“...we consider that the section means what it says, and that there is not much point in trying to paraphrase it.” (Supreme Court in Thompson v CIR)
“...it is unnecessary to adopt Dobson J‘s purposive approach to the interpretation of the provisions to find personal liability on the part of the receivers. It is clear from the purpose and scheme of the GST Act that the obligation to make returns and pay GST is placed on persons who are carefully and specifically identified, namely those who are required to be registered and those who are deemed to be liable in certain situations. The presence of the express provisions in the GST Act means that it is unlikely that Parliament intended liability under the Act to be implied.” (Court of Appeal in Simpson v CIR)
Those statements from the Supreme Court and Court of Appeal should be refreshing reading for tax advisors. The statements re-affirm the point that at least in cases where tax avoidance is not alleged, tax legislation should be construed according to ordinary principles of statutory interpretation. What that means is that it will generally not be appropriate to paraphrase the statutory language, or to seek to imply into the relevant provision some preconceived notion of how the section "should" work, if to do so would be inconsistent with what the section says.
These recent reminders also highlight a risk for tax advisors who spend much of their time working "in" the tax system. A field as complex as tax law necessarily results in the establishment of practices and interpretations based on shared perceptions of how the system "should" work. These recent cases, along with other decisions of the courts over the past few years, are a reminder that in managing tax risk, an established practice regarding a particular aspect of the tax laws, even if it has Inland Revenue's acceptance, is vulnerable to challenge if it is not supported by the underlying legislation.
In this update, we summarise three recent decisions concerning liability for GST. As well as serving as an important reminder of basic principles of statutory interpretation, the three decisions provide important guidance as to the application of the Goods and Services Tax Act 1985 ("GST Act") in situations which may occur frequently in practice.
Two of the three decisions are Court of Appeal decisions relating to the liability of receivers for, and the priority of Inland Revenue to, GST on the sale of a company's assets while in receivership. In both cases it was held that, although the receivers were not personally liable for the GST, Inland Revenue nevertheless had priority. In one case (Simpson v CIR  NZCA 126) this was because the GST had been received on a mortgagee sale. In the other case (Stiassny v CIR  NZCA 93) it was because the GST had already been paid to Inland Revenue in satisfaction of the debt. Issues concerning GST on the sale of land will be less likely to arise in future, given the enactment of section 11(1)(mb) of the GST Act, which zero-rates supplies wholly or partly consisting of land, although the new zero-rating rules do not apply in all cases.
The third decision, the Supreme Court's decision in Thompson v CIR  NZSC 36, concerned the taxpayer's eligibility to deregister for GST. On the facts, the Court concluded that three sales of land did need to be taken into account in deciding whether Mr Thompson was eligible to deregister. Accordingly, he was not eligible to deregister with effect prior to any of the sales occurring, and GST was payable by him on those sales.
Simpson v Commissioner of Inland Revenue  NZCA 126
Simpson v CIR concerned an application for directions as to whether the receivers were personally liable to Inland Revenue for the payment of GST on five mortgagee sales by Capital + Merchant Investments Ltd ("CMI"). The receivers were appointed to CMI in November 2007. CMI was not GST registered because it provided GST exempt supplies. The receivers enforced mortgages over five companies by mortgagee sale of the properties mortgaged. GST was incurred and paid to the receivers in respect of each mortgagee sale. Inland Revenue claimed that GST.
The High Court had held that the receivers were personally liable to account to Inland Revenue for the GST. The Court of Appeal overturned that finding, but held (for other reasons) that Inland Revenue nevertheless did have priority to the amount.
Inland Revenue has priority on a mortgagee sale
The starting point was that, although CMI was not GST registered, GST was payable by CMI to Inland Revenue as a result of sections 5(2) and 17 of the GST Act. In particular, section 5(2) deemed the mortgagee sales to be supplies in the course of taxable activities carried on by the mortgagors (who were deemed to be registered persons) while section 17 imposed an obligation on the mortgagee to pay and file a special return in respect of the GST on the mortgagee sales.
