Sanli Group Limited v Zhang

[2023] NZHC 374

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2021-404-001658

[2023] NZHC 374

BETWEEN

SANLI GROUP LIMITED

Plaintiff

AND

CHENG ZHANG, JIN KUK JUNG and PILL SOON SO

Defendants

Hearing:

10 October 2022

Appearances:

K Crossland for the Plaintiff

J Strauss for the Second and Third Named Defendants

Judgment:

10 March 2023

JUDGMENT OF ASSOCIATE JUDGE GARDINER

This judgment was delivered by me on 10 March 2023 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date.......................................

Solicitors:

Shieff Angland, Auckland JC Legal, Auckland

J Strauss, Auckland

SANLI GROUP LTD v ZHANG [2023] NZHC 374 [10 March 2023]

Introduction

[1]                 Cheng Zhang, Jin Kuk Jung and Pill Soon So (the defendants) sold a property to the plaintiff, Sanli Group Limited (Sanli Group), for a price inclusive of GST.

[2]                 In the sale and purchase agreement (the agreement), the defendants warranted that they were not registered for GST under the Goods and Services Tax Act 1985 (the Act) and would not be so registered at settlement. After settlement, Sanli Group lodged with the Inland Revenue Department (IRD) a GST return in which it claimed a GST credit adjustment of $1,304,347.83 in relation to the purchase of the property. The IRD advised Sanli Group that it was not entitled to claim that adjustment because, in its view, the defendants were conducting a GST taxable activity in respect of the property sale. This meant that the supply was zero-rated under the Act, and no GST credit could be claimed.

[3]                 Sanli Group brought proceedings against the defendants for breach of warranty, claiming damages of $1,304,347.83 for the GST credit adjustment it was unable to obtain, accounting fees of $17,200 it incurred trying to resolve the issue with the IRD, interest and costs. Sanli Group applies for summary judgment of its claim.

[4]                 The first-named defendant, Mr Zhang, has taken no steps in the proceeding. Mr Jung and Mr So oppose summary judgment on the grounds they did not breach the warranty as they were not registered for GST or liable to be registered for GST at settlement. In essence, their defence is that the IRD did not deem them to be GST registered under the ‘forced’ registration provision in the Act.1

[5]                 The defendants also say that any claim Sanli Group may have had against them is barred by a Deed of Settlement in which Sanli Group and the defendants agreed to settle all present and future issues between them.

[6]                 The summary judgment hearing took place on 10 October 2022, and judgment was reserved. After the hearing, on 31 October 2022, the IRD paid a GST refund to Sanli Group based on its claimed GST credit adjustment of $1,304,347.83.

1      Goods and Services Tax Act 1985, s 51(4)(b).

Accordingly, Sanli Group does not now seek damages in this amount. Sanli Group still seeks summary judgment for the interest and costs (accounting and legal) portion of its claim.

[7]                 The defendants invite the Court to strike out the statement of claim on the basis that its foundation has fallen away with the IRD’s acceptance of Sanli Group’s claim.

[8]The issues to be determined are:

(a)Do the defendants have an arguable defence that they did not breach the warranty because the IRD did not deem them to be GST registered?

(b)Do the defendants have an arguable defence that the Deed of Settlement precludes Sanli Group from bringing a claim?

(c)Should the statement of claim be struck out?

Legal principles – summary judgment

[9]                 Rule 12.2(1) of the High Court Rules 2016 (HCR) provides that this Court may give judgment against a defendant if the plaintiff has satisfied the Court that the defendant has no defence to a cause of action, or any part thereof, in a statement of claim.

[10]              The relevant principles governing a summary judgment application are well established:2

… The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as, for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent or is inherently improbable: Eng

2      Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].

Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the court’s assessment of the evidence is a matter of judgment. The court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

Do the defendants have an arguable defence that the IRD did not deem them to be GST registered?

