Tale Holdings Limited v Commissioner of Inland Revenue
[2016] NZHC 763
•22 April 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-419-000032 [2016] NZHC 763
IN THE MATTER OF the Tax Administration Act and the Goods
and Services Tax Act 1985
BETWEEN
TALE HOLDINGS LIMITED Plaintiff
AND
THE COMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 4-5 April 2016 Counsel:
A C Beck for Plaintiff
A B Goosen and C M Kern for DefendantJudgment:
22 April 2016
JUDGMENT OF COLLINS J
Summary of judgment
[1] Tale Holdings Ltd (Tale) acquired a land subdivision called Delta Subdivision (Delta) from Te Anau Lakeside Estates Ltd (Te Anau). Tale did not pay any money for Delta. Instead, Tale acquired Delta on the basis it would accept liability for a debt of approximately $8.5 million, which Te Anau owed the ANZ National Bank
Ltd (ANZ).1 At the time, the rateable value of Delta was approximately
$4.2 million2 and its market value approximately $3.2 million.3
[2] Tale claimed a GST refund of $936,629.06 based upon the “purchase” price
of Delta.
1 The ANZ subsequently became the National Bank of New Zealand. For convenience I will refer to the bank as the ANZ throughout this judgment.
2 This figure is based on a rateable valuation carried out by the Southland District Council at approximately the time of sale.
3 I explain the basis for this conclusion in [82] to [99].
TALE HOLDINGS LIMITED v THE COMMISSIONER OF INLAND REVENUE [2016] NZHC 763 [22 April
2016]
[3] The Commissioner of Inland Revenue (the Commissioner) denied the GST refund sought by Tale and ordered an additional GST payment of $9,428.06. The total GST refund denied was therefore $946,111.11. She concluded Tale was engaged in a tax avoidance arrangement. The Commissioner also imposed a shortfall penalty of 50 per cent of the GST refund denied to Tale.
[4] I have concluded:
(1)Tale was engaged in an arrangement that had a tax avoidance purpose or effect that was not merely incidental.
(2) The Commissioner was right to disallow (and adjust) the whole of the
GST refund sought by Tale.
(3) The Commissioner’s assessment of a shortfall penalty was correct.
[5] To assist in understanding my conclusions I have divided this judgment into the following topics:
(1) a summary of the Commissioner’s case;
(2) a summary of Tale’s case;
(3) an overview of the law governing tax avoidance; (4) a summary of the issues;
(5) my reasons for concluding there was an arrangement;
(6)my reasons for concluding the arrangement had a tax avoidance purpose or effect;
(7)my reasons for concluding the arrangement had a tax avoidance purpose or effect that was not merely incidental;
(8) my reasons for concluding the Commissioner correctly disallowed
(and adjusted) the whole of the GST refund sought by Tale;
(9) my reasons for concluding the Commissioner’s assessment of a
shortfall penalty was correct; and
(10) a summary of my conclusions.
Summary of Commissioner’s case
[6] Tale is required to demonstrate on the balance of probabilities that the Commissioner has erred in her assessments.4 It is, however, convenient to first set out the position of the Commissioner, and then explain the case for Tale. I have taken this approach because much of the factual background that underpins the Commissioner’s assessments is accepted. In particular, no issue is taken with the facts I summarise in parass [7] to [40].
Te Anau
[7] Te Anau was incorporated in July 2003 to purchase, subdivide and sell Delta, a 39.98 hectare parcel of land in Te Anau. It was envisaged Delta would be subdivided into approximately 240 sections.
[8] Mr Bradley was the sole director of Te Anau. McKerrow Investments
Limited (McKerrow) held 75 per cent of the shares in Te Anau. Approximately
95 per cent of the shares in McKerrow were held by Mr Bradley and members of his family. The remaining 25 per cent of the shares were held by people connected to Mr Bradley. Mr Bradley was a guarantor of Te Anau’s loan from the ANZ. Mr Bradley was also the director and a shareholder of other land development companies including Featherstone Park Developments Ltd (Featherstone).
[9] Mr Wilson, an accountant in Rotorua, was the tax agent for Te Anau. Mr Gowing, a solicitor in Whakatane, was the solicitor for Te Anau.
4 Tax Administration Act 1994, s 149A(2)(b); BNZ Investments Ltd v Commissioner of Inland
Revenue (2008) 23 NZTC 21,821 at [9].
[10] Te Anau engaged Cantab Management Ltd (Cantab) to manage aspects of the Delta development, particularly the marketing and sale of subdivided sections. Mr Osmond was the sole director of Cantab and a major shareholder of Cantab through various shareholding entities.
[11] By August 2009, Te Anau was in considerable financial difficulty. It owed the ANZ approximately $8.5 million and was having difficulty selling sections in Delta because of the effects of the global financial crisis. The debt to the ANZ was secured by way of a mortgage over the titles of Delta.
[12] Mr Osmond explained in his evidence that in August 2009 he attended a meeting at Mr Bradley’s home in Hamilton. Also present at that meeting were Mr Bradley, Mr Wilson, Mr Gowing, two other lawyers, Mr Bradley’s son and Mr Lee (an ANZ manager). At that meeting Mr Lee said it would be in Mr Bradley’s interests if the developments being undertaken by Te Anau and Featherstone could
“become stand alone entities”.5 To achieve this, Delta would need to be sold to a
third party.
[13] Mr Osmond arranged for Te Anau to enter into a conditional sale and purchase of Delta to an entity called Smart Property Sales and Rentals Ltd (SPSRL) or nominee. The sole director of SPSRL at the time was Mr De Jong, who is Mr Osmond’s son-in-law. The shares in SPSRL were substantially owned by members of Mr Osmond’s family through various shareholding entities.
[14] The sale and purchase agreement between Te Anau and SPSRL was dated
31 August 2009 and provided that SPSRL or its nominee would purchase Delta from Te Anau. The purchase price was to be the amount owed to the ANZ by Te Anau at the date of settlement. The agreement was conditional upon:
(1)Te Anau being served with a wind-up application and the application remaining in place 10 days after service.
5 Evidence-in-chief, M A Osmond, 4 April 2006 at [6].
(2) The ANZ consenting to the transfer of Delta to the purchaser with the
mortgage remaining on the titles on the existing terms and conditions.
Tale
[15] On 17 March 2010, Tale was incorporated. The shares in Tale were held by two companies, which were substantially owned and controlled by people and companies associated with Mr Osmond and Cantab. The directors of Tale at the time of its incorporation were members of Mr Osmond’s family.
[16] Tale was a “shell company”. It had no equity and the shareholders paid nothing for their shares. Mr Osmond thought that the Delta project provided members of his family with a risk-free opportunity to have “a go” at a subdivision enterprise.6
[17] On 16 July 2010, Featherstone, which by this stage was in liquidation, served a notice to wind-up Te Anau. The notice stated Featherstone was owed $35,094 for an inter-company loan to Te Anau. The notice to wind-up Te Anau was still in place
10 days after it had been served, thereby fulfilling the first of the conditions of the sale and purchase agreement between Te Anau and SPSRL, referred to in para [14(1)].
[18] In late July 2010, SPSRL nominated Tale as the purchaser of Delta.
[19] On 5 August 2010, Mr Gowing and Mr Wilson became directors of Tale at the insistence of the ANZ. File notes made by officers of the ANZ at this time refer to the ANZ wanting an improvement in the governance arrangements concerning the Delta project.
Acquisition of Delta by Tale
[20] At the time Delta was transferred to Tale, the land in question comprised 14 separate titles. Thirteen of those titles related to individual sites while the 14th title
6 Evidence-in-chief, M A Osmond, 4 April 2016 at [12].
related to approximately 15 hectares comprising approximately 100 sites. At the time the rateable value of the 14 titles was $4,195,000.
