F B Duvall Ltd v Commissioner of Inland Revenue
[2000] NZCA 54
•17 May 2000
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA 23/99 |
| BETWEEN | F B DUVALL LTD |
| Appellant |
| AND | COMMISSIONER OF INLAND REVENUE |
| Respondent |
| Hearing: | 3 May 2000 |
| Coram: | Richardson P Gault J Keith J |
| Appearances: | B M Grierson for Appellant J H C Coleman and M J Ruffin for Respondent |
| Judgment: | 17 May 2000 |
| JUDGMENT OF THE COURT DELIVERED BY RICHARDSON P |
This GST objection proceeding has had a tortured history. The assessments for the seven periods in question (6 months periods ended 31 August 1987 to 31 August 1990, both inclusive) were made in May 1990 and amended in November 1990. On 31 May 1991 F B Duvall Limited ("Duvall") filed amended returns which were however treated as objections to the assessments. The objections were disallowed except to the extent that the Commissioner reverted to the calculations made in May 1990. Duvall required the Commissioner to state a case to the Taxation Review Authority. That was done on 28 January 1993.
The objection proceeding was heard by the Taxation Review Authority on 17 March 1993. He delivered his decision on 29 April 1993 ((1993) 15 NZTC 5,159). Duvall appealed to the High Court. The case stated by the Taxation Review Authority to the High Court was dated 22 February 1996. The appeal was heard on 11 July 1997, judgment being delivered on 9 October 1997 ((1997) 18 NZTC 13,470). That led to further judgments and minutes of the High Court with a very considerable volume of further affidavit material being filed by the parties in response to issues canvassed by and before the High Court. The final judgment of 3 November 1999 recalled part of the first judgment of 9 October 1997 and settled the form of the final judgment on the original appeal from the Taxation Review Authority ((1999) 19 NZTC 15,515). All told there are seven judgments and five minutes of the High Court in the case on appeal.
In the result, what began as a challenge by Duvall to output tax (which succeeded) ended in a denial to the company of input tax credits.
The central issue in this appeal
The central issue in the appeal to this court is whether the Commissioner was entitled at the July 1997 hearing to change the stance he had previously taken on the output tax question and by that means to open up the input tax credits and whether the High Court had jurisdiction to follow that course. For the reasons we shall give we answer that question in the negative. Consequently it is unnecessary to traverse the subsequent course of the proceeding and the ensuing minutes and judgments involved.
The Goods and Services Tax Act 1985
Goods and services tax is "charged ... on the supply (but not including an exempt supply) in New Zealand of goods and services ... by a registered person in the course or furtherance of a taxable activity carried on by that person" (s8(1)). Supplies of financial services are exempt from tax (s14) and "financial services" as defined in s3 include "the payment or collection of any amount of ... dividend or other amount whatever in respect of any ... equity security" (subs (1)(ka)).
In calculating the amount of GST payable in respect of a taxable period the amount of input tax in relation to the supply of goods and services made to the registered person during that taxable period is deducted from the amount of output tax of that taxpayer attributable to the taxable period (s20) and any input tax not previously deducted may be carried forward and deducted from the output tax in a later period (s20). Output tax and input tax are defined in s2. "Output tax" in relation to a registered person is the tax charged pursuant to s8(1) in respect of the supply of goods and services made by that person. "Input tax" in relation to a registered person is "tax charged under s8(1) ... on the supply of goods and services made to that person ... being in any case goods and services acquired for the principal purpose of making taxable supplies". "Taxable supplies" is in turn defined as any supply of goods and services charged with tax pursuant to s8.
The assessment and the objections
The case stated by the Commissioner to the Taxation Review Authority records that during the relevant GST periods Duvall was in receipt of administration fees from various subsidiary companies and that the Commissioner calculated the GST on the basis of the administration fees claimed as paid to Duvall as set out under the heading in the Commissioner's case stated, "output tax payable". The notices of assessment themselves were expressed as being in respect of total supplies made by Duvall for the particular periods.
