Commissioner of Inland Revenue v Edgewater Motel Ltd
[2002] NZCA 293
•18 November 2002
| 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 supply; or
(b) Where the second person has been unable to obtain the written statement referred to in paragraph (a) of this subsection, that person may determine, in relation to any reasonable information held, that the supply of those goods would not have been a taxable supply if those goods had been sold by the first person (notwithstanding that the first person may not be the owner of those goods).
*“Goods” means all kinds of personal or real property (s2). So land is goods.
17 Special returns
(1) Where goods are deemed to be supplied by a person pursuant to section 5(2) of this Act, the person selling the goods, whether or not that person is a registered person, shall, on or before the last working day of the month following the month within which the sale was made,—
(a) Furnish to the Commissioner in the prescribed form a return showing—
(i) That person's name and address and, if registered, registration number; and
(ii) The name, address, and, if registered, registration number of the person whose goods were sold; and
(iii) The date of the sale; and
(iv) The description and quantity of the goods sold; and
(v) The amount for which they were sold and the amount of tax charged on that supply; and
(vi) Such other particulars as may be prescribed; and
(b) Pay to the Commissioner the amount of tax charged on that supply; and
(c) Furnish to the person whose goods were sold, details of the information shown on the return referred to in paragraph (a) of this subsection,—
and the person selling the goods and the person whose goods were sold shall exclude from any return, other than a return required pursuant to this subsection, which either or both may be required to furnish under this Act, the tax charged on that supply of goods.
(2) Any amount of tax charged on any supply of goods to which this section applies shall be deemed, for the purposes of this Act, to be tax payable and shall be recoverable as a debt due to the Crown.
It might be thought reasonably plain from these two provisions that the burden of the GST liability on a mortgagee sale is shifted from the mortgagor to the mortgagee:
A sale of land of a mortgagor under a power exercisable by a mortgagee is deemed to be a supply in the course of a taxable activity carried on by the mortgagor (which is deemed a registered person) unless either of the situations in s5(2)(a) or (b) applies (which they did not in the present case);
The mortgagee is obliged:
to furnish a return covering the matters specified in s17(1)(a);
to pay to the Commissioner the whole of the tax charged on the supply;
to furnish the mortgagor with the information in the return;
The tax is to be excluded from any other GST return of either party; and
The tax is recoverable as a debt due to the Commissioner from the party which is obliged to pay it, namely the mortgagee.
Further, it is plain – the respondents conceding the point in their oral submissions in this Court – that, if the mortgagee is obliged by s17 to pay the whole of the GST charged in relation to the sale, that payment constitutes an expense “occasioned by the sale” and, as such, is payable in priority to the mortgage moneys under s104(1)(a) of the Land Transfer Act 1952, which dictates the application of the proceeds of a mortgagee sale of land:
104 Application of purchase money
(1) The purchase money to arise from the sale by the mortgagee of any mortgaged land, estate, or interest shall be applied—
(a) Firstly, in payment of the expenses occasioned by the sale:
(b) Secondly, in payment of the money then due or owing to the mortgagee:
(c) Thirdly, in payment of subsequent registered mortgages or encumbrances (if any) in the order of their priority:
(d) Fourthly, the surplus (if any) shall be paid to the mortgagor.
But the respondents have contended, successfully in the High Court, that ss5(2) and 17 must be read consistently with what they say is the scheme and purpose of the GST Act in relation to mortgagee sales. In particular, they stress that because of s5(2), although the sale is by the mortgagee, the supply is made by the mortgagor. Output tax is usually the liability of the person making the taxable supply. Therefore, they argue, the GST liability remains with the mortgagor. What s17 requires of the mortgagee is merely that it should make payment of GST on behalf of the mortgagor out of money which would otherwise be available to the mortgagor after the indebtedness to the selling mortgagee and any other mortgagee(s) has been paid. Section 17 is just a payment mechanism. So in this case, it is said, Bellman was entitled to pay itself $952,666, which included the first mortgage debt and the expenses of sale, and should then have accounted to Edgewater for the balance. Only if that balance had satisfied Edgewater’s secured debt would Bellman have been obliged under s17 to make any payment to the Commissioner in or towards the GST charged on the supply.