[21] Tale did not obtain a valuation of Delta or pay anything for the land. Instead, Tale accepted the titles to the land subject to the mortgage held by the ANZ.
[22] Settlement took place on 20 August 2010. Te Anau issued a settlement statement to the plaintiff for the purchase price of $8,515,744 (including GST). On that date, Te Anau issued a tax invoice to Tale which recorded the sale price at
$8,515,000. That sum included GST of $946,111.18. Te Anau did not pay any GST
in relation to the “sale” of Delta.
[23] On 23 August 2010, the ANZ consented to the transfer of the remaining Delta titles to Tale subject to the mortgage the ANZ held over the titles to the sections. This consent satisfied the second condition of sale, referred to in para [14(2)].
[24] On 15 September 2010, Tale registered for GST with effect from 1 August
2010.
GST Return
[25] On 1 November 2010, Tale lodged a GST return with the Commissioner for the two month period ending 30 September 2010. The return claimed an input of
$8,516,437.51 and a GST refund of $936,629.06.
[26] The GST refund sought was slightly lower than the GST which might otherwise have been claimed on the purchase price because Tale had sold one section for $85,000 during the period covered by the return, thereby generating an output tax setoff.
[27] Mr Osmond, who continued to provide consultancy services to Te Anau as well as Tale through Cantab, explained to the ANZ on 17 September 2010 that it was
“envisaged the GST refund would be paid to the bank”.7
7 Memorandum from Cantab to ANZ, 17 September 2010, common bundle of documents at 281.
[28] On 12 November 2010, the Commissioner notified Tale that she would not be issuing a GST refund until she had verified the validity of Tale’s claim for a GST refund.
Sale of Delta
[29] Te Anau continued to be liable for the debt to the ANZ as Te Anau was not released from its obligations by the bank when it consented to the transfer of Delta to Tale. Under the terms of the mortgage, Tale also continued to be liable to the ANZ for the debts to Te Anau that were secured by the mortgage to the ANZ.8
[30] Tale continued to encounter difficulties in completing aspects of the subdivision and selling sections. To address some of these difficulties the ANZ advanced Tale $102,000 on 28 September 2010. This money was used to pay some creditors of Te Anau. Mr Osmond said he arranged for Tale to pay some creditors in full. Others who were mainly contractors and trades people, deemed to be less important to the future development and sale of Delta, were paid 20 cents in the dollar. Those paid in full included Mr Wilson’s and Mr Gowing’s firms, Cantab and other professional advisors. When preparing the list of creditors who were owed money by Te Anau, Mr Osmond omitted any reference to the Commissioner.
[31] In September and October 2010, Mr Osmond endeavoured to settle Te Anau’s debt to Featherstone. Those efforts failed and as a result Te Anau was liquidated. Mr Bradley, who had guaranteed Te Anau’s debt to the ANZ was then required by the bank to provide a guarantee for the debt Tale owed the ANZ. This was done on
21 December 2010.
[32] The difficulty which Tale encountered in trying to sell the remaining sections is highlighted by the fact that no sections were sold by Tale in 2011. The Commissioner’s records show that Tale returned the following sales as outputs for
GST purposes:
8 Property Law Act 2007, s 203.
Two month GST
period
Sales numbers Price GST paid 30 September 2010
1
$85,000
Nil
31 January 2012
5
$387,000
$34,116
31 March 2012
1
$80,000
Nil
31 May 2012
1
$75,000
Nil
31 January 2013
8
$528,500
Nil
31 March 2014
1
$67,500
Nil
[33] In August 2011, the ANZ engaged Colliers International (Colliers) to value Delta. Colliers’ report related to the 113 remaining sites and concluded the market value of the remaining sections as at September 2011 was $2,680,000 plus GST (if any).
[34] By 17 September 2012, Tale’s liability and that of Mr Bradley in relation to
the Te Anau/Tale debt had grown to $10,166,981.
[35] In May 2013, the ANZ conducted a mortgagee sale in relation to all but one of the remaining Delta sections. The ANZ received $1.75 million from this sale.
[36] The total proceeds of sale by Tale and ANZ of the Delta sections acquired by
Tale was $2.97 million.
[37] Officers of the Inland Revenue Department (the IRD) interviewed Mr Wilson and Mr Gowing on 29 August 2013. In his interview, Mr Wilson explained that he and Mr Gowing “were more bank representatives than directors of [Tale], the bank had to approve all our moves, [and] had to approve and agree with all our
directions”.9 Mr Wilson also explained that he was appointed a director of Tale “to try and protect the bank’s interests”.10 Mr Wilson confirmed to the IRD that once the GST refund “was released [it] was going back to the bank to offset against their mortgages …”.11 Mr Wilson confirmed that Tale was essentially working as a liquidator of the Delta project for the ANZ.12
[38] In his interview with the IRD officers, Mr Wilson said he believed the ANZ had valued Delta at the time the remaining titles to Delta were transferred to Tale. If any valuation was obtained by the ANZ then it appears not to have been disclosed to Mr Wilson or Mr Gowing. The Colliers valuation was the only valuation of Delta obtained by the ANZ which was produced in evidence.
[39] Mr Gowing was scheduled to give evidence in the hearing before me. He was unable to do so because he was overseas. Mr Gowing’s statement to an IRD officer and his written evidence-in-chief were admitted by consent.
[40] In his interview with an IRD officer, Mr Gowing said it was intended Tale would complete the Delta development with finance from the ANZ and sell the properties to repay the bank. He also said Tale would be entitled to a GST refund and that half of that refund would be used to reduce the debt owed to the ANZ.13
Mr Gowing further said:14
… [T]he objective … was to … try and get the bank settled and if that occurred then that had the benefit of … reducing Mr Bradley’s exposure …
Commissioner’s assessment
[41] On 28 November 2014, the Commissioner informed Tale that she had assessed Tale’s claim for GST for the period ending 30 September 2010 and had decided to deny a GST refund of $946,111.11 and to impose a shortfall penalty of
$473,055.55 pursuant to ss 141D and 141FB of the Tax Administration Act 1994 (the
Tax Administration Act).
9 IRD interview with S Wilson, 29 August 2013, common bundle of documents at 632.
10 At 640.
11 At 641.
12 At 660.
13 IRD interview with R Gowing, 29 August 2013, common bundle of documents at 684.
14 At 693.
[42] In summary, the Commissioner’s case is that Tale and others entered into an arrangement which was contrived and artificial. The Commissioner says that the sale of the Delta properties to Tale was designed to look like a genuine sale but because of the liability that attached to the properties in question, normal market forces were not engaged. The Commissioner says Tale was a party to an arrangement entered into for the purpose of obtaining a GST refund which was ultimately designed to benefit the ANZ and Mr Bradley in his capacity as guarantor.
Summary of Tale’s case
[43] The case for Tale is that the steps taken to transfer the Delta titles from Te Anau to Tale were legitimate commercial measures designed to protect the various development projects that were being undertaken by Mr Bradley through a number of entities, including Te Anau and Featherstone. Mr Beck, counsel for Tale, emphasised that while Te Anau had clearly experienced financial difficulties, the Delta project had some value and a commercial solution was put in place to preserve the value of that project. This involved finding a buyer who was willing to continue the Delta project.
[44] It is part of Tale’s case that the steps taken in August 2010 to transfer the remaining Delta titles to Tale were done with the full support of the ANZ, which wished to ensure the Delta project would be completed successfully. This is why the ANZ insisted on the appointment of Mr Gowing and Mr Wilson as independent directors of Tale.
