ChatGPT’s GST Clause

Written By Matthew Cridland

Why I rate it 4 out of 10

A.             Overview

In the rapidly evolving landscape of AI, tools like ChatGPT are transforming how professionals approach complex tasks.  ChatGPT is a type of AI known as “large language model” (LLM), developed using advanced machine learning techniques on vast data sets.  The models learn the statistical relationships between words and phrases, enabling them to perform various natural language processing tasks.

The level of assistance that such AI tools can provide is dependent on several factors, including the quality, nature and depth of the data sets used in the training, the processing equipment on which the LLM is run, developer-determined response parameters, and the quality of the machine learning program employed.  While the capabilities today are somewhat limited, they are rapidly improving and will undoubtedly impact tax and legal professionals and their clients in many ways.

However, while AI tools can assist with general sample clauses and other tasks, GST professionals need to “understand the lore, not just the law”.  This means having a deep understanding of ATO practices and procedures (and commercial practices and procedures) in addition to the legislation itself, which is crucial for accurate and practical advice to clients.

To evaluate the practical utility of ChatGPT, I conducted a test by requesting a sample GST clause for a contract for the sale of a tenanted commercial building.  On a scale of 1 to 10, I would score the clause no higher than 4.

No doubt the quality of the response could be improved by using further prompts to nudge ChatGPT in the right direction. This highlights another point – the effectiveness of responses from AI tools like ChatGPT heavily depends on the quality of the prompts.  A well-crafted prompt can significantly enhance the relevance and accuracy of the output. 

While a client may be tempted to save costs by requesting sample clauses from ChatGPT directly, the risk is that the client will not use the right prompts to illicit the most suitable clause. The client may also misinterpret the output.

B.             My test prompt

To illustrate the current capabilities of ChatGPT, my test was conducted using the following prompt:

My client owns a commercial building in Sydney.  The property is currently 50% tenanted.  Rent is payable in advance on the first day of each month.  The sale is scheduled for 15 February 2025 and there will be a rent adjustment on settlement.  Can you suggest a GST clause for the contract of sale?

I chose this prompt because it reflects a common commercial property scenario, making it a practical test of ChatGPT’s capabilities.

C.            Chat GPT’s suggested GST clause

Here is the GST clause that ChatGPT suggested, presented verbatim:

GST clause

1.             GST definitions

  • GST means Goods and Services Tax as defined in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act).

  • Supply means the sale of the Property as described in this Agreement.

  • GST Amount means the amount of GST payable on the Supply.

 2.             GST Exclusive Consideration

  • The consideration for the Supply under this Agreement is exclusive of GST.

 3.             GST Payable

  • If the Supply is a taxable supply under the GST Act, the Purchaser must pay to the Vendor an amount equal to the GST Amount in addition to the consideration for the Supply.

4.             Tax Invoice

  • The Vendor must provide a tax invoice to the Purchaser for the GST Amount at or before the time the consideration for the Supply is payable.

 5.             Adjustment for Rent

  • The parties agree that any rent paid in advance by the tenants for the period after the settlement date will be adjusted at settlement.  The Vendor will provide a statement of rent received and payable up to the settlement date.

6.             Going Concern

  • The parties agree that the Supply is a supply of a going concern for the purposes of the GST Act, provided that the requirements of section 38-325 of the GST Act are satisfied.

In addition to the above clause, ChatGPT also provided the following comment:

This clause ensures that the GST treatment is clearly defined and that both parties understand their obligations regarding GST.  It also addresses the rent adjustment at settlement, which is important given the timing of the sale. 

While the structure of the suggested GST clause is quite good, it is nonetheless incomplete and the content is lacking.

D.            The basic elements of a good GST gross-up clause

Before critiquing ChatGPT’s suggested clause, it is important to outline the essential elements of a good GST gross-up clause:

1.        GST definitions

To the extent the clause uses terms that have a defined meaning in the GST Act, the definitions clause should make it clear that those terms will have the same meaning when used in the GST clause.  In addition to “GST”, this is relevant for other terms defined in the GST Act such as ““consideration”, “invoice”, “recipient”, “supply”, “adjustment event”, “adjustment note”, “GST group”, “going concern”, “Commissioner”, etc.

2.        Consideration excludes GST

The clause should make it clear that all consideration, whether paid or “provided”, is expressed exclusive of GST.   The inclusion of the reference to “provided” ensures the clause applies to non-monetary consideration (if any).

3.        The consideration is increased by an amount equal to the GST payable on the supply

The clause needs to make it clear that if GST is payable on a taxable supply made under the agreement, the recipient must pay the supplier an additional amount equal to the GST payable on the supply.  This is the “GST gross-up”.  Most parties will expect the clause to apply on a reciprocal basis, allowing either party to charge GST should they make to a taxable supply under the agreement.  Clauses which only allow one party to recover GST are typically viewed as “supplier friendly”.

4.        Timing

The clause also needs to make it clear when the GST amount is to be paid by the recipient.  Generally, it will be when the consideration for the supply is to be paid or provided.

5.          Tax invoice or Adjustment Note

The clause should make it clear that the recipient is not required to pay the supplier an amount on account of GST under the GST gross-up clause until the recipient has first received a tax invoice or adjustment note (as the case may be).  This ensures the recipient is not required to make a GST related payment before it receives a document that will support claiming an input tax credit (GST credit), if any.

6.          Adjustment Events

Adjustment events are events that impact the GST position of the parties involved in a taxable supply.  Examples include the cancellation of a supply or a change to the consideration for a supply.

While the GST Act deals with each parties entitlements or obligations with respect of adjustment events, the GST clause also needs to deal with the adjustment of any GST payments between the parties.