[11]              Settlement of the sale and purchase agreement occurred in February 2020. On or about 7 May 2020, Sanli Group lodged with the IRD a GST return for the period ended 31 March 2020, claiming a GST credit adjustment of $1,304,347.83 for the purchase of the property.

[12]              On 1 December 2020 the IRD, by letter, informed Sanli Group that it did not consider that Sanli Group was entitled to claim the credit adjustment, saying:

Based on the information held, it does appear that the vendors were conducting a GST taxable activity and as such that the purchase by Sanli Group Limited is zero-rated under section 11(1)(mb) of the GST Act 1985.

At this time we think that Sanli Group Limited is not entitled to the claimed
$1,304,347.83 credit adjustment and that instead of a credit assessment of

$1,252,632.45 a debit assessment is required of $51,715.38.

Please consider this and let me know your thoughts. My team leader and I are available to meet with you and the client if required.

[13]              On 2 August 2021 the IRD, by letter, again informed Sanli Group that the purchase of the property should have been compulsorily zero-rated under the Act. After apologising for the length of time it had taken to progress the matters since a meeting with Sanli Group’s accountant on 23 February 2020, the IRD said:

At the meeting we discussed the second-hand goods claim of $1,304,347.83 on the purchase of 77 Nobilo Road in Huapai in relation to the Goods and Services Tax (‘GST’) period ended 31 March 2020. This relates to the earlier unconditional sale and purchase agreement (‘S&PA’) of 6 May 2016 (with a delayed settlement). That S&PA presents a sale from an unregistered vendor to a registered purchaser. Schedule 2 of the S&PA has “No” next to vendor GST registration and “Yes” next to purchaser GST registration.

However, we consider that agreement appears to be incorrect in setting out that the vendor was not GST registered.

At the time of the S&PA it appears that the vendors were registered and had a taxable activity, or at a minimum an intention to commence a taxable activity.

…

It follows that we are considering a situation where the vendor and the purchaser have adopted inconsistent GST treatments.

Example 10 of IS 17/08 “GST - Compulsory zero-rating of land rules (general application)” shows where a vendor should have been registered (or in the current case they were registered but did not fill out the S&PA on that basis) there is a correction so that the transaction is zero-rated.

It does appear that the purchase of the property should have been compulsorily zero-rated in terms of section 11(1)(mb) of the GSTA.

Please let [me] have your comment on this and in particular whether Sanli Group Limited agrees that its claim for a second-hand good[s] credit is incorrect on the above basis.

[14]              In the intervening period, Sanli Group had written to the defendants,  on     23 December 2020 and 7 May 2021, advising them of the IRD’s view and demanding payment of the GST credit adjustment it was unable to obtain, plus accounting and legal fees.

[15]              In a letter dated 12 May 2021, Wing Wong, Mr Zhang’s accountant, responded to Sanli Group, stating that neither he nor the defendants had been involved in Sanli Group’s discussions with the IRD about the sale of the property. Mr Wong asked for copies of Sanli Group’s application for a GST credit adjustment, correspondence between Sanli Group and the IRD, and any other documents or information provided by Sanli Group to the IRD for the purposes of the application.

[16]              On 5 August 2022, almost a year after the commencement of this proceeding, the IRD issued a notice of proposed adjustment (NOPA) to Sanli Group’s GST return for the period ended 31 March 2020. The IRD proposed to adjust Sanli Group’s assessment for the period to remove the credit adjustment claimed of $1,304,347.83 in relation to the property. The IRD’s analysis of the proposed adjustment runs to eight pages. The essential point is that the IRD’s proposed adjustment was based on the view that the defendants were all registered or liable to be registered for GST when the agreement for sale and purchase was entered into, and at settlement.

[17]              Sanli  Group   says   that  the  combined   effect   of  the  IRD  letters   dated  1 December 2020 and 2 August 2021 was to deem the defendants registered for GST at the time of the agreement for sale and purchase. That decision was confirmed in the NOPA. Accordingly, the defendants breached cl 14.1 of the agreement whereby

they warranted that they were not registered for GST or liable to be registered for GST at the time of settlement.