Duvall filed amended returns (treated by the Commissioner as a late objection) relying on dicta in a TRA decision ((1990) 12 NZTC 2,690) as indicating that payment of such administration charges would be classed as dividends from the subsidiary company to the parent company and so exempt from tax under ss 14 and 3(1)(ka). In its letter of 3 June 1991 referring to that TRA decision Mr Russell contended that "Under the circumstances it is clear that in similar cases as far as F B Duvall is concerned the payments from the subsidiary companies will be classed as dividends". Further correspondence ensued but not, as we read it, purporting to change the basis of the objection and the Commissioner issued two further notices of assessment expressed as being in respect of total supplies made by Duval for the respective periods.
The amended returns for each of the periods showed separately the calculation of output tax based on supplies made by Duvall and the calculation of input tax credits based on supplies received by Duvall. Not surprisingly, given the different subject matters involved, there was no correspondence between the amounts of supplies made and supplies received and thus the 1 February 1990 period return showed supplies made of $396,790.20 and supplies received as $708,046.11, and thus output tax as previously paid of $44,087.80 and input tax credits of $78,671.79. In total Duvall claimed to recover $164,152.65 (output tax on the administration charges and input tax credits) plus interest.
The Commissioner took the view that as an income tax decision the TRA decision was irrelevant to Duvall's GST position and disallowed the objections. Duvall required the Commissioner to state a case which in the final paragraph (para 8) stated as the question for the determination of the TRA, whether the Commissioner had acted incorrectly in making the GST assessments and, if so, then how should such asessments be amended.
The TRA decision and the case stated by the TRA to the High Court
At the beginning of his judgment the TRA recorded that the issues involved both questions of fact and law and that the question of fact was whether or not Duvall supplied any goods and services for the purposes of the objection on which GST ought to have been payable. The contractual provision under which the administration charges had been paid read:
13. IN consideration of the administration services now and to be provided by the Owner it is hereby agreed by all the parties hereto that at the end of each accounting period and in any event not less than once in each six months the net surplus arising from the business operations of the Company after payment of all costs including the payments due to the Consultant and the Manager shall be paid to the Owner as an Administration Charge to Parent Company.
However, for the reasons he gave the TRA concluded that the Commissioner acted correctly in making the GST assessments.
Section 43 of the Inland Revenue Department Act 1974 provided for appeals from the TRA to the High Court to be by way of a case stated by the TRA setting forth the facts and the questions of law or fact arising for the determination of the High Court. On the hearing of an appeal the High Court was entitled to cause the case so stated to be sent back to the TRA for amendment, but no such step was taken in this case and in jurisdictional terms the High Court was confined to the issues raised by the case stated.
The case stated on appeal recorded the determination that the Commissioner acted correctly in making the assessments by including the disputed receipts (the receipts by Duvall from subsidiary companies) as taxable supplies assessable for income tax.
Numerous points were identified in the case stated as questions arising for determination. There was considerable discussion as to what if any services had been provided by Duvall to the subsidiaries. Mr Russell gave evidence for Duvall that there had never been any goods and services supplied by the parent company to the subsidiaries and the submission for the company was that if, however, such goods and services were provided, the payments received were exempt under s14, being in respect of financial services. The TRA concluded, and asked whether it was correct in finding, that Duvall had not discharged the onus of proof because its witness had made mutually irreconcilable statements. At the end of the case stated on appeal the TRA recorded that taking into account the determination in respect of the stated questions of disputed fact and law, the final question for determination of the High Court became:
Was the Respondent correct in determining that the administration charges, which were included in the assessments for the periods ending 31st August 1987, 28th February 1988, 31st August 1988, 28th February 1989, 31st August 1989, 28th February 1990, and 31st August 1990, were "taxable supplies" and therefore subject to Goods and Services Tax?
We should add that there was no discussion of supplies received by Duvall and of its input tax credits.