[45] It is also the case for Tale that the tax invoice issued by Te Anau on
20 August 2010 was legitimate and that Tale was entitled to the GST refund claimed.
[46] Mr Beck submitted that even if there were an arrangement that had the effect of avoiding tax, the effect was merely incidental and Tale was entitled to the GST refund claimed.
[47] Mr Beck also submitted that if it were found that there was a tax avoidance arrangement, then the Commissioner’s assessment of the amount of GST that she
disallowed was wrong. He also submitted that there was no basis for the
Commissioner to impose a shortfall penalty.
An overview of Tax Avoidance Law
Section 76 of the Goods and Services Tax Act 1985
[48] The Commissioner’s case is based on the premise Tale was engaged in a tax avoidance arrangement under s 76 of the Goods and Services Tax Act 1985 (the GST Act).
[49] The relevant provisions of s 76 of the GST Act provide:
76 Avoidance
(1) A tax avoidance arrangement entered into by a person is void against the Commissioner for tax purposes.
(2) A tax avoidance arrangement is one that directly or indirectly—
(a) has tax avoidance as its purpose or effect; or
(b) has tax avoidance as one of its purposes or effects, whether or not another purpose or effect relates to ordinary business or family dealings, if the purpose or effect is not merely incidental.
(3) If a tax avoidance arrangement is void against the Commissioner, the Commissioner may adjust the amount of tax payable by, or the amount of tax refundable to, a registered person affected by the arrangement, whether or not the registered person is a party to the arrangement, in the manner the Commissioner considers appropriate to counteract any tax advantage obtained by the registered person from or under the arrangement.
…
(8) For the purpose of this section–
arrangement means a contract, agreement, plan or understanding, whether enforceable or unenforceable, including all steps and transactions by which it is carried into effect
tax avoidance includes—
(a) a reduction in the liability of a registered person to pay tax: (b) a postponement in the liability of a registered person to pay
tax:
(c) an increase in the entitlement of a registered person to a refund of tax:
(d) an earlier entitlement of a registered person to a refund of tax:
(e) a reduction in the total consideration payable by a person for a supply of goods and services.
[50] In Glenharrow Holdings Ltd v Commissioner of Inland Revenue (Glenharrow)15, Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue (Ben Nevis)16 and Penny v Commissioner of Inland Revenue (Penny),17 the Supreme Court explained the law governing tax avoidance in New Zealand. Glenharrow concerned s 76 of the GST Act. Ben Nevis and Penny concerned s BG1 of the
Income Tax 1994 (the Income Tax Act) which is, in all material respects, the same as s 76 of the GST Act. Both s 76 of the GST Act and s BG1 of the Income Tax Act are general anti-avoidance provisions.
Relationship between general anti-avoidance provisions and specific provisions
[51] In Ben Nevis, the Supreme Court examined the relationship between s BG1 of the Income Tax Act and specific provisions of that Act. The majority in Ben Nevis explained how s BG1 was to be reconciled with specific provisions when it said:18
… [T]hey are meant to work in tandem. Each provides a context which assists in determining the meaning and, in particular, the scope of the other. Neither should be regarded as overriding. Rather they work together …
[52] In Penny, the Supreme Court also said:19
… [T]he policy underlying the general anti-avoidance provision is to negate any structuring of a taxpayer’s affairs whether or not done as a matter of “ordinary business or family dealings” unless any tax advantage is just an incidental feature …
… But what the [Income Tax] Act does require of taxpayers is that they should not structure their transactions with a more than merely incidental
15 Glenharrow Holdings Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR
359.
16 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2
NZLR 289.
17 Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433.
18 Ben Nevis, above n 16, at [103].
19 Penny, above n 17, at [47] and [49].
purpose of obtaining a tax advantage unless that advantage was in the contemplation of Parliament …
(Footnotes omitted)
[53] The majority of the Supreme Court explained in Ben Nevis that the test for tax avoidance involves two discrete steps. The first step involves an assessment of whether the taxpayer has met the requirements of the specific provisions relied upon by the taxpayer to achieve the tax result argued by the taxpayer. If the specific provisions have not been complied with, then the taxpayer is not entitled to the tax benefits he or she has claimed. 20
[54] The second step requires an examination of the use of the specific provisions in light of the arrangements as a whole:21
… a further question arises based on the taxpayer’s use of the specific provision viewed in the light of the arrangement as a whole. If, when viewed in that light, it is apparent that the taxpayer has used the specific provision, and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement …
[55] The majority of the Supreme Court in Ben Nevis provided guidance as to the circumstances in which Parliament would not have contemplated the use of specific provisions of the Income Tax Act to obtain a tax advantage. The same conditions are relevant to s 76 of the GST Act. The relevant factors referred to by the Supreme Court included:22
(1) The manner in which the arrangement was carried out.
(2)The role of all relevant parties and the relationship they have with the taxpayer.
(3) The economic and commercial effect of the transactions in issue.
20 Ben Nevis, above n 16, at [107].
21 At [107].
22 At [108].
(4)The nature and extent of the financial consequences of the arrangement.
The Supreme Court also concluded that a “classic indicator” of a use outside
Parliamentary contemplation is:23
… the structuring of an arrangement so that the taxpayer gains the benefit of
the specific provision in an artificial or contrived way...
[56] The majority of the Supreme Court in Ben Nevis proceeded to explain that:24
In considering these matters, the courts are not limited to purely legal considerations. They should also consider the use made of the specific provision in the light of the commercial reality and the economic effect of that use. The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament’s purpose.
… If the use of the specific provision is beyond parliamentary contemplation, its use in that way will result in the arrangement being a tax avoidance arrangement.
[57] The test articulated by the majority of the Supreme Court in Ben Nevis recognises that general anti-avoidance provisions of New Zealand’s tax legislation cannot anticipate a taxpayer’s ingenuity in crafting arrangements.25 Rather, the general anti-avoidance provisions work by the Court asking itself if Parliament had foreseen transactions of the type in question when enacting the specific provisions deployed, whether it would have contemplated the arrangement was within the scheme and purpose of those specific provisions. If not, the transactions will be a tax avoidance arrangement. This assessment will usually involve an examination of
both the law and the evidence.
[58] The parties agree that Tale met the specific requirements of the GST Act concerning its claim for a GST refund. Thus, there is no need to inquire into the first of the two steps referred to by the Supreme Court in Ben Nevis when setting out the approach to tax avoidance in New Zealand.26 The second step in Ben Nevis
underscores the first three of the following issues.
23 Ben Nevis, above n 16, at [108].
24 At [109].
25 At [101].
26 Refer paragraph [53] above.
The issues
[59] The issues in the present case can be distilled into five questions:
(1) Was there an “arrangement” for the purposes of s 76 of the GST Act?
(2) If there were an “arrangement”, did that arrangement have a tax
avoidance purpose or effect?
(3) If there were an “arrangement”, did it have a tax avoidance purpose or
effect that was not merely incidental?
(4)If there were a tax avoidance arrangement, was it wrong for the Commissioner to have disallowed (and adjusted) the whole of the GST refund sought by Tale?
(5) Was the Commissioner’s assessment of shortfall penalties correct?
Was there an “arrangement” for the purposes of s 76 of the GST Act?
[60] For there to be an arrangement for the purposes of s 76 of the GST Act there need only be “a contract, agreement plan or understanding … including all steps and transactions by which it is carried into effect”27 between two or more entities.
[61] In the Court of Appeal judgment of Commissioner of Inland Revenue v
Penny, the Court of Appeal observed that:28
... the expression “arrangement” is very broadly defined. Something less than an enforceable contract may constitute an arrangement for tax purposes. It may include a plan or understanding and also embraces all steps and transactions by which an arrangement is carried into effect ...