[18]              Sanli Group maintains that the fact that the IRD has now paid the adjustment does not change the fact that the defendants breached the warranty. Sanli Group submits that once the IRD determined that the defendants were or were required to be registered for GST (which occurred with the IRD letters dated 1 December 2020 and 2 August 2021), the warranty was breached.

[19]              Conversely, the defendants say that because the IRD has now accepted Sanli Group’s GST assessment, the foundation of its claim against the defendants for breach of warranty has fallen away. Essentially, the defendants submit that the IRD’s ultimate acceptance of Sanli Group’s claim for a credit adjustment proves their defence that the IRD had not made a final decision to deem them GST registered in relation to the sale.

[20]              The agreement is an ADLS/REINZ ninth edition standard form agreement for sale and purchase of real estate. The warranty on which Sanli Group relies is contained in cl 14.1 and sch 2 of the agreement:

14.0Zero-rating

14.1The parties warrant that the particulars stated in Schedule 2 are correct at the date of this agreement.

[21]Schedule 2 contains a statement:

1.The vendor is registered under the GST Act or will be so registered at settlement. Yes/No

[22]Beside that is written “No”.

[23]On the front page of the agreement was the statement:

The vendor is registered under the GST Act in respect of the transaction evidenced by this agreement and/or will be so registered at settlement: Yes/No

[24]“No” is written beside that statement.

[25]Clause 1.1 of the agreement is a definitions clause and includes the following:

1.1    Definitions

(1) Unless the context requires a  different  interpretation,  words  and phrases not otherwise defined have the same meanings ascribed to those words and phrases in the Goods and Services Tax Act 1985, the Property Law Act 2007, the Resource Management Act 1991 or the Unit Titles Act 2010.

…

(8)“GST” means Goods and Services Tax arising pursuant to the Goods and Services Tax Act 1985 and “GST Act” means the Goods and Services Tax Act 1985.

…

(28) The terms “going concern”, “goods”, “principal place of residence”, “recipient”, “registered person”, “registration number”, “supply” and “taxable activity” have the meanings ascribed to those terms in the GST Act.

[26]The GST Act provides:3

registered person means a person who is registered or is liable to be registered under this Act

[27]              The Court of Appeal in Ling v YL NZ Investment Ltd confirmed that the terms “registered under the GST Act” and “registered person”, as they are used in a ADLS/REINZ standard form agreement, are synonymous.4

[28]              A person’s liability for registration is  governed  by  s  51  of  the  GST Act. A person becomes liable to be registered if, in a 12-month period, that person carries out a taxable activity and makes a total value of supplies exceeding $60,000, or there are reasonable grounds for believing that will occur. Subsection (4) provides two ways for a person to be registered:

(4)Where any person has—

(a)made application for registration pursuant to subsection (2), (3), or section 54B, and the Commissioner is satisfied that that person is eligible to be registered under this Act, that person shall be a registered person for the purposes of this Act with effect from such date as the Commissioner may determine; or

3      Section 2(1).

4      Ling v YL NZ Investment Ltd [2018] NZCA 133, (2018) 20 NZCPR 830 at [29].

(b)not made application for registration pursuant to subsection (2), and the Commissioner is satisfied that that person is liable to be registered under this Act, that person shall be a registered person for the purposes of this Act with effect from the date on which that person first became liable to be registered under this Act: provided that the Commissioner may, having regard to the circumstances of the case, determine that person to be a registered person from such later date as the Commissioner considers equitable.

[29]              Sanli Group’s claim relies on the proposition that the defendants were deemed to be registered under s 51(4)(b) and were therefore a “registered person” in breach of the warranty in the agreement.

[30]              The onus is on Sanli Group to establish that the defendants have no tenable defence to its claim. I consider that, for the following reasons, the defendants have a reasonably arguable defence that the IRD had not deemed the defendants to be registered for GST.