Further, section 185 of the Property Law Act 2007 provided that the proceeds arising from a mortgagee sale were to be applied first to the payment of any "amounts reasonably paid or advanced at any time by the mortgagee ... with a view to the realisation of the security" (section 185(2)(d)). In an earlier decision (CIR v Edgewater Motel Ltd (2004) 21 NZTC 18,644) in respect of the predecessor to section 185 (section 104 of the Land Transfer Act 1952), the Privy Council had held that GST was payable by a first mortgagee ahead of payment of the debts owing to the first and second mortgagees as the GST was an "expense occasioned by the sale" for the purposes of that section (the result in that case was to the detriment of the second mortgagee).
The CMI receivers accepted that there were no material differences between section 185 of the Property Law Act and its predecessor, and that the GST payable by CMI was included within the "costs of sale" which were covered by section 185(2)(d).1 Therefore, the receivers conceded that, if CMI had not been in receivership, the proceeds of the mortgagee sales would have been required to be applied by CMI first in payment of the GST due to Inland Revenue.
But the receivers argued that the receivership had changed the position because:
- the obligation to pay the GST rested solely on CMI and not the receivers, who were therefore entitled to treat the GST as an unsecured debt;
- as Inland Revenue would be an unsecured creditor in respect of GST in the event that CMI was liquidated, Inland Revenue was an unsecured creditor ranking behind the secured creditor; and
- as agents of CMI, which did not carry out any taxable activity in a mortgagee sale, the receivers could have no personal liability for CMI's GST debt.
The Court of Appeal rejected this analysis. While the receivers were correct that they had no personal liability for CMI's debts, that did not mean that they were entitled to keep the GST and pass it on to the secured creditor. The Court held that the receivers, as agents of CMI, could not have a greater claim to the proceeds of sale than CMI itself.
This aspect of the judgment has been subject to criticism on the basis that the purpose of section 185 (and its predecessor section 104) had previously been viewed as to put the mortgagee in funds for GST (and other expenses of sale) actually paid by that mortgagee (so that the mortgagee undertaking the sale is not disadvantaged by having incurred those costs). In other words, section 185 was viewed as creating a priority for the mortgagee undertaking the sale so that it could be reimbursed for its expenses, and not as creating a priority for the person to whom the expenses were owed (such as, here, Inland Revenue).
It seems to us that there may be two ways of approaching the issue:
- Under the approach adopted by the Court of Appeal, the starting point is section 185, which provides that the proceeds of the mortgagee sale are to be applied first in payment of amounts reasonably paid or advanced at any time by the mortgagee with a view to realisation of the security. If this is the starting point, then it seems the proceeds of sale must, as the Court of Appeal held, be applied first to that purpose, with the result that Inland Revenue would effectively have a priority.
- An alternative approach is to ask first whether the mortgagee has actually paid (or will at any time pay) the expense in question. Only if the answer is yes can there be an "amount reasonably paid or advanced at any time by the mortgagee ... with a view to the realisation of the security", as is required by section 185(2)(d) as it currently reads. If the answer is no (because the GST ranks as an unsecured claim against the insolvent mortgagee's estate) then section 185(2)(d) cannot apply; there will be no amounts actually paid or advanced at any time in respect of which the mortgagee would be entitled to reimbursement.
The difficulty appears to be that section 185 was not drafted with an insolvent mortgagee in mind. Where the mortgagee is solvent, the result under either approach is the same. But in the case of an insolvent mortgagee, where the expenses of sale might not otherwise be able to be paid by the mortgagee (as they would rank behind the secured creditors), the position is not so clear.
No personal liability for receivers
Given its conclusion that Inland Revenue has priority under section 185 of the Property Law Act, it was unnecessary to consider the receivers' personal liability for the GST. But the Court went on to find, contrary to Dobson J, that the receivers were not personally liable for the GST.
Receivers do of course have personal liability for the payment of GST in relation to taxable supplies made by a company during its receivership. This is by virtue of section 58(1A) of the GST Act (which provides that where a registered person is in receivership, the person's receiver will be treated as a registered person carrying on the person's taxable activity). But that provision has no application to a mortgagee sale by a company not carrying on a taxable activity and not registered for GST.