Also of relevance to the arguments were the following portions of s27:
27Assessment of tax
(1) Subject to sections 108A and 108B and Part 4A of the Tax Administration Act 1994, the Commissioner may from time to time, from returns furnished under this Act and from any other information in the Commissioner's possession, make assessments of the amount that, in the Commissioner's judgment, is the tax payable pursuant to this Act and the Tax Administration Act 1994 by—
(a)Any person required to furnish any return under this Act; or
…
(d) In the case of an assessment in relation to goods deemed to be supplied by a person pursuant to section 5(2) of this Act,—
(i) The person selling the goods; or
(ii) The person whose goods are sold, if any written statement supplied by that person under section 5(2)(a) of this Act to the person selling the goods is in the judgment of the Commissioner incorrect,—
(1A) Where—
(a) A person is not satisfied with—
(i) Any return furnished by that person under this Act; or
(ii) A return furnished under section 17 of this Act by another person in relation to goods sold in or towards satisfaction of a debt owed by the person,—
and requests the Commissioner, in writing, to make any addition or alteration to that return; and
(b) The Commissioner has not already made an assessment of the amount of tax payable in respect of the period to which the return relates,—
the Commissioner shall make an assessment of the amount that, in the Commissioner's judgment, is the tax payable pursuant to this Act, and the person so assessed shall be liable to pay the tax so assessed except in so far as the person establishes on objection that the assessment is excessive or that tax is not payable.
…
(3) If an assessment or amended assessment is made under this section or the Tax Administration Act 1994], the Commissioner shall—
(a) Cause notice of the assessment or amended assessment to be given to the person liable to pay the tax; and
(b) In the case of an assessment or amended assessment in relation to goods deemed to be supplied by a person pursuant to section 5(2) of this Act, send a copy of such notice to whichever of—
(i) The person whose goods were sold; or
(ii) The person selling the goods—
is not the person assessed.
…
(6) For the purposes of this Part and Parts 3, and 6 of this Act, and Part 9 of the Tax Administration Act 1994, where—
(a) A person, not being a registered person, supplies goods and services and represents that tax is charged on that supply; or
(b) A person furnishes, or makes default in furnishing, a return required to be made by that person pursuant to section 17 of this Act in relation to a supply of goods referred to in section 5(2) of this Act; or
(c) A person whose goods are sold in the circumstances referred to in section 5(2) of this Act supplies a statement under section (5)(2)(a) of this Act to the person selling the goods, and that statement is in the judgment of the Commissioner incorrect,—
that person shall be deemed to be a registered person and any tax represented to be charged on the relevant supply by that person shall be tax payable by that person.
The argument is also said to be supported by the fact that in a bankruptcy, liquidation or receivership s42 ranks GST amongst the preferential claims.
The High Court judgment
In a reserved decision in the High Court at Auckland delivered on 28 May 2002, reported at (2002) 20 NZTC 17,713, Baragwanath J said that his decision should turn on whether the GST Act should receive a literal construction which, he considered, made no practical sense, or whether it should, as he preferred, receive a “strained construction” that gave effect to “the settled public policy that mortgagees are entitled to first priority”. He believed that there was a tension between s104, which stated substantive rights and which the Judge regarded as “the dominant provision”, and the “machinery provision” of s17. He concluded that, in terms of s104, GST would not be an expense occasioned by the sale and that s104 must dominate. As has already been indicated, the respondents in this Court did not rely, correctly as we will later make clear, upon any such tension, for there is none.