For example, assume a supplier needs to refund $1,000 (excluding GST) to a recipient.  An adjustment events clause is needed to ensure the GST previously paid by the recipient is also adjusted and the payment by the supplier is for $1,100 (including $100 of GST).  This GST related refund payment is not governed by the GST Act and needs to be dealt with contractually between the parties.

7.        Reimbursements and Indemnity Payments

If a party to the Agreement is entitled to be reimbursed or indemnified for a cost or expense, the GST clause should make it clear that the cost or expense must first be reduced to the extent that party is entitled to an input tax credit.

For example, if a party incurs a cost of $1,100 including GST for which a $100 input tax credit is available, in the event of a reimbursement, the cost should be reduced to $1,000.  This reflects that the relevant party will recover $100 as an input tax credit.

If the reimbursement payment is consideration for a taxable supply, the relevant party will be able to gross-up the reimbursement amount for GST, subject to issuing a tax invoice.

8.        No merger

In contracts, particularly those relating to the sale of land, it is important that the GST clause includes a provision making it clear that the GST clause survives completion and continues to have effect into the future.  This will be relevant if a vendor needs to recover GST from a purchaser after completion of a sale.

E.             Additional clauses

In addition to the basic elements, a GST gross-up clause may also need to address other issues, including:

  • Supplies or acquisitions made by a member of a GST group. 

This is relevant if a party to the agreement is a member of the GST group (as it is the representative member of that group which is liable for GST or entitled to input tax credits for supplies or acquisitions made by that party).

  • Going concern agreements.

For an eligible supply to be GST-free as a going concern, this must be agreed by both parties in writing.  Typically, this is included in the GST clause.

  • Margin scheme agreements.

If the margin scheme applies to an eligible transaction, this also needs to be agreed in writing.  Again, this is typically addressed in the GST clause.

  • Calculation of consideration by reference to other amounts.

Sometimes the consideration for a supply is to be calculated by reference to amounts received for other supplies (for example, turnover rents calculated on sale proceeds) or by reference to amounts expended on acquisitions (for example, “cost plus” contracts).  The GST clause may need to address this if it is relevant in the context of a specific transaction.

There are many other provisions that may be required in a GST clause for a specific transaction and the above is far from an exhaustive list.

F.             The problems with ChatGPT’s clause

While ChatGPT’s suggested clause had a solid (but incomplete) structure, there are several issues that need to be addressed to make it suitable for use in a contract for the sale of land.  Those issues include the following:

  • Definitions: The definition clause defines “GST” by reference to its meaning in the GST Act, but it does not do the same for other terms used in the clause which have a defined meaning in the GST Act.

  • GST Payable: The GST payable clause only allows the Vendor to charge an additional amount on account of GST.  It does not apply on a reciprocal basis and allow the Purchaser to charge GST, if necessary.

  • Tax Invoice: The clause states that the Vendor must issue a tax invoice before the time the consideration for the supply is payable.  While it is arguably implicit, the clause does not explicitly state the Purchaser can withhold its GST payment until it has received a tax invoice.  Further, the clause makes no reference to adjustment notes.

  • Rent Adjustment: The clause includes a provision requiring the rent to be adjusted.  However, the clause should make it clear that the rent is to be adjusted on a GST exclusive basis and the vendor is entitled to retain all amounts received from tenants for the month of February on account of GST.  For example, if the rent payable by a tenant on 1 February is $10,000 plus GST of $1,000, the rent to be adjusted on 15 February is the $10,000 only.

  • Going Concern: The going concern clause may not be effective because it is unclear if the parties consider all of the requirements to be satisfied.  It also fails to deal with the requirement for the purchaser to pay GST if the sale is later determined to be a taxable supply.  Further, it does not include any indemnity from the Purchaser for interest and penalties that may be imposed on the Vendor.

  • Purchaser’s GST Registration: In the context of a going concern sale, the Purchaser should be required to represent and warrant that it will be GST registered (or be required to be GST registered) as at the settlement date.  This is not addressed in the sample clause.

  • Missing clauses: There is no adjustment events clause, no reimbursement clause and no clause preventing merger of the GST clause on settlement.  The clause also fails to deal with parties that may be a member of a GST group.

I note that my test prompt also stated that the Commercial Building is only 50% tenanted, yet the GST clause suggested by ChatGPT assumes that 100% of the sale will qualify as the GST-free supply of a going concern.  This would only be correct if the Vendor can establish that it is using the untenanted part of the building in its leasing enterprise (for example, by actively marketing the vacant areas for lease).

For these and other reasons, I would not consider the clause suitable for use in a contract for the sale of land and I would not score it higher than a four out of 10.

Despite these criticisms, it is undeniably impressive that ChatGPT was able to understand my prompt sufficiently and revert with a clause that had the right structural “bones”, albeit the content may have been lacking.  No doubt this will improve (and quickly).

G.              Concluding remarks

While ChatGPT’s ability to generate sample GST clauses is impressive, it should not be seen as a threat to GST professionals.  Many law firms already have their own suites of precedent GST clauses that are more sophisticated and can be provided to clients quickly at low cost.

The true value of experienced GST professionals lies in their ability to ask the right questions, critically review AI-generated outputs, and address specific issues such as rent adjustments. Knowing how to structure transactions as GST-free going concerns and advising parties on mitigating potential GST, duty and other tax risks is where professionals truly add value.

As noted at the outset, GST professionals need to “understand the lore, not just the law”.  Having a deep understanding of regulator practices and procedures (and commercial practices and procedures) is every bit as important as understanding the legislation.  It is crucial for providing accurate and practical advice to clients.

As AI technology continues to evolve, it will undoubtedly become a valuable tool for professionals, enhancing their ability to deliver high-quality services efficiently.  However, the expertise and judgement of experienced GST professionals will remain indispensable in navigating the complexities of the tax law.

Matthew Cridland
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