29 March 2024

GST and long-term non-reviewable contracts
16 June 2005

As 1 July 2005 approaches, we are becoming aware of many suppliers who have not applied their minds to the implications of the new legislation. We urge readers to scrutinise their existing contracts and determine whether the rules apply to them. In summary, where there are applicable contracts, the following options are available:

If a supplier and a recipient cannot agree on a revised price, the GST law allows for an arbitration process. Under that process, an independent assessor is appointed to work out an appropriate revised price. If the recipient does not agree with the arbitrated offer, the recipient will be required to pay the GST instead of the supplier.

Option 1: The supplier pays the GST based on the existing price of the supply.
The contract price of the supply is not revised and the supplier pays the Tax Office GST of one-eleventh of the existing contract price. If the recipient is registered for GST, they may be entitled to claim a GST credit.

Option 2: The supplier pays the GST based on a revised price.
The contract price is revised by mutual agreement or a new agreement is entered into. The supplier pays GST of one-eleventh of the revised price. If the recipient is registered for GST, they may be entitled to claim a GST credit.

Option 3: The recipient pays the GST (even if not registered for GST) based on the existing price of the supply.
The contract price is not revised and the recipient pays GST of 10% of the price of the taxable supply. If the recipient is registered for GST, they may be entitled to claim a GST credit.
Option 3 only takes effect if the recipient:
elects to pay the GST
The recipient can give a written notice to the supplier of the recipient’s election to pay the GST. Once the recipient provides this notice, the election to pay GST can not be revoked. The supplier should retain the recipient’s written election for at least five years; or
does not accept an arbitrated offer of a price revision
The recipient will only become liable to pay the GST in this situation if the supplier has followed the requirements of the prescribed arbitration process.
However, option 3 does not apply in the following special situations:
the contract specifically precludes a price revision to account for the GST or a similar tax on the supply, or
the price of the supply was paid in full before 2 December 1998. (In this case the supply may continue to be GST-free beyond 30 June 2005.)

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