Burke v Commissioner of Inland Revenue

[2019] NZHC 2569

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-001376

[2019] NZHC 2569

UNDER

Section 26A of the Taxation Review Authorities Act 1994

IN THE MATTER

of an appeal against the decision of the Taxation Review Authority

BETWEEN

DARRYL PATRICK BURKE
Appellant

AND

COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:

9 October 2019

Counsel:

GJ Thwaite for Appellant

OJG Upperton and TN Carr for Respondent

Judgment:

10 October 2019

JUDGMENT OF DOWNS J

This judgment was delivered by me on Thursday, 10 October 2019 at 1 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Crown Law, Wellington.

GJ Thwaite, Auckland.

BURKE v COMMISSIONER OF INLAND REVENUE [2019] NZHC 2569 [10 October 2019]

The appeal

[1]    Mr Darryl Burke contends he owes less goods and services tax—better known as GST—than the Commissioner of Inland Revenue considers payable. The Taxation Review Authority found for the Commissioner.1 Mr Burke appeals.2 Mr Burke argues a payment of almost $500,000 to his financier on 3 August 2007 effects his GST liability for the August/September period that year.

The background in brief

[2]    Mr Burke is a self-employed contractor who renovated houses and buildings. He is, and was, GST registered.

[3]    In 2006, Mr Burke and Citywide Capital Ltd—or Citywide—entered a property venture. Mr Burke bought two properties: 10 and 19 Florey Street, Rotorua. Citywide loaned Mr Burke the money to buy both. The loans were secured by a mortgage over each property. The loan agreement required Mr Burke to use Citywide’s chartered accountant and claim, through her, his GST refunds as soon as these were available. It required Mr Burke to use these to pay, first, any default under the loan; second, to pay interest; and third, to repay principal. The agreement also required Mr Burke to pay his suppliers. Mr Burke did so using money he had borrowed from Citywide, albeit Citywide made the payments. Mr Burke and Citywide would confer about what suppliers he owed; Citywide’s accountant then paid them.

[4]    In the middle of 2007, Mr Burke sold 19 Florey Street. On 3 August 2007, he repaid Citywide $498,640.48. The loan agreement required as much. The sum represented interest, an amount or amounts earlier owing to Citywide from Mr Burke, and the cost of Mr Burke’s suppliers.

[5]    Mr Burke continued work on 10 Florey Street, but he and Citywide then parted company. Mr Burke and Citywide could not agree on further funding to allow

1      Burke v Commissioner of Inland Revenue [2019] NZTRA 3.

2      I may take a different view if Mr Burke persuades me the Authority’s decision is wrong; see Austin, Nichols & Co v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [40] and [6]; and AAA Developments (Ormiston) Ltd v Commissioner of Inland Revenue [2015] NZHC 2318, (2015) 27 NZTC 22-026.

Mr Burke to complete  number  10.  In  early  September  2007,  Mr  Burke  left  New Zealand. He left his suppliers unpaid. For reasons that need not be recorded, none of this caught the Commissioner’s attention until 2015.

The decision of the Taxation Review Authority

[6]    Mr Burke argued his arrangements with Citywide meant his earlier expenses— his payments to his suppliers—should be attributed to the disputed period (August/September 2007), and therefore deductible within it. Mr Burke submitted this meant his core GST liability was $20,857.49, not $51,840.30. Mr Burke contended his arrangements with Citywide were “unique”.3 He said he was not liable to pay his suppliers until he paid Citywide. So, he could only then claim his expenses as GST deductions. Mr Burke said repayment of the $498,640.48 on 3 August 2007 meant his earlier expenses fell within the disputed period.

[7]Judge Sinclair disagreed:4

I do not accept this analysis for a number of reasons. The Loan Agreement was structured to enable development funds to be drawn down by the disputant to pay suppliers’ invoices and included a detailed mechanism by which this was to be done. [Citywide] did not assume any responsibility for making payment and the disputant remained at all times contractually liable to pay these invoices. Mr Thwaite placed emphasis on the fact that the payments to suppliers were not made out of the disputant’s own pocket. I do not consider this to be of any significance. The fact is, as soon as particular amounts were drawn down, they were debited to the disputant’s account under the Loan Agreement. The disputant became liable to pay interest and to repay these amounts. In summary, while [Citywide] loan funds were used, payment of the invoices was still made by the disputant.

In addition, it was the disputant who was required under the Loan Agreement to file GST returns (using the services of the project accountant) claiming input tax deductions. The GST refund payments were made directly by Inland Revenue to the disputant, and the disputant was then required to account to [Citywide] for the payments received by him. It is evident from this arrangement, that it was the disputant, as the party liable to pay the input tax on the suppliers’ invoices who in fact claimed the input tax deductions in the GST periods ending 31 March, 31 May and 31 July 2007, not [Citywide].

On a careful consideration of the terms and conditions of the Loan Agreement, I do not agree that there is anything exceptional in the funding arrangements which in any way changes the nature of the parties’ GST obligations. The disputant remained responsible for payment of the suppliers’ invoices and to

3      Burke v Commissioner of Inland Revenue, above n 1, at [26].

4      At [28]–[30].

claim input tax deductions which happened in the prior GST periods. The disputant’s payment of $498,640.48 on 3 August 2007 was not made in exchange for a supply of any good or service. Instead, it was paid in reduction of the amounts owing under the Loan Agreement. Importantly, repayment of a loan is not consideration for a supply and the payment made by the disputant was not subject to GST input tax. Accordingly, in these circumstances, it cannot generate an input tax deduction.

