, where the builder takes the matter in hand and deals with issues promptly, with a view to the best outcome for all involved the use of a creditors trust can certainly be a very effective means to that end.

If you would like to know more, or have clients that may be able to utilise anarrangement of this nature please don’t hesitate to call me for a no obligation discussion.

How often have we consumers and buyers found ourselves in negotiations for work or services at the receiving end of a quote? 'More often than not' would be a common response and observation.First time home buyers for example love shopping around for quotes before taking the plunge. After buying the perfect house, painters and contractors are brought in. These service providers will usually make a quote before offering their services. This has become the norm.

Receiving a quote is a comforting thought. It offers choice and security. It allows parties to make informed decisions based on their income. However a simple quote can turn into a contract in some situations. The recent judgment delivered by the Supreme Court of New South Wales in Megalift v Terminals [2009] NSWSC 324 warns parties to exercise care and diligence when negotiating a quote as an innocent conversation could turn into a contractually binding offer.

In the above case, Terminals had used the services of Megalift. The latter party was required to discharge a huge storage sphere from a barge on the former party’s premises. It was later discocered that the sphere could not be discharged without excavating some of the land. This miscalculation or oversight caused inconvenience, delay and added costs. Megalift, having provided an unexpected service, not initially quoted for, claimed the extra amount. Terminals on the other hand counter claimed for the excavation costs.

On 28 April 2006, Megalift had sent a revised quotation to Terminals. Subsequently, both parties entered into a contract on 1 May 2006. The Supreme Court was faced with the question of whether a contractual relationship existed prior to 1 May 2006.

The facts of this case are unique in that two agreements allegedly existed. Megalift disputed that its first letter dated 21 March 2006 was an offer capable of acceptance. According to their understanding of quotes and legally binding contracts, this was simply a ‘quotation’ or ‘budget offer’. Terminals treated this as well as the purchase order as a contract, on 4 April 2006. Based on their comprehension of legal obligations, they held Megalift responsible for breaching the first agreement.

So, which agreement was legally binding? Justice Bergin ruled in favour of the first one (4 April 2006), where an offer was made and accepted. Both parties were already in negotiation, discussing terms and details such as transportation and delivery. These conversations involved quotations and although no fixed price was agreed upon, it was nonetheless a contract which was legally binding. Moreover, her Honour disregarded the quotation for the purpose of a budget only. This did not prevent the parties from contracting.

How did the court reach this conclusion? A contract requires an offer and an acceptance. However, are price quotations offers and if they are, when do they become legally binding? Each case should be decided on the facts. The question is one of objective intention of the parties involved. "We quote you" has been held not to be an offer but "shall be happy to have an order from you to which we will give prompt attention" was held to be an offer in a Canadian case. In Canadian Dyers Association v. Burton it was further stated that - "In each case of this type, it is a question to be determined upon the language used, and in light of the circumstances in which it is used, whether what is said by the vendor is a mere quotation of price or in truth an offer to sell."

The commercial context of such negotiations as well as the circumstances in which quotations are discussed, are important considerations. A way to avoid being bound by a mere estimate is to ensure that the quotation clearly states that it is not a binding offer. The next time you make a quote or accept one, just make sure you expressly convey your intention and desire to be bound by the quote. 

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