Further, the Court held that Dobson J had erred in finding sections 5(2) and 17 of the GST Act imposed personal liability on the receivers. These sections imposed a GST liability on "the person selling the goods" - namely, the mortgagee (here CMI). While the receivers were in control of the sale, they could only conduct the sales by exercising CMI's powers in their capacity as agent. They were not selling the property for the purpose of the GST Act.
Stiassny v CIR  NZCA 93
Stiassny v CIR was a proceeding to recover GST that had been paid to Inland Revenue in respect of a sale of forestry assets by a partnership known as the Central North Island Forest Partnership ("CNIFP").
The two partners in the CNIFP (but not the partnership itself) had been placed in receivership by secured creditors. The proceeds of sale of the CNIFP's assets were insufficient to both repay in full the secured creditors, and pay the GST payable on the sale. The receivers considered there was a significant risk that, under the GST Act, they would be personally liable for GST arising on the sale. If they did not pay the GST when due, they could be exposed to a claim for the GST and penalties and interest.
There was insufficient time to seek a court ruling. Therefore, the receivers filed a GST return in the name of the CNIFP, and paid the GST by cheque drawn on the CNIFP's account. The receivers then filed a notice of proposed adjustment ("NOPA") by which they disputed their personal liability for the GST.
Inland Revenue rejected the receivers' NOPA. The receivers, the partners in the CNIFP, and the security trustees for the secured creditors (who had previously advised Inland Revenue that they reserved their rights to bring a claim to recover the GST) subsequently commenced proceedings in the High Court to recover the GST. Inland Revenue applied to strike out these proceedings. That application was declined by Allen J in the High Court, and Inland Revenue appealed to the Court of Appeal.
The issues on appeal were whether the receivers were personally liable to pay the GST (in which case it was agreed that the GST would be a receivers' expense or liability,2 and Inland Revenue would be entitled to retain the sum paid); and if not, whether any of the relevant parties could recover the amount, either by way of:
- a claim for priority to the funds used to make the GST payment; or
- an in personam claim against Inland Revenue. This claim was made based on the developing law of unjust enrichment, which in certain circumstances recognises a right to recover amounts paid by reason of mistake (the mistake alleged being that the payment had been made on the basis the receivers were personally liable for the GST when that was not in fact the case).
The Court of Appeal held that the receivers were not personally liable to pay the GST. Inland Revenue relied on section 58(1A) of the GST Act, which provides that where a registered person is in receivership, the person's receiver will be treated as a registered person carrying on the person's taxable activity (and so will be personally liable for any amount of GST arising in respect of those activities). However, in this case, the CNIFP (which was the GST registered party) was not in receivership. Instead, the receivers were appointed only in respect of the two member companies of the CNIFP, which were not GST registered.3 Therefore, section 58(1A) did not apply.
Although Inland Revenue would not otherwise have had priority to the funds used to pay the GST, because the GST had already been paid to Inland Revenue, section 95 of the Personal Property Securities Act 1999 ("PPSA") applied. Section 95 provides that a creditor who receives payment of a debt owing by way of "debtor-initiated payment" has priority over a security interest in the funds paid, the intangible that was the source of the payment, and a negotiable instrument used to effect the payment, whether or not the creditor had knowledge of the security interest at the time of payment. Inland Revenue's debtor (the CNIFP) had chosen to pay the GST, so there was a "debtor-initiated payment" in terms of section 95.
The restitutionary claim by the secured creditors (and the receivers, who could have no greater right of recovery than the secured creditors) was rejected based on the Court's reading of section 95 of the PPSA. The Court held that it would defeat the purpose of section 95 if that section could be circumvented by "the simple mechanism of the secured creditor asserting that the payment was made by a mistake about whether the payee was entitled to priority".