[62] Parliament has deliberately defined the concept “arrangement” as used in s 76 of the GST Act in very broad terms. An “arrangement” may encompass a series of decisions and steps which, taken together constitute an arrangement, plan or
understanding. The concept “arrangement” covers “all kinds of concerted action by
27 GST Act, s 76(8).
28 Commissioner of Inland Revenue v Penny [2010] NZCA 231, [2010] 3 NZLR 360 at [70].
which persons may arrange their affairs for a particular purpose or so as to produce a
particular effect”.29
[63] In Petersen v Commissioner of Inland Revenue, the Privy Council explained that the Commissioner is entitled, at her option, to identify the whole or any part or parts of a single composite scheme as the “contract, agreement, plan or understanding” that constitutes the “arrangement” for the purposes of s 76 of the GST Act.30
[64] Mr Goosen, senior counsel for the Commissioner, submitted an “arrangement” for the purposes of s 76 of the GST Act could be construed from the following “agreement, contract, plan or understanding” involving Te Anau, SPSRL, Tale, the ANZ and Mr Bradley:
(1) Te Anau and SPSRL entering into the sale and purchase agreement.
(2) The sale and purchase agreement becoming unconditional when
Te Anau failed to pay the demand issued by Featherstone for $35,094.
(3)SPSRL nominating Tale and Tale accepting the nomination to purchase Delta from Te Anau.
(4)Te Anau and Tale failing to take steps to make the sale of Delta a zero rated sale of a going concern.
(5) The ANZ agreeing the term in the sale and purchase agreement that
Delta be transferred to Tale with the mortgage remaining on the titles.
(6)Te Anau issuing a GST tax invoice for the sale of Delta and failing to return or pay the output tax on the sale.
29 Bell v FC of T (1953) 87 CLR 548, cited with approval by Richardson P in Commissioner of Inland Revenue v BNZ Investments Ltd (2001) NZTC 17,103 (CA) at [46]; see also Elmiger v Commissioner of Inland Revenue [1967] NZLR 161 (CA) per North P; James Coleman Tax Avoidance Law in New Zealand (2nd ed, CCH New Zealand Ltd, 2013) at 51.
30 Peterson v Commissioner of Inland Revenue [2006] 3 NZLR 433 (PC) at [33].
(7) Tale claiming a GST input tax return in respect of the purchase of
Delta.
[65] Mr Beck was very critical of the Commissioner’s case that there was an arrangement for the purposes of s 76 of the GST Act. Mr Beck pointed out that the Commissioner’s arguments had evolved from her claiming in her Notice of Proposed Adjustment (NOPA) dated 11 June 2014 that the “arrangement” comprised 15 steps31 to a claim in her Statement of Position (SOP) dated 26 September 2014 that the
arrangement comprised 12 steps.32 Mr Beck suggested the Commissioner’s case
31(1) On 31 August 2009, Te Anau, in consultation with Cantab, drew up a sale and purchase agreement to sell Delta to SPSRL or nominee.
(2) On 17 March 2010 Tale was incorporated.
(3) On 5 August 2010, Mr Wilson and Mr Gowing were appointed directors. (4) Tale was nominated as the purchaser.
(5) On 20 August 2010, the titles were transferred to Tale, a tax invoice for the GST inclusive amount of $8,515 was issued to Tale, the debt remained in the account of Te Anau, all securities remained in place.
(6) On 23 August 2010, Te Anau was liquidated.
(7) Te Anau failed to file the GST return for the period ended 31 August 2010 to account for the output tax on the sale of Delta.
(8) The last GST return filed by Te Anau was for the period ended 31 July 2010.
(9) On 23 August 2010, ANZ consented to the transfer of the parcel of land from Te Anau to
Tale.
(10) On 28 September 2010, the important creditors of Te Anau were paid upon the direction of the ANZ.
(11) On 1 November 2010, Tale lodged a GST claim for the period ended 30 September 2010 claiming the GST input credit of $946,111 on the Delta purchase.
(12) ANZ diary note stated that the security provided by Mr Bradley was to remain in place.
Mr Bradley provided another guarantee dated 21 December 2010 for the debt to the ANZ
taken over by Tale from Te Anau.
(13) The value of the sale was set at what was owed to ANZ at settlement rather than the market value.
(14) The treatment of the supply by Tale and Te Anau as a standard rated rather than a zero rated supply.
(15) The non-payment of output tax liability by Te Anau.
Commissioner’s Notice of Proposed Adjustment, 11 June 2014 at [114], common bundle of
documents at 587.
32 (1) Te Anau and SPSRL (or nominee) entered into the agreement in respect of Delta.
(2) A decision was made to standard rate the supply rather than to zero rate the supply.
Te Anau and SPSRL did not record in writing the intention that the supply would be capable of being carried on as a going concern.
(3) The agreement would only trigger if Te Anau was served with an application for its liquidation, and that liquidation action was not withdrawn within 10 working days from the date of service.
(4) The purchase price under the agreement was to be the amount secured by the mortgage held by the bank, not the market value of the property being transferred.
(5) Tale was incorporated.
(6) Tale was nominated as the purchaser under the agreement, pursuant to a deed of nomination between SPSRL and Tale.
(7) On 16 July 2010, Te Anau was served with a liquidation application by Featherstone’s
liquidator, which was not withdrawn by Te Anau within the relevant timeframe of
10 working days following service.
before me reflected a further change in position about the composition of the arrangement.
[66] Mr Beck was particularly critical of what he said was the Commissioner identifying for the first time, two new steps in the “arrangement”, namely the failure of Te Anau to take steps to avoid liquidation and the failure of Te Anau and Tale to take steps to make the transaction zero rated. Mr Beck further submitted that the inability of the Commissioner to identify accurately what the alleged arrangement was, pointed to an inherent weakness in the Commissioner’s case, namely, that there was not an agreement which could be clearly identified as constituting an arrangement for the purposes of s 76 of the GST Act.
[67] I do not think Mr Beck’s criticisms of the Commissioner’s position are correct. The NOPA issued by the Commissioner refers to the failure of Te Anau and Tale to make the transaction zero rated and the Commissioner’s SOP contains an implication that the liquidation of Te Anau was part of the arrangement.
[68] It is axiomatic that the Commissioner should be as precise as possible when identifying what constitutes an arrangement for the purposes of s 76 of the GST Act. The Commissioner’s statutory obligations, however, do not extend to providing the taxpayer with an extensive analysis of the facts and law she relies upon. All that is required is “a concise statement of the key facts and the law in sufficient detail to inform the [taxpayer] of the grounds of the Commissioner’s proposed adjustment”
(emphasis added).33
[69] The Commissioner can identify the whole arrangement or elements of the arrangement when invoking s 76 of the GST Act. Where a subset or element of a
(8) In consequence, the condition in the sale and purchase agreement was satisfied and the agreement became a “live contract”.
(9) With the approval of the [ANZ] the GST refund expected to result from the transfer of the property was transferred to Tale subject to the previous mortgage.
(10) Te Anau issued a GST tax invoice for the property purchase.
(11) Te Anau did not return the sale for GST purposes and did not pay the output tax liability. (12) Tale claimed an input tax deduction for the purchase price based on the value of the bank
loan that it assumed liability for as a consequence of the statutory provisions of the
Property Law Act 2007.
Commissioner’s statement of position, 26 September 2014 at [152], common bundle of
documents at 808.
33 Tax Administration Act 1996, s 89F(2)(b).
wider arrangement is nominated however, that subset or element must, in itself, meet
the definition of “arrangement”.34
[70] There is no doubt aspects of the Commissioner’s case about what constituted the arrangement in this case has evolved. There are however five key elements that have remained since the time the Commissioner issued her NOPA. These satisfy the very broad definition of “arrangement” for the purposes of s 76 of the GST Act.