The Judge remarked that in a liquidation or a receivership mortgagees must be paid in priority to GST claims and that where a debtor company itself sells its property with the consent of its mortgagees there is no priority for GST. He asked why priority should turn on the fortuity of the method of enforcing securities. Noting that under s5(2) a mortgagee sale involved an activity carried on by the mortgagor and noting also the close linkage with s17, Baragwanath J said it would make sense for the mortgagee to be liable to account for GST to the extent of any surplus after payment of mortgages, but for the mortgagor to be liable for GST on what was its supply, to the extent that there was no or insufficient surplus.
The Judge did not accept an argument for the Commissioner that he would be unable to pursue the mortgagor for the GST debt. The Judge said that s27(1) contemplated the tax being paid either by the person selling the goods or by any person required to furnish any return.
The Judge had no doubt that Westwood, the mortgagor, was a person required to furnish a return under the Act. The Commissioner could, he said, choose to make an assessment under s27(1) (a) against it, or could claim the surplus from Bellman and the balance from Westwood. He said that the Act would function properly if s17 was construed essentially as a machinery provision giving effect to the general policy of s104 and of the GST Act that a mortgagee takes priority over the Commissioner to the extent that the sale realises more than is needed to discharge the mortgages. Effectively, he said, s17 must be taken to modify s104.
Discussion
Against the plain language of ss5(2) and 17 the Judge’s analysis loses force when his contention that GST cannot be an expense under s104(a) is examined. Indeed, the Judge himself at no stage explained why that should be so. GST is a tax on supplies, constituted in this case by the sale of land. It is a tax on the particular sale. We can see no reason why a tax payable on a supply made pursuant to a sale – i.e. because a sale took place - should not be regarded as an expense “occasioned by the sale”. The seller, be it a GST registered owner or a mortgagee, cannot effect the sale without output tax becoming payable in respect of the supply of the “goods”. The situation is readily distinguishable from that in Re Mesco Properties Ltd [1979] 1 All ER 302 in which corporations tax (a form of income tax levied on corporations) was said to be not a necessary result of a sale, merely a possible consequence of the sale at a profit. The corporations tax actually payable depended on what, if any, profits arose in the financial year, and was subject to any carrying forward of losses. In stark contrast, GST is payable on a mortgagee sale regardless of the results of other transactions and regardless of whether the property in question is sold at a profit or a loss. Section 17 isolates the transaction by requiring a separate return. In their written submissions counsel for the respondents advanced an argument which they did not pursue orally that GST could not be an expense because it does not affect the value of the property. They said GST was a mere consequence of sale. But there is no reason to limit “expenses” in s104 to items which affect the value of the land. An expense is something related to the sale which the vendor must pay because of the sale regardless of whether, if it were not paid, the purchaser would attribute a lesser value to the land.
It was accordingly wrong for the Judge to consider that the interpretation of s17 must be “strained” in order to produce consistency with s104. As we have indicated, the respondents recognised the difficulty of supporting the Judge’s view in this respect. Instead, their starting point was the language of ss5(2) and 17. They were, however, faced with a formidable task in trying to establish that there is in the Act a discernible policy in favour of mortgagees which should lead us to depart from the literal and natural meaning of the words of those sections. As we understood Mr Windeatt, who presented this part of the oral submissions for the respondents, the argument was that within ss27 and 42 there was an indication that Parliament intended that s17(1)(b)’s requirement for the mortgagee to pay the amount of tax charged on the supply should relate only to a surplus; and that s17(2)’s statement that such amount was recoverable as a debt meant that it was recoverable (if necessary) from the mortgagor. Mr Windeatt, unlike the Judge, placed no reliance on s27(1). Counsel was right in this respect. The mortgagor is not, in terms of para (a) of that subsection, a person required to furnish a return. Indeed, the final portion of s17(1) states the contrary – that the person whose goods were sold shall exclude from any return the tax charged on the supply of goods under the mortgagee sale. And, under para (d) of s27(1), which is concerned with an assessment in relation to goods deemed to be supplied by a person (the mortgagee) under s5(2), the Commissioner is empowered to make an assessment of tax payable by the person selling the goods (again, the mortgagee) or the person whose goods are sold (the mortgagor); but this can be done against the mortgagor only if any written statement supplied by the mortgagor under s5(2)(a) is judged by the Commissioner to be incorrect. That is not alleged in the present case. Where it occurs, the usual effect of s5(2) is reversed, so that the mortgagor becomes responsible for payment of the tax. That is, however, no indication at all that the mortgagor has any residual liability where s5(2) operates normally. So the Judge was wrong to find any assistance for his view in s27(1).