[31]              First, the two IRD letters on which Sanli Group relies are addressed to Sanli Group, not the defendants. There is no evidence before the Court of the IRD formally advising the defendants that they were deemed to be a GST registered person in relation to the sale and purchase. There were ongoing discussions taking place between accountants for Mr Jung and Mr So and the IRD about whether they were conducting a taxable activity in respect of the property. Mr Jung has put in evidence an email from the IRD to his former accountant dated 14 April 2021, in which the IRD states, after seven pages of reasoning, that it considers that Mr Zhang and the trustees of the So Jung Family Trust were conducting a taxable activity with the property, and that therefore the sale to Sanli Group was required to be compulsorily zero-rated under the Act. Yet in a follow-up email dated 1 December 2021, the IRD asked for an explanation as to why the defendants considered that position to be incorrect.

[32]              Second, the two IRD letters relied on by Sanli Group are equivocal, with the IRD expressing a view and asking for Sanli Group’s comment. In the first letter the IRD states that “it does appear that the vendors were conducting a GST taxable activity” and that, “[a]t this time we think that Sanli Group Limited is not entitled to the claimed $1,304,347.83 credit adjustment”. The letter closed with a request that Sanli Group consider this position and respond.

[33]              In the second letter the IRD states that “it appears that the vendors were registered and had a taxable activity” and that “[i]t does appear that the purchaser of the property should have been compulsorily zero-rated”. The letter closed, again, with a request to Sanli Group for its comment on whether it agreed with the IRD.

[34]              Third, the terms of the NOPA suggest that the IRD had not made a final decision. As the name suggests, by this notice the IRD proposed to adjust Sanli Group’s GST assessment to reflect the zero-rating of the property purchase. But the adjustment had not yet been made. The NOPA explains that it begins a process that is provided for by pt 4A of the Tax Administration Act 1994. On receiving a NOPA, if the recipient taxpayer agrees with the adjustment proposed, then the Commissioner makes the adjustments.5 If the taxpayer disagrees with any of the adjustments proposed, they must notify the IRD by notice of response (NOR) that the proposed adjustment is rejected.6 It follows that a final decision had not been reached in respect of Sanli Group’s claim to a GST credit adjustment.

[35]              This situation is distinguishable from the facts in Ling, the main authority on which Sanli Group relies. In that case, there was a clear communication from the IRD to the vendor, Ms Ling, deeming her to be GST registered. The IRD wrote to Ms Ling, giving her a GST registration number, and said:7

You’re now registered for GST as from 8 May 2015. From this date, you need to charge and account for GST on all goods and services you supply in your taxable activity, using the hybrid accounting basis.

[36]              Additionally, the purchaser’s advisor, on enquiring about the status of their claim for a GST refund, were advised by the IRD:8

I can confirm the vendor for the property sale at 170 Station Road, Pukekohe is GST registered and should have been at the time of sale.

[37]Subsequently, the IRD again wrote to the purchaser’s advisor, saying:9

5      Tax Administration Act 1994, s 89H.

6      Section 89G.

7      Ling v YL NZ Investment Ltd, above n 4, at [10].

8 At [11].

9 At [14].

This email is to confirm the supply of land at 170 Station Road, [Pukekohe] from Louise Ling to your client was made from a registered person to another registered person and was part of the vendors taxable supplies.

Therefore, the zero rating criteria under section 11(1)(mb) of the GST Act 1985 has been satisfied and accordingly it is proposed that the GST refund claim by your client will be disallowed.