[71] In my assessment, the “arrangement” in this case comprises the following
five key elements:
(1)At the time of the sale and purchase agreement between Te Anau and SPSRL, Te Anau and the ANZ had an understanding that the future development and sale of Delta would be structured in a way that would provide the best protection for Te Anau and the ANZ.
(2)The sale and purchase price between Te Anau and Tale was set solely by reference to the amount which Te Anau owed the ANZ as at the date of settlement.
(3)Te Anau and Tale agreed to the ANZ’s requirement that the sections acquired by Tale would continue to be subject to the mortgages held by the ANZ on exactly the same terms and conditions.
(4)Te Anau issued a GST tax invoice for the purchase but did not pay any output tax.
(5)Tale filed its claim for the GST refund anticipating the refund would be paid to the ANZ and used wholly or in part to repay part of the mortgage held by the ANZ over the Delta titles.
[72] There were at least two parties to this arrangement, namely Te Anau and Tale. It is possible others may also have been parties to the arrangement, including
34 Peterson v Commissioner of Inland Revenue, above n 30, at [33]; Alesco New Zealand Ltd v
Commissioner of Inland Revenue (No 2) [2012] 2 NZLR 252 (HC) at [11]-[14] and [39].
SPSRL, the ANZ, Mr Bradley and Cantab.35 It is however not necessary to go beyond identifying Te Anau and Tale as parties to the arrangement.
[73] It is also likely there were other elements to the arrangement, including decisions not to zero rate the transaction or to take steps to avoid the liquidation of Te Anau. Those additional possible elements of the arrangement were of a second tier nature rather than the key elements that were ultimately relied upon by the Commissioner. Tale has always understood that the five elements of the arrangement I have identified in para [71] formed the basis of the Commissioner’s assessments.
[74] Tale has not been able to establish on the balance of probabilities that the Commissioner was wrong in relation to her assessment that the five elements I have identified constituted an “arrangement” for the purposes of s 76 of the GST Act. I am therefore satisfied the Commissioner was correct when she concluded there was an “arrangement” for the purposes of s 76 of the GST Act.
Did the “arrangement” have a tax avoidance purpose or effect?
[75] A taxpayer’s subjective motive or purpose is irrelevant in deciding if an impugned arrangement has a tax avoidance purpose or effect. The Supreme Court in Glenharrow held that it is for the Court to objectively determine the purpose and effect of the arrangement. This is achieved by considering the effect of the arrangement and then working backwards to objectively determine what the purpose of the arrangement was.
[76] The Supreme Court in Glenharrow explained:36
… whether or not a particular arrangement constitutes tax avoidance should not depend on difficult judgments about what the taxpayer had in mind. If it did, a scheme which was void, if devised and implemented by one taxpayer, could be immune from s 76 [of the GST Act] if developed by another in
35 The ANZ, Mr Bradley and SPSRL did not give evidence and were not represented in the proceeding before me. I have therefore been cautious about reaching any conclusions adverse to them. As it transpires, the evidence before me was so compelling that it has not been necessary to reach conclusions that are directly critical of the ANZ, SPSRL or Mr Bradley. I record, however, that I have put to one side suggestions in bank diary notes that the ANZ and Tale had an intention to engage in a profit sharing arrangement. The evidence concerning this suggestion is inconclusive, and I have not relied upon it when determining there was an arrangement.
36 Glenharrow, above n 15, at [35] and [38].
different circumstances. That cannot be so, for such an approach would produce different results for identical arrangements depending on whether the parties were or were not driven wholly or in part by a desire to produce a particular tax consequence. It would also require the courts to assess the veracity of the parties, who are always likely to say that tax consequences were not in the forefront of their minds …
…
… the general anti-avoidance provision [is] concerned not with the purpose of the parties, but with the purpose of the arrangement. That is a crucial distinction. Once you put the purpose of the parties to one side and seek by objective examination to find the purpose of the arrangement, you must necessarily do that by considering the effect which the arrangement has had
– what it has achieved – and then, by working backwards as it were from the effect, you are able to determine what objectively the arrangement must be taken to have had as its purpose …
[77] In considering the purpose or effect of the arrangement it is convenient to first examine the objective of the GST regime, and then focus upon the effect and purpose of the arrangement in this case.
Objectives of the GST regime
[78] In Glenharrow, the Supreme Court explained the general nature of the GST
regime. The Supreme Court said:37
Broadly speaking, GST is a type of value-added tax. It is fundamentally an indirect tax levied on transactions with consumers. The legislation envisages that, for a business, over time the net impact will be an impost of GST on the value which the business adds to the goods and services it supplies. GST has been likened to a turnover tax (the outputs are the turnover) but with provision for offsetting deductions (or credits) for the GST content of input costs (the expenses incurred in producing the outputs).
...
GST utilises the invoice or credit-offset system. Consequently, and differing from other forms of consumption tax, GST is a multi-stage tax imposed on the value added at every stage of the business activity by which goods or services reach the ultimate consumer. It is a tax on final consumption because it is the sum of the value added by firms at each stage of the supply chain that consumers ultimately purchase and consume. Registered persons producing taxable supplies effectively operate as tax collectors on behalf of the government and as such are not themselves subject to GST’s economic incidence. That is of course consistent with the neutrality and efficiency of the revenue collection rationales that underlie the Act. The corollary is that
37 Glenharrow, above n 15, at [41] and [43].
registered persons should, by the same token, not obtain unacceptable windfall gains from the regime.
(Footnotes omitted)
[79] The overall efficacy of the GST regime relies on businesses making a profit. In doing so, over time, businesses may pay more output tax than they claim as input tax. Over time, the net impact will be an impost of GST on the value which a business adds to the goods and services it supplies.38 The GST scheme recognises, however, that there is always a risk that a business will not make a profit. The Supreme Court addressed this point when it said in Glenharrow:39
From a reading of the Act as a whole it is clear that the legislature anticipated that, for a trader in goods and services, there will over time usually be some balancing out or netting off of the GST components of sales and purchases. There will obviously be timing differences. Goods and services will frequently not be both bought and sold in the same GST period but the Act appears to have been drafted with an anticipation that in the long run, and broadly speaking, appropriate offsetting will occur. In fairness, however, where a cost of acquisition precedes the return from a sale, a deduction is made available in advance of the arrival of that return. Where this occurs there is always the risk that the return which eventuates will not be as great as the cost of acquisition, or there will be a nil return. That is a risk which the Act requires the [Inland Revenue Department] to accept as within a normal range of trading results, in the same way as it is able to take a greater benefit where a return from a business transaction is unusually large. The intent and the application of the Act accommodates such variables. Where transactions are between traders the Act is effectively self- policing because both must account for GST. There is limited opportunity for manipulation if the parties are at arm’s length. The consideration they agree upon can be expected to be an open market value …
...
… The whole premise of the Act generally … is that transactions will be driven by market forces: that their commercial and fiscal effects will be produced by those forces and will not contain distortions which affect (that is, defeat) the contemplated application of the GST Act. It is when market forces do not prevail that s 76 is available to the Commissioner.
[80] The following two features of the GST regime referred to by the Supreme
Court in Glenharrow are particularly relevant to the present case:
38 Glenharrow, above n 15, at [41].
39 At [44] and [47].
(1)The GST regime contemplates that transactions will be driven by market forces. That is to say, the GST Act does not contemplate transactions will be structured in a contrived and artificial way.
(2)The GST Act contemplates that over time there will be a netting off of the GST component of sales and purchases. The GST Act does not contemplate a taxpayer claiming GST input when there is no possibility of output tax being paid over time.
Purpose of the arrangement
[81] I propose to examine the purpose of the arrangement by focusing upon three features of the transaction:
(1) The artificiality of the purchase price. I will deal with this topic
under the heading, the “market value of Delta”.