Mr Windeatt referred us first to s27(1A), which enables a mortgagor to seek an amended assessment of a return furnished by the mortgagee under s17. But the “person so assessed” as a consequence of the Commissioner’s reassessment remains the mortgagee. The subsection, therefore, does not support the view that the mortgagor has some liability to pay the assessment if the surplus in the hands of the mortgagee is insufficient. The requirement in subs(3) for a copy of the notice of the (amended) assessment to be sent to the mortgagor if it is not the person assessed takes the argument no further.
Nor do we find in s27(6) anything which provides support for the respondents’ suggestion that s17 is qualified by some overall scheme and purpose apparent in the legislation. It was not suggested that para (a) was of assistance to the respondents. Para (b) deems a person to be a registered person where that person furnishes, or ought to have furnished, a return required by s17. The mortgagee is deemed to be a registered person and the tax represented by it to be charged on the supply is said to be tax payable by it. Why this should be necessary in view of s5(2) and 17 is not immediately clear, but it is certainly not a basis for supporting the view that the mortgagor is in some manner also rendered liable. Para (c) is directed to a mortgagor who has supplied to the selling mortgagee a statement judged by the Commissioner to be incorrect. Curiously, any tax represented to be charged on the relevant supply “by that person” (i.e. the mortgagor) is made payable by the mortgagor. Yet it is not to be expected that where the mortgagee sells the property there will have been any representation by the mortgagor of the tax charged on the supply unless, as Mr Lennard, for the Commissioner, rather faintly suggested, the furnishing of a tax return by the mortgagee based on information supplied by the mortgagor can amount to such a representation by the mortgagor. There may have been an incorrect statement by the mortgagor that the supply will not be a taxable supply. But that would not appear to be a representation as to the tax actually charged by the mortgagee on the supply. However this may be, it does not have any application to a case where no incorrect statement under s5(2)(a) has been made. It is referable to a situation where the normal operation of s5(2) has been reversed. Subsection (6) is puzzling but does not expressly or by implication render a mortgagor liable for GST unless an incorrect statement is supplied.
We were not persuaded that the contrast with the position where a mortgagor sells the property itself (there being no priority for GST save under s42, if there is a subsequent insolvency) or indeed any other analogy with any of the specific situations dealt with by the GST Act (for example s58, which deals with specified agents, who are treated as carrying on the taxable activity of the incapacitated person) provides any sound reason for departing from the plain language of s17.
There is no settled policy apparent in s104 that a mortgage debt is to have priority over a tax payable as a result of the sale of the mortgaged land. Section 104 does not address taxes, but that does not mean that when they arise under another statute they cannot qualify as expenses. Priority of a tax will depend upon what is dictated by the taxing statute. Section 104 is a general provision which gives priority to expenses occasioned by the sale. In this case the GST Act, by imposing a tax on the sale transaction, creates an expense of sale which ranks under s104 ahead of the mortgage debt. That it might not do so where the tax is imposed under a different section of the GST Act is beside the point when s17 is so clearly worded.
The argument of Mr Lennard convinces us that the correct view is as we stated it in para [4], and that the selling mortgagee is obliged to pay the GST charged on the supply of the land in priority to any payment in respect of secured debts. Such payment is an expense occasioned by the sale and must ultimately be borne by the mortgagor by way of deduction from the purchase price under para (a) of s104 of the Land Transfer Act.
Result
The appeal of the Commissioner is allowed. The respondents must pay the Commissioner’s costs in this Court in the sum $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.
Solicitors:
Simpson Grierson, Auckland, for Appellants
Crown Law Office, Wellington for Respondents
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