The High Court hearings and decisions
Four years after the TRA gave his decision Duvall's appeal come before the High Court for hearing. By then the Commissioner had concluded, no doubt having regard to his assessment of the evidence given before the TRA, that the appeal had to be allowed, and at the beginning of his judgment Baragwanath J recorded that counsel agreed that the appeal by Duvall must be allowed by consent. The Judge added that the main issue for him to determine was upon what grounds.
The Commissioner contended that no services, financial or otherwise, were supplied by Duvall and so no GST arose. Duvall submitted it was not open to the Commissioner to raise the "no services" argument; and, further, that the services it supplied to its subsidiaries were financial services and therefore exempt from GST.
While there was no discussion of input tax credits in Baragwanath J's first judgment, clearly the reason why the Commissioner sought to advance the "no services" submission was to provide a stepping stone to a contention that Duvall was not entitled to input tax credits. That was on the basis that supplies received by Duvall were not "goods and services acquired for the principal purpose of making taxable supplies" as required by the definition of input tax. It seems that at no stage either before the TRA or in the High Court did the Commissioner seek to argue that, if the supplies made by Duvall were exempt financial services, then they were not "taxable supplies".
Baragwanath J concluded that the Commissioner's contention that no services were provided was open for consideration on appeal. The Judge discussed CIR v V H Farnsworth Ltd [1984] 1 NZLR 428 and BASF New Zealand Ltd v CIR (1997) 18 NZTC 13,322, concluding that the zone of contention and of the High Court's jurisdiction was delimited by the Commissioner in arriving at his assessment and the terms of objection to that assessment (p13,474). He went on to review the assessment and objection process, concluding (p13,479):
The position in my opinion is
(1)in Duvall's correspondence antedating the notices of assessment and objection it took the position that it was supplying financial services;
(2)the notice of assessment in responding to the correspondence was couched in terms consistent with it - that it disputed the claim to provision of financial services, construed by itself in the context of the preceding correspondence it addresses and rejects the claim of no financial services;
(3)the notice of objection was ambiguous and could relate either to the provision of financial services or to the provision of no services;
(4)in evidence Mr Russell changed direction and advanced the assertion that no services were supplied.
We should add that the Judge's conclusion (2) is not, however, wholly consistent with the notices of assessment referred to in paras [7] and [8] or with his express finding that a notice of assessment (subsequent to the 1990 assessments and maintaining the figure for total supplies resulting in the total output tax as specified) asserted that Duvall had supplied taxable services (p13,476).
The Judge went on to hold that it was the task of the TRA to consider whether services had or had not been provided and that there was no jurisdictional reason why the parties should not reverse their position upon the point on appeal; or why the court should not deal with the matter on the merits. And in the next section of the judgment he held that no services were supplied by Duvall in return for the administration charges.
Responding to the Judge's order that the Commissioner make assessments for certain periods "in the light of the principle stated in this judgment", the Commissioner made zero assessments which, while allowing for the wrongly allowed output tax, also rejected input tax credits. That was challenged by Duvall. Baragwanath J ultimately held that both output tax and input tax deductions should properly be reduced to zero in each period ((1999) 19 NZTC 15,039 and
(1999) 19 NZTC 15,515). There could be no input tax in relation to Duvall who, operating a scheme which never entailed the making of any supply of goods and services, could not have received "the supply of goods and services ... for the principal purpose of making taxable supplies" within the s2 definition of input tax (p15,043).
Discussion
For reasons we can state quite briefly we are satisfied that the Commissioner was not entitled to change the stance he had taken in making the assessments and had pursued before the TRA, namely, that the administration charges were in respect of taxable supplies assessable for output tax; and that the High Court lacked jurisdiction to hear and determine the Commissioner's new argument that Duvall had not supplied any services to subsidiaries, and then in subsequent judgments to determine that Duvall was not entitled to input tax credits.
First, after counsel agreed, as they did, that the appeal had to be allowed by consent and if there was no reason for the High Court to demur, it is difficult to see any justification for going beyond the consent and beyond formally allowing the appeal.