(2) The fact Tale did not pay anything for Delta. I deal with this topic
under the heading “nature of the transaction”.
(3) The fact the transaction was unlikely to result in GST being paid. I
deal with this factor under the heading “effect of the transaction”.
Market value of Delta
[82] The most striking feature of the arrangement in this case was the way the sale and purchase price for Delta was devised in the contract between Te Anau and Tale.
[83] Tale accepts that the purchase price for Delta was determined solely on the basis of what Te Anau owed the ANZ as at the date of settlement.
[84] Tale did not obtain an independent valuation to determine if the price it was to pay for Delta bore any resemblance to its market value.
[85] In his evidence before me, Mr Wilson said that at the time Tale purchased Delta he was of the view Delta was worth more than $8.5 million. Mr Wilson’s evidence on this point was as follows:40
Q. But you didn't know the value of Delta?
A. We believed at the time the value of the Delta far in excess of the
$8.5 million debt taken on.
Q. What did you base that on?
A. The feeling at the time of all the parties involved, the bank. Q. The bank obtained a valuation?
A. The bank had obtained previous valuations, they had, they were not made party to us and at that time, well this probably was back in
2009, we all believed a valuation was between [$]12 and $14 million. So at those times property development was ramping
ahead. Yes we had seen a slowdown in the market. We believed it short-term and there was no reason at that time, 2009/10, why we couldn’t continue to receiving the [$]12 to $14 million from the
section sales.
[86] As I have previously noted, the only valuation of Delta commissioned by the ANZ was that prepared by Colliers in September 2011, more than a year after Tale acquired Delta.
[87] Mr Osmond acknowledged he never engaged in independent expert to value Delta. Instead, Mr Osmond said he did some basic calculations which he described as “doodles” based on what he said were the remaining 120 sections having an average value of $120,000. Mr Osmond’s evidence was:41
Q. Did you prepare written calculations?
A. Apart from doodles … I can’t recall typing up a proposal but we had a family meeting and discussed it and I did basically the assessment I did a minute ago. There’s 120 sections, average about $120,000, take off the GST, you’ve got about $12 million. There’s about $7.5 million owing. There’s, on the face of it, a profit.
Q. Right. So you didn’t … appoint an independent expert valuer did you?
A. No. No.
40 Notes of Evidence at 6, lines 31-34 and 7, lines 1-11.
41 At 57, lines 20-27.
[88] The evidence advanced on behalf of Tale about the value of Delta in the range of $12 to $14 million at the time it was acquired on 20 August 2010 contrasts markedly with four pieces of evidence relied upon by the Commissioner.
[89] First, Ms Loh, an IRD investigator, obtained evidence about the rateable value of the 14 Delta titles acquired by Tale. That rateable valuation was based upon a valuation undertaken by the Southland District Council in September 2009. Ms Loh’s evidence was that the rateable value of the 14 lots in question was
$4,195,000.
[90] Second, the valuation undertaken by Colliers in September 2011 concluded that the market value of the 113 sites that had by that stage not been sold was
$2,680,000. By that stage Tale had sold just one section for $85,000.
[91] Third, the sales of Delta undertaken by both Tale and the ANZ ultimately realised just $2.97 million. I appreciate the sales conducted by the ANZ were mortgagee sales and that it is likely the sections were sold by the ANZ at prices which were lower than might otherwise have been obtained if normal market forces had applied. Nevertheless, it is striking that the actual prices obtained by Tale and the ANZ were not significantly different from the valuation undertaken by Colliers.
[92] Fourth, the Commissioner arranged for Mr McPhail to undertake an assessment of the commercial and economic merits of Tale acquiring Delta for
$8,515,000 on 20 August 2010. Mr McPhail is not a registered land valuer. He is however, an expert in valuing businesses. Mr McPhail’s extensive analysis led him to conclude a prudent investor in August 2010 would not have paid significantly more than $3.2 million for Delta, and would not have assumed liability for $8.5 million, which Tale did when it acquired Delta. Mr McPhail also concluded a prudent investor would have appreciated in August 2010 that by assuming liability for the $8.5 million which Te Anau then owed the ANZ, the prospect of Tale making a profit was extremely remote.
[93] It is telling that Tale did not produce any independent evidence to support
Mr Wilson and Mr Osmond’s assumptions about the value of Delta at the time it was
acquired by Tale.42 Nor did Tale produce any evidence to contradict Mr McPhail’s careful analysis about the striking lack of commercial value to the transaction between Te Anau and Tale.
[94] I will not allow the benefit of hindsight to distort my judgement about the market value of Delta at the time it was acquired by Tale. It is clear to me, however, that Mr Osmond and Mr Wilson’s assumptions about the value of Delta were, at the time, profoundly optimistic.
[95] In my assessment, the valuation prepared by Colliers in September 2011 and the expert evidence of Mr McPhail, provide the most accurate guidance as to the true market value of Delta at the time it was acquired by Tale.
[96] The Colliers valuation used the direct comparison methodology to assess the average value of each section to be $105,442. Colliers then used the discounted cashflow approach to derive at an overall value of $2.683 million.
[97] Mr McPhail used a similar valuation methodology to that followed by Colliers when he assessed the value of Delta as at August 2010. Mr McPhail’s calculations led him to conclude that at the time Tale acquired Delta the land was worth approximately $3.2 million.
[98] I am satisfied that the market value of Delta at the time it was acquired by Tale was approximately $3.2 million. This conclusion is based upon Mr McPhail’s helpful analysis which in turn applied the same methodology used by Colliers. The approach taken by Colliers and Mr McPhail was orthodox. The comparatively small difference in the assessments by Mr McPhail and Colliers is explained by the passage of time from when the transaction occurred, which was Mr McPhail’s point
of reference, to when Colliers undertook its valuation.
42 I have put to one side a valuation prepared by a Mr Ure for Westpac New Zealand Ltd in August
2014 for three reasons. First, that valuation related to only part of Delta. Second, that valuation was completed four years after the transaction and therefore of little direct relevance to the value of Delta as at August 2010. Third, Mr Ure’s valuation failed to have regard to the time required to sell sections and the costs associated with the sales of sections; refer to the evidence of S J McPhail, 5 April 2016 at [74].
[99] Mr Beck did not cross-examine Mr McPhail. Tale chose not to call any evidence to challenge the conclusions reached by Mr McPhail and Colliers. The fact Mr McPhail and Colliers used widely recognised methods when reaching their conclusions leads me to my conclusion that Mr McPhail’s assessment of the market value of Delta at the time it was required by Tale was accurate.
Nature of the transaction
[100] It is significant that Tale did not actually pay any money to Te Anau for Delta. Instead, Tale agreed to accept liability for the debt Te Anau had incurred with the ANZ.
[101] I am satisfied that the transaction at the heart of the arrangement was not a normal commercial transaction. The shareholders of Tale provided no equity and had no capital at risk. The price at which Tale acquired Delta was set by reference to Te Anau’s debt to the ANZ, not the real value of the land in question. This was clearly a contrived and artificial transaction, which was designed to serve the interests of the ANZ and probably Mr Bradley. Tale was merely a vehicle to mitigate the losses which the ANZ and probably Mr Bradley were likely to suffer.
Effect of the transaction
[102] A further feature of the arrangement was that the interests of the ANZ were secured by a mortgage over the 14 titles to Delta acquired by Tale. This in itself was not unusual. The effect of this aspect of the arrangement, however, had GST consequences.