Mr Burke’s appellate case

[8]    Mr Burke advances the same arguments as those rejected by the Judge. He contends his repayment of Citywide on 3 August “should activate the deductibility” of his earlier expenses to offset his GST liability in the disputed period. Mr Burke contends there is a link between his repayment of Citywide and his earlier, GST deductible expenses, in turn effecting their timing for GST purposes. Put another way, Mr Burke argues he did not really pay his suppliers until 3 August, when he repaid Citywide, even though his suppliers’ invoices had been earlier paid, and in tax periods before the disputed one.

Analysis

[9]    First, some basics. GST is a broad, value-added tax borne by the final consumer. GST distinguishes input tax from output tax to render GST neutral until the consumer bears it. An example may help. Company A supplies timber. Company B makes wooden furniture. If company B buys timber from company A, the transaction attracts GST. Company B must pay GST on its purchase to company A. Company A must account for this tax as output tax. Company B may claim the GST it paid to company A as input tax. So, the transaction is GST neutral as between the two companies.

[10]   GST registered persons must adopt one of three accounting bases: invoice, payments or hybrid. Those who use the invoice basis return output tax and claim input tax deductions during the period in which the relevant supply is made.5 This is, generally, the earlier of the issuing of an invoice or payment of that invoice.6 Those who use the payments basis return output tax and claim input tax deductions during

5      Goods and Services Act 1985, s 20(3)(a) and 20(4)(a) as at 3 September 2007.

6      Section 9(1) as at 3 September 2007. The current version of the Act uses the same wording.

the period in which payment is made.7 Those who use the hybrid basis return output tax on an invoice basis and claim input tax deductions on a payments basis.8

[11]   Mr Burke adopted a hybrid basis with two-monthly taxable periods. He changed to a payments basis from 1 August 2007.9

[12]   Section 20(3) of the Goods and Services Tax Act 1985 establishes how much GST is payable in a taxable period. Those who account for tax on a payment or hybrid basis are governed by s 20(3)(b)(i). It provides:

(3)   Subject to this section, in calculating the amount of tax payable in respect of each taxable period, there shall be deducted from the amount of output tax of a registered person attributable to the taxable period—

(b)in the case of a registered person who is required to account for tax payable on a payments basis or a hybrid basis pursuant to section 19, the amount of the following:

(i)input tax in relation to the supply of goods and services made to that registered person, being a supply of goods and services which is deemed to take place pursuant to section 9(1) or section 9(3)(a) or section 9(3)(aa) or section 9(6), to the extent that a payment in respect of that supply has been made during the taxable period:

[13]   So, for those using the payments or hybrid basis, the input tax is deducted from the output tax in relation to the supply of goods and services “to the extent … a payment in respect of that supply has been made during a taxable period”.10

[14]   The provision answers Mr Burke’s case. Mr Burke was supplied goods in three periods before the disputed period: February/March; April/May; and June/July 2007. Mr Burke paid for these goods within these periods. Mr Burke was entitled—and did—claim his corresponding input tax deductions within each of these taxable periods.   No further input tax deduction arose for the disputed period in terms of     s 20(3)(b)(i); Mr Burke’s suppliers had already been paid.

7      Goods and Services Act, s 20(3)(b) and 20(4)(b) as at 3 September 2007.

8      Section 20(3)(b) and 20(4)(a) as at 3 September 2007.

9      Burke v Commissioner of Inland Revenue, above n 1, at [8].

10     Emphasis added.

[15]   Mr Burke’s August payment of $498,640.48 to Citywide was obviously not made to obtain supplies from his suppliers; again, they had been paid. Indeed, this payment was not made in exchange for a good or service attracting GST. It was a loan repayment, and one required by the loan agreement between Citywide and Mr Burke. So, contrary to Mr Burke’s submission, there is no material linkage between this payment and the goods earlier supplied to him. In short, Mr Burke’s repayment of Citywide on 3 August did not somehow mean his suppliers were paid only then.

[16]   Relatedly, Mr Burke’s arrangements with Citywide do not affect his GST liability. Mr Burke was required to pay his suppliers’ invoices irrespective of his obligations to repay Citywide.   If he did not, his suppliers would sue him.   That   Mr Burke paid them with money borrowed from Citywide is beside the point. And as observed, that he repaid Citywide on 3 August is also beside the point.  In terms of   s 20(3)(b)(i), the payment “in respect of [each] supply” occurred when Mr Burke paid his suppliers for goods they provided to him; not when he repaid Citywide under the loan agreement.

[17]   For completeness, it matters not who paid Mr Burke’s suppliers. Input tax means, in relation to a registered person, tax charged under s 8(1) on the supply of goods and services to that person, being goods and services acquired for the principal purpose of making taxable supplies.11  It is unarguable the goods were supplied to  Mr Burke. He acquired them.

[18]   These reasons largely mirror those of Judge Sinclair, who was undoubtedly correct.

Result

[19]The appeal is dismissed.

……………………………..

Downs J

11     As at 3 September 2007.