[38]              Ms Ling accepted that she was registered for GST, and that the IRD had backdated her registration to 8 May 2015.10 The purchaser did not challenge the IRD’s rejection of its claim and agreed to amend its GST assessment by excluding the claim for the GST refund.11

[39]              The facts in this case are very different to those in Ling. Here, there were ongoing discussions taking place between the defendants and the IRD on one hand, and Sanli Group and the IRD on the other, regarding whether the IRD’s view that the defendants were undertaking a taxable activity in relation to the property was correct. In fact, on 30 September 2022, Sanli Group submitted a NOR to the NOPA. This was not referred to by Sanli Group during the summary judgment hearing, because, according to Sanli Group, it was not considered relevant to the issues before the court (other than to mitigation of damages). The NOR and the IRD’s response are not before the Court. But following the NOR, the IRD accepted Sanli Group’s claim for a credit adjustment. This outcome supports the defendants’ defence that the IRD had not made a final decision on their GST status in relation to the transaction.

[40]              Accordingly, my conclusion on the application for summary judgment is that the defendants have at least a tenable defence that they did not breach the warranty.

Should the statement of claim be struck out?

[41]              In a memorandum filed after Sanli Group informed the defendants and the Court that the IRD paid the GST refund, the defendants invite the Court to strike out the statement of claim under r 15.1 of the HCR or the Court’s inherent jurisdiction. The defendants argue that as the IRD has now accepted Sanli Group’s GST claim, the foundation for its assertion that the defendants breached the warranty has fallen away.

10     At [37](e).

11     At [15] and [34].

[42]              In a memorandum in response Sanli Group disagrees, maintaining that the defendants breached the warranty when the IRD decided not to accept Sanli Group’s tax return with the proposed credit adjustment on 1 December 2020.

[43]              The Court may strike out a proceeding under r 15.1 without an application having been made.12 Moreover, the strike-out power in r 15 does not affect the inherent jurisdiction of the court.13

[44]              The Court may strike out a claim if it discloses no reasonably arguable cause of action.14 It is inappropriate to strike out a claim unless “the court can be certain that it cannot succeed”.15 The jurisdiction should be exercised sparingly.16 However, as the Court of Appeal said in Attorney-General v McVeagh:17

… if the claim is doomed to failure, there can be no justification for allowing it to continue. The striking-out jurisdiction is founded on the realisation that resources are finite and are not to be wasted.

[45]              A key hurdle facing Sanli Group is the fact that the IRD has paid the sought credit adjustment to Sanli Group and in doing so acknowledged that the defendants were not GST registered nor liable to be registered at the time of settlement. On that basis, there can be no live breach of the warranty, and as Sanli Group concedes, no claim for damages in the amount of the credit adjustment.

[46]              I see considerable difficulty in any claim that the defendants are nonetheless liable to pay interest and Sanli Group’s legal and accounting costs because the IRD did not immediately accept that the defendants were not liable to be GST registered. While it has taken more than two years for the IRD to accept Sanli Group’s GST return, I am not convinced that responsibility for the delay properly lies with the defendants. As stated earlier, it is doubtful that the letters relied on by Sanli Group establish a final decision on the defendants’ GST status. The letters are equivocal, and it appears that the IRD had not taken a final stance in respect of the defendants’ GST status prior to

12     Siemer v Stiassny [2011] NZCA 1 at [14].

13     High Court Rules 2016, r 15.1(4).

14     Rule 15.1(1)(a).

15     Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].

16     Attorney-General v Prince & Gardner [1998] 1 NZLR 262 (CA) at 267.

17     Attorney-General v McVeagh [1995] 1 NZLR 558 (CA) at 564.

the issuing of the NOPA. In that sense, Sanli Group jumped the gun in initiating this proceeding when it did.

[47]              However, I cannot, in this summary context, entirely discount the possibility that on amended pleadings Sanli Group might be able to advance a tenable argument that because of the considerable delay, it was robbed of the full benefit of the contractual warranty. Given that the warranty assigned the risk of the defendants’ GST status to the defendants, there might be a tenable argument that they are liable for a temporary breach.

Result

[48]The application for summary judgment is dismissed.

[49]The informal application to strike out the statement of claim is dismissed.

[50]              I invite Sanli Group to make submissions, of no more than four pages, on costs, within 20 working days. The defendants may make their submissions, again of no more than four pages, within a further 10 working days.

Associate Judge Gardiner