[103] Under a mortgagee sale, the claims of the Commissioner for payment of GST take priority over the mortgagee’s right to recover the principal sum and interest under the mortgage.43 The position is different however, where a mortgagee does not exercise a power of sale but allows a debtor to sell the property that is subject to the mortgage. A mortgagee who receives money from such a sale does not have to
retain the output tax. The mortgagee is entitled to be paid the full amount of the debt
43 GST Act 1985, ss 5(2) and 17; Edgewater Motel Ltd v Commissioner of Inland Revenue [2004] UKPC 44 at [4].
covered by the mortgage and the seller is not entitled to retain any proceeds of the sale to pay the GST on the sale.44
[104] The arrangements put in place in August 2002 meant that because Tale would be unlikely to sell Delta at a price greater than the amount required to repay the ANZ mortgage in full, Tale would only ever be able to pay output tax on the sales of Delta to the extent which the ANZ would allow. Tale would thus be claiming and recovering an input tax deduction and not paying the output tax that would normally be expected where transactions are governed by ordinary market forces. This is what transpired. Only $34,116 of GST was paid by Tale in respect of the sale of five sections and subsequently no GST was paid in respect of the return of 12 lots of land before the ANZ finally stepped in and sold Delta under a mortgagee sale.
[105] Judged objectively, I am in no doubt the plan put in place when Tale acquired Delta from Te Anau on 20 August 2010 was designed to minimise the losses which the ANZ and probably Mr Bradley were going to suffer if Te Anau failed.
[106] Part of the plan involved Tale obtaining a GST refund based upon the sale price for Delta. That GST refund, which was likely to be the most significant source of revenue for Tale, at least in the first few months of its existence, was to be used to reduce the debt owed by Te Anau and Tale to the ANZ. If the GST refund had been paid by the Commissioner and applied to the debt owed to the ANZ, Mr Bradley’s exposure to the bank would also have been reduced.
[107] The arrangement depended on Tale receiving a GST refund based upon a “sale” price that was contrived and artificial. The “sale” price for Delta bore no resemblance to the market value of Delta. In addition, it was obvious because the debt to the ANZ was secured by way of a mortgage, the Commissioner was unlikely to receive any GST payments from Tale.
[108] Allowing Tale to obtain a GST refund for the acquisition of Delta in such circumstances defeats the revenue collection purpose of the GST Act and does not
44 Rob Mitchell Builder (in liquidation) v National Bank of New Zealand Ltd (2004) 21 NZTC
18,397 (CA).
result in a netting off of inputs and outputs over time. If the GST claim had been allowed in this case, Tale and the ANZ would have received an unacceptable windfall gain from the arrangement.45
[109] The arrangement in this case was designed to alter the incidence of GST in a way which could not have been within the contemplation and purpose of Parliament when it enacted the GST Act. The arrangement clearly had a tax avoidance purpose or effect.
Did the arrangement have a tax purpose or effect that was not merely incidental?
[110] Tale submitted that if it is found that there was a tax avoidance arrangement for the purposes of s 76 of the GST Act, its case falls within the “merely incidental” exception set out in s 76(2)(b) of the GST Act.
[111] Tale argues that the tax purpose or effect it endeavoured to achieve was a natural consequence of its legitimate commercial objectives.
[112] The difficulty with this aspect of Tale’s case is that the test the Supreme Court advanced in Ben Nevis for identifying a tax avoidance purpose or effect was substantially the same as the test which was developed in Challenge Corporation Ltd to determine if the tax avoidance purpose was merely incidental.46
[113] It is for this reason the Supreme Court said in Ben Nevis that it will rarely be the case that, if a specific provision is used outside of Parliamentary contemplation, the tax avoidance purpose or effect will be merely incidental.47
[114] The insurmountable obstacles to Tale’s submission that its arrangement fell
within the merely incidental exception in s 76 of the GST Act can be succinctly summarised.
45 Glenharrow, above n 15, at [43].
46 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (CA).
47 Ben Nevis, above n 16, at [114].
[115] First, Tale frankly acknowledges that it was part of the plan it engaged in that it would receive a GST refund, which was going to be applied to the debt owed to the ANZ.
[116] Second, Tale is forced to accept that the obtaining of a GST refund was a key objective in itself. The GST refund sought by Tale was likely to be its most significance source of revenue, at least in the initial stage of Tale’s role in the development and sale of Delta.
[117] Third, the GST refund that was sought was based on a contrived and artificial price that had no resemblance to the true market value of Delta and involved the suspension of ordinary market forces.
[118] By any objective standard, the GST refund sought by Tale was not merely incidental to the commercial decisions of the parties to the arrangement. The assessment was a “tax avoidance arrangement” which did not come close to falling within the “merely incidental” exception in s 76(2)(b) of the GST Act.
Was it wrong for the Commissioner to have disallowed (and adjusted) the whole of the GST refund?
[119] Tale takes issue with the Commissioner’s decision to disallow the entire GST refund sought and the adjustments which the Commissioner made to reflect the section sold in September 2010. Mr Beck submitted the Commissioner’s decision went beyond counteracting a tax advantage and amounted to a forfeiture. He suggested that if the transaction had an inflated value then the Commissioner was required to reconstruct the transaction and assign an appropriate value to it in order to calculate the true GST refund to which Tale was entitled.
[120] Mr Beck submitted there was a clear basis for reconstruction in this case because the Commissioner had herself placed reliance on the rateable value of Delta to reach the conclusion that the transaction price was inflated. Mr Beck suggested that if the rateable value of the land were used in a reconstruction then the avoidance component of the GST would be the difference between the assigned value and the actual purchase price.
[121] It is important to appreciate that where s 76 applies, as in this case, the arrangement is “void” against the Commissioner.48 The author of Tax Avoidance Law in New Zealand has noted that in deduction-based avoidance cases, “the voiding or annihilating effect of [s 76] will be sufficient to remove any tax advantage.”49
[122] Section 76(3) and (4) of the GST Act does however confer on the Commissioner a broad discretion to exercise reconstruction powers to counteract any “tax advantages” obtained under the arrangement, that survive the voiding effect of s76(1) of the GST Act. The onus is on Tale to establish that the Commissioner’s reconstruction, if there were one, is wrong and by how much.50
[123] In the present case, the Commissioner has not undertaken a adjustment under s 76(3) of the GST Act. Instead, she has proceeded on the basis that Parliament would have contemplated that the transaction ought to have been zero rated for GST purposes. The onus is therefore on Tale to demonstrate that the transaction could not have been zero rated and that commercial objectives were necessarily connected to the arrangement.
Zero rating as a “going concern”
[124] Under s 11(1)(m) of the GST Act, taxpayers have a choice as to whether or not to zero rate or standard rate a supply as a “going concern”.51 If the “going concern” provisions of the GST Act are engaged, GST is charged by the vendor at zero per cent. This has the effect of the purchaser not paying any GST and is
therefore not entitled to claim a GST refund on the transaction.
48 GST Act, s 76(1).
49 James Coleman Tax Avoidance Law in New Zealand, above n 29, at 153 citing Wisheart v Commissioner of Inland Revenue 71 ATC 6001 at 6015-6016, [1972] NZLR 319 (CA) at 337 and Ashton v Commissioner of Inland Revenue (1975) 2 NZTC 61,030, [1975] 2 NZLR 717 (PC); Alesco New Zealand v Commissioner of Inland Revenue (No 2) (2011) 25 NZTC 20-099 at [156] and BNZ Investments Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,582 at
[527]-[541] per Wild J.
50 Ben Nevis, above n 16, at [171]; see also Miller v Commissioner of Inland Revenue [2001] 3
NZLR 316 (PC) at [22]; Alesco New Zealand Ltd v Commissioner of Inland [3013] NZCA 40, [2013] 2 NZLR 175 at [119].
51 The relevant law was changed with effect from 1 April 2011; refer Goods and Services Tax Act
1985, s 11(1)(mb). I have applied the law as it stood prior to 1 April 2011.
