Commissioner of Inland Revenue v Edgewater Motel Ltd - [2002] NZCA 293

IN THE COURT OF APPEAL OF NEW ZEALAND

CA110/02

BETWEEN	THE COMMISSIONER OF INLAND REVENUE
Appellant

AND	EDGEWATER MOTEL LIMITED AND OTHERS
Respondent

Hearing:	4 November 2002
Coram:	Keith J Blanchard J Tipping J McGrath J Anderson J
Appearances:	M T Lennard and S F Wellik for Appellant M M B Van Ryn and P Windeatt for Respondents
Judgment:	18 November 2002

JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J

The issue

The issue on this appeal is whether a mortgagee who has sold the mortgaged property under a power of sale must pay goods and services tax (GST) in priority to the recovery of principal and interest under the mortgage, or whether the mortgage debt has priority and the mortgagee’s obligation to pay GST is limited to any surplus which would otherwise be payable to the mortgagor.

The facts

Westwood Meadows Development Ltd (Westwood) had mortgaged a property at Whangarei to Bellman Holdings Ltd (Bellman) as first mortgagee and to Edgewater Motel Ltd (Edgewater) as second mortgagee. After defaults, Bellman exercised its power of sale and sold the property for $940,000 plus GST of $117,500. The sale price was thus $1,057,500. Bellman paid $117,500 to the Commissioner under protest and applied the $940,000 towards the debt owing to it which was then $952,666. Accordingly there was a shortfall of $12,666 for Bellman. Edgewater, which of course had received nothing, brought a proceeding against the Commissioner seeking repayment of the GST on the basis that $12,666 would go to Bellman and Edgewater would receive the rest. There has been some question about the standing of Edgewater to bring such a claim (instead of claiming against Bellman which in turn might have claimed against the Commissioner). However, all parties are anxious to have the substantive issue determined and the Commissioner has not pursued that question.

The statutory provisions

The argument largely revolves around the following provisions of the Goods and Services Tax Act 1985:
5Meaning of term “supply”
…
(2) For the purposes of this Act, where any goods* acquired (whether in terms of a hire purchase agreement, as defined in the Hire Purchase Act 1971, or otherwise) or produced by a person (that person being referred to hereafter in this subsection as the first person) are sold, under a power exercisable by another person (that person being referred to hereafter in this subsection as the second person), in or towards the satisfaction of a debt owed by the first person, those goods shall be deemed to be supplied in the course or furtherance of a taxable activity carried on by the first person (being deemed a registered person), unless—
(a) The first person has furnished, to the second person, a statement in writing that the supply of those goods would not be a taxable supply if those goods were sold by the first person (notwithstanding that the first person may not be the owner of those goods), and stating fully the reasons why that supply would not be a taxable…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading Commissioner of Inland Revenue v Edgewater Motel Ltd

Details

AGLC: Commissioner of Inland Revenue v Edgewater Motel Ltd [2002] NZCA 293
Case: [2002] NZCA 293
Decision Date: 18 November 2002

CaseChat Overview and Summary

The case between the Commissioner of Inland Revenue and Edgewater Motel Limited revolves around the interpretation of the Goods and Services Tax (GST) Act 1985 and the Land Transfer Act 1952 in relation to a mortgagee sale of property. Edgewater Motel Limited, the second mortgagee, sought repayment of the GST paid by Bellman Holdings Limited, the first mortgagee, from the Commissioner of Inland Revenue. The central legal issue was whether the mortgagee, who sold the mortgaged property under a power of sale, must pay the GST in priority to the recovery of principal and interest under the mortgage or if the mortgage debt has priority and the mortgagee's obligation to pay GST is limited to any surplus which would otherwise be payable to the mortgagor.

The Court of Appeal examined the statutory provisions of the GST Act and the Land Transfer Act. The Goods and Services Tax Act 1985 deems the sale of goods under a power of sale as a supply in the course of a taxable activity carried on by the mortgagor unless specific conditions are met. Section 17 of the Act requires the seller to pay the tax charged on the supply. The Land Transfer Act 1952 dictates the application of the proceeds of a mortgagee sale, stating that expenses occasioned by the sale must be paid first, followed by the mortgage debt, and then any surplus to the mortgagor. The Court found that the plain language of the relevant sections indicated that the mortgagee must pay the GST charged on the supply of the land in priority to any payment in respect of secured debts.

The Court of Appeal held that the mortgagee is obliged to pay the GST charged on the supply of the land in priority to any payment in respect of secured debts. This payment is an expense occasioned by the sale and must ultimately be borne by the mortgagor by way of deduction from the purchase price. The appeal of the Commissioner was allowed, and Edgewater Motel Limited must pay the Commissioner's costs in the sum of $5,000 together with his reasonable disbursements, to be fixed if necessary by the Registrar. Costs in the High Court are to be fixed by that Court in light of this judgment.

Orders