The restitutionary claim by the CNIFP was also rejected. The Court held it was a defence to a claim of unjust enrichment that the payee has given good consideration for the payment, as Inland Revenue had done in this case (by discharging a debt owing to him). It was argued for the CNIFP that there was an additional requirement of good faith on the part of the payee, and that because the payment had been made under protest, Inland Revenue had not acted in good faith. Differing from the High Court on this point, the Court of Appeal held that even if the additional good faith requirement did apply, Inland Revenue had received a GST payment in the belief that it was properly due (albeit with notice of an adverse claim by the secured creditors) and that notice of that adverse claim could not, without more, amount to an absence of good faith.
The Court of Appeal's decision will not be the last word on these issues. The Supreme Court has granted leave to appeal the Court's decision. A date for the Court to hear the appeal has not yet been set, but it is likely to be later this year or early 2013.
Thompson v CIR  NZSC 36
The Supreme Court has given judgment in Thompson v CIR  NZSC 36, which concerned eligibility to deregister for GST. The Court reaffirmed the Court of Appeal's decision in Lopas v CIR (2006) 22 NZTC 19,726 holding that in determining whether the value of a person's taxable supplies over the coming 12 months will exceed the registration threshold, capital transactions connected with the cessation of the taxable activity cannot be disregarded. On the particular facts, the Court concluded that three sales of land did need to be taken into account in deciding whether Mr Thompson was eligible to deregister. Accordingly, he was not eligible to deregister with effect prior to any of those sales occurring, and GST was payable by him on those sales.
The Court was critical in particular of the approach taken by the High Court Judge, who had focussed (based on the language used in Lopas) on whether a sale was "planned" at the relevant time. This did not give effect to the statutory language, which simply required that Inland Revenue be "satisfied that the value of that person's taxable supplies in the period of 12 months then beginning will be not more than the [specified amount]" (section 52(1) of the GST Act).
The Court concluded its decision by providing general guidance on the interpretation of section 52:
 De-registration depends on the Commissioner being “satisfied” that taxable supplies for the next 12 month period will not be more than the threshold. We appreciate that as a result of Lopas and this judgment, de-registering taxpayers will usually take good care that retained assets are not disposed of until 12 months have elapsed from de-registration. For this reason, there normally will be, at the date of de-registration, a settled intention that there will be no relevant asset disposals for at least 12 months. And, in at least the general run of cases, it will be perfectly clear that other taxable supplies will not exceed the threshold. That said, a few comments may be of assistance should issues arise in the future as to the application of s 52:
- First and foremost, we consider that the section means what it says and that there is not much point in trying to paraphrase it.
- Secondly, the section requires the Commissioner to be satisfied as to a negative (that turnover will not exceed the threshold). This involves an objective, forward-looking assessment, not one controlled by hindsight.
- Thirdly, the test will not be satisfied when transactions which would result in the turnover being exceeded are either (i) being implemented at the proposed de-registration date or (ii) planned to occur (or contemplated as likely to occur) in the course of the succeeding 12 months.
- Finally, the test will probably be satisfied only where the taxpayer can show a settled intention that such transactions will not take place.
The Supreme Court is correct that in future, properly advised taxpayers (for whom retaining assets on deregistration produces a better outcome than disposing of the assets while registered) will take good care that retained assets are not disposed of until 12 months have elapsed from deregistration. In the Thompson case, the Supreme Court stated that the taxpayer's tax planning in respect of GST was a "doubtful tax plan", that the view of the law it was premised on was "wrong", and that certain advice provided to the taxpayer was "incomplete".
The references throughout the Thompson judgment to tax advice the taxpayer had received are interesting in the context of a case that involved a straightforward question of statutory interpretation. References to the taxpayer's motives (as reflected in the tax advice he received) might be explained on the basis that the test in section 52 requires an examination of the taxpayer's intentions for Inland Revenue to be satisfied that the taxpayer's turnover over the coming 12 months will not exceed the threshold. If the taxpayer's (and his advisor's) motives were considered to have some wider significance, then that would conflict with the orthodox view that even in cases of alleged tax avoidance (let alone in cases turning on the specific provisions) a taxpayer's motives should be irrelevant.