[125] “Going concern” is defined in s 2(1) of the GST Act. The relevant parts of
the definition provide that a “going concern” exists where:
(a) there is a supply of a taxable activity, or of a part of a taxable activity where that part is capable of separate operation; and
(b) all of the goods and services that are necessary for the continued operation of that taxable activity or that part of a taxable activity are supplied to the recipient; and
(c) the supplier carries on, or is to carry on, that taxable activity or that part of a taxable activity up to the time of its transfer to the recipient.
[126] Under s 9(1) of the GST Act the following requirements need to be satisfied at the time of supply for a supply to be zero rated:
(1) The supply must be chargeable with tax under s 8 of the GST Act. (2) The supply must be made to a registered entity.
(3) The supply must be of a going concern.
(4) The activity must be a going concern at the time of supply.
(5)The supplier and the recipient must intend the supply is of an activity that is capable of being carried on as a going concern.
(6)There must be agreement in writing by the supplier and the recipient that the supply is of a going concern.
[127] The Commissioner accepts that two of the requirements for zero rating were not met in this case, namely:
(1) Tale had yet to be registered for GST at the time of sale; and
(2)there was no agreement in writing that the supply was of a going concern.
[128] In all other respects, the sale by Te Anau to Tale was of a going concern which was able to be zero rated for the purposes of GST.
[129] There is no reason why Tale could not have registered for GST and entered into a separate agreement with Te Anau, prior to the time of supply which recognised that the supply was for a going concern.
[130] The subdivision work went on as before in all material respects. Tale completed the works required to finalise the subdivision, marketed sections and sold
17 sections. It is clear that the parties to the transaction chose not to make the transaction zero rated for GST purposes.
[131] I agree with the Commissioner, that in the circumstances of this case, where Tale was anticipating a windfall of the total value of the GST refund, it was incumbent upon Te Anau and Tale to ensure that a realistic and honest approach was taken to the GST position. This would have been achieved had the parties to the transaction ensured that the transaction was for a going concern which would not attract GST.
[132] There was no reason why Tale could not have achieved its alleged commercial objectives by entering into the arrangement in a way that was tax neutral and did not involve tax avoidance.
[133] I am therefore satisfied that the Commissioner was correct to proceed on the basis that Parliament would have contemplated that the transaction in question ought to have been zero rated for GST purposes. Tale has failed to demonstrate that the transaction could not have been zero rated.
Was the Commissioner’s assessment of a shortfall penalty correct?
[134] The Commissioner determined Tale had taken an “unacceptable tax position” in respect of an arrangement that had the dominant purpose of avoiding tax. The Commissioner therefore determined, pursuant to ss 141D and 141FB of the Tax Administration Act that Tale was required to pay a shortfall penalty of 50 per cent of the amount of GST, which was the subject of the tax avoidance arrangement.
Unacceptable tax position
[135] The test for an “abusive tax position” in s 141D applies if a taxpayer has taken an “unacceptable tax position” under s 141B of the Tax Administration Act. The concept “unacceptable tax position” is defined in s 141B of the Tax Administration Act in the following way:
(1) A taxpayer takes an unacceptable tax position if, viewed objectively, the tax position fails to meet the standard of being about as likely as not to be correct.
[136] In Ben Nevis, the Supreme Court explained:52
… An unacceptable interpretation is an interpretation or application of that tax law which “fails to meet the standard of being … about as likely as not to be correct” when viewed objectively. Whether an interpretation is unacceptable is determined at the time the tax position is taken by the taxpayer …
…
On its terms this standard does not require that the appellants’ tax position had a 50 per cent prospect of success but, subject to that qualification, the merits of the arguments supporting the taxpayer’s interpretation must be substantial. The stipulation of an objective test means that the taxpayer’s belief that the position taken was correct, or not unacceptable, is irrelevant.
(Footnotes omitted)
[137] As I have emphasised in this judgment, Tale, in its capacity as a party to the transaction, engaged in an artificial contrivance which was designed to secure a tax advantage.
[138] It is significant that at the time of the arrangement in this case, the Supreme Court had delivered its decisions in Ben Nevis and Glenharrow. In Glenharrow, the Supreme Court said:53
… the arrangement still had a very artificial element: the price was not paid in economic terms, even though as between the parties a debt was discharged. In this case it is not the price but the “payment” that created the distorting effect. Glenharrow accepted the legal obligation to pay the full price but at the outset the parties were well aware, and any objective
52 Ben Nevis, above n 16, at [176] and [184].
53 Glenharrow, above n 15, at [51] and [54].
observer in 1997 would have seen, that payment in full would certainly not
occur …
…
… there can be no issue that Glenharrow undertook liability for the
$44,920,000 funded by vendor finance. But Glenharrow was a shell company with a share capital of just $100. And as Mr Meates was unregistered, there was no GST impost on the other side of the transaction. The end in view was a distortion which very plainly defeated the intent and application of the Act. It cannot be said that, looked at objectively, the tax advantage was merely incidental to the commercial decisions of the parties to the arrangement.
(Footnotes omitted)
[139] There are similarities between the Glenharrow arrangement and the arrangement in the present case. In both cases the purchaser was a shell company, the price was not paid in economic terms, the price “paid” was inflated and GST was not paid by the vendor.
[140] I agree with Mr Goosen when he submitted that at the time Tale took its tax position there was significant Supreme Court case law which strongly indicated the position being taken by Tale was not, when viewed objectively, likely to be correct.
[141] Under s 141D of the Tax Administration Act, a shortfall penalty is imposed on a taxpayer who takes an abusive position. For an abusive tax position shortfall penalty to be applied, four requirements must exist, including the requirement that when:54
… [V]iewed objectively, the tax position must have been taken in respect, or as a consequence, of an arrangement entered into with a dominant purpose of avoiding tax.
Dominant purpose
[142] I am satisfied the Commissioner is correct when she concluded that the arrangement in issue had a dominant purpose of avoiding tax by obtaining a GST
54 Tax Administration Act 1994, s 141D(7)(b); Beecham v Commissioner of Inland Revenue [2014] NZHC 2839, (2014) 26 NZTC 21-111 at [39]. The other three requirements of s 141D of the Tax Administration Act are:
(1) The taxpayer must have taken a tax position.
(2) The taxpayer’s tax position must lead to a tax shortfall exceeding $20,000.
(3) The tax position must be an “unacceptable tax position”; s 141D(4).
input in circumstances where the price had not been paid in economic terms, where it was obvious that no significant output tax would be returned by Tale and the GST refund which was sought was based upon a contrived and artificial value.
[143] In paras [81] to [109] I have analysed these three features of the arrangement under the headings of “market value of Delta”, “nature of the transaction” and “effect of the transaction”. Those three factors leave me in no doubt that the arrangement had a dominant tax avoidance purpose.
[144] I conclude therefore that the Commissioner was correct when she assessed
Tale as being liable for a shortfall penalty for taking an abusive tax position under s
141D of the Tax Administration Act.
Conclusion
[145] I am very satisfied Tale was engaged in arrangements, which had a tax avoidance purpose or effect that was more than merely incidental.
[146] The Commissioner was right to have disallowed the whole of the GST refund sought by Tale.
[147] The Commissioner’s assessment of shortfall penalties was also correct.
[148] I will provide Mr Beck with an opportunity to file submissions, if he wishes to do so, within 10 days of the date of this judgment explaining why the Commissioner should not be awarded costs on a scale 2B basis. The Commissioner will have a further 10 working days in which to reply. Otherwise, costs are awarded
in favour of the Commissioner on a scale 2B basis.
Solicitors:
Succeed Legal, Wellington for Plaintiff
Crown Law Office, Wellington for Defendant
D B Collins J
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