Second, even if it could be said that there was a qualified consent on the part of the Commissioner based on a changed view of the facts and the law - and that is not suggested in the judgment - it was not open for the Commissioner to assert the contrary of the basis on which the assessments had been made and objected to. All the notices of assessment asserted that Duvall had supplied services (paras [7], [8] and [19]). Relying on a TRA income tax decision the basic objection was that the administration charges were dividends and exempt from output tax under ss14 and 3(1)(ka) (para 8). The Commissioner disallowed the objection on the ground that that income tax decision was irrelevant to Duvall's GST position (para 10). The case stated by the Commissioner to the TRA recorded that during the relevant periods Duvall was in receipt of administration fees from subsidiaries and that the Commissioner calculated GST on the basis of the administration fees paid to Duvall as set out under the heading "output tax payable" (para [7]). While there was conflicting evidence on the part of Duvall before the TRA, the Authority's final determination in upholding the assessments was that the administration charges were taxable supplies and therefore subject to GST (para [14]).
On the appeal to the High Court the Commissioner was necessarily confined to the stance he had taken and which had been upheld by the TRA, namely that Duvall was liable for output tax having made supplies to subsidiaries for which it received the administration charges. The attempt to assert the opposite, namely that no supplies of services were made by Duvall, was outside the Commissioner's actual assessments of output tax.
Further, the High Court was not hearing and determining the objections to the assessments. Rather, it was hearing an appeal on questions of law or fact arising for its determination in terms of the case stated by the TRA. That case stated ultimately confined the High Court to determining whether the Commissioner was correct in determining that the administration charges were taxable supplies and therefore subject to GST (para [14]). The case was not sent back to the TRA for amendment. It must follow that in the High Court the Commissioner was not entitled to change that stance and that the High Court exceeded its jurisdiction in allowing the Commissioner to do so and in hearing and determining the appeal as it did.
Finally, input tax credits were not in issue in the assessments or for that matter at the hearing before the TRA. Reference to those credits in the amended returns of Duvall was only a matter of necessary arithmetical calculation, and the brief reference in cross‑examination of Mr Russell at the hearing before the TRA, at pp67‑68 of the transcript, to the claim to input tax as noted in this court by Mr Coleman, ended with Mr Russell's answer that in two identical situations the Commissioner had first reversed and then allowed his claim. Unsurprisingly, there was no mention at all of input tax credits or input tax in the judgment of the TRA or in the case stated by the Authority to the High Court. The whole focus was properly on output tax.
Result
For these brief reasons we conclude that the appeal must be allowed, with the result that the orders made in the High Court in the judgment of 9 October 1997 and in subsequent judgments beyond the bare allowance by consent of the appeal against the decision of the TRA, are quashed. In lieu it is ordered that the GST assessments referred to in the case stated by the Commissioner to the TRA be amended by deleting the amounts shown as payable by way of output tax in respect of administration fees for supplies made by Duvall to subsidiary companies. We understand from discussion with counsel that in that result the Commissioner will recognise the input tax credits and make appropriate refunds without further order. It will then be for the Commissioner to determine whether he is able to make further assessments in respect of the input tax credits, notwithstanding the prima facie time bar, and, if so, whether he should do so.
Costs
Duvall is entitled to costs on the appeal which are fixed at $5,000 together with any reasonable disbursements including travel and any accommodation expenses of counsel as fixed if necessary by the Registrar.
Given the history of the matter in the High Court, Mr Grierson sought an indemnity for all costs incurred by Duvall in that court. It was suggested that those costs might be fixed by the Registrar of the High Court. To save time and expense, but subject of course to considering the submissions of counsel as to the basis for a cost award and quantum, we would be prepared to make an overall order for costs in the High Court. We invite counsel for Duvall to submit a memorandum as to costs incurred with submissions as to an overall order and counsel for the Commissioner to file a memorandum in response.
Solicitors
Bruce Grierson, Auckland, for appellant
Crown Law Office, Wellington, for respondent
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