The New Zealand Taxation Review Authority (TRA) recently confirmed in Smith v Commissioner of Inland Revenue [2016] NZTRA 9 that a taxpayer who has not engaged in taxable activities may not claim input tax incurred.

The taxpayers in this case were Mr Smith (Smith) and a company of which he was the sole shareholder and director (Company).

Smith registered for GST in 2011 for an activity described on the registration form as “vineyard and farming”. Subsequently, he submitted GST returns seeking GST refunds for payments made “Purchasing grapes vineyard and winery” and “Start up of vineyard”.

In 2012, he incorporated a company of which he was the sole shareholder and director (Company). The Company was registered for GST and its business activity was stated to be “grow grapes/wine marketing”. The Company filed a GST return claiming input tax credit for the purchase of 2 motorbikes and a tractor, as well as some private items. Payment was never made on the 2 motorbikes and the tractor and the transactions were subsequently reversed.

The Commissioner of Inland Revenue (Commissioner) took the view that neither Smith nor the Company were engaged in any taxable activity in the relevant GST periods and disallowed the claims made.

The TRA found that the taxable activities of Smith and the Company were vague. Smith had described his business activity as “vineyard and farming”. However, although he entered into around 40 agreements for the sale and purchase of wineries, vineyards and farms, the agreements were all conditional on successful financing and no deposit was paid on the agreements, none of which settled. After Smith incorporated the Company, it was even unclear what his own taxable activity would be. As for the Company, it was described as engaging in the business activity of grow grapes/wine marketing” but Smith had furnished a business proposal for the Company to borrow money to invest in vineyards which were to be operated by separate subsidiary companies.

There was no evidence that either Smith or the Company had the financial resources available to be able to commence the stated business activities. Little weight was put on Smith’s oral evidence of his negotiations with potential investors. In addition, the TRA found that neither Smith nor the Company had the financial resources to even complete the purchase of the motorbikes and tractor.

Smith had also told the TRA that he intended that the motorbikes and tractor would be leased out while the vineyard project was being developed. However, there was no evidence of any contracts having been entered into or any business proposal relating to this alleged activity.

The TRA held that the steps taken by Smith and the Company could be described at best as preparatory steps towards the commencement of a taxable activity. However, such commencement work is not sufficient and does not create or amount to a taxable activity. There still must be an activity to which those steps attach. In this case, there was no activity which Smith or the Company was carrying on continuously or regularly and which involved or was intended to involve the making of supplies to other persons for a consideration. Instead, Smith and the Company merely had a rudimentary proposal for an ambitious development which they did not advance to any extent.

The TRA thus concluded that it was not satisfied that the disputants were engaged in any taxable activity during the time that they were registered for GST and that the input tax credits claimed were disallowed.

Editorial Note

The Smith case affirms that in order for a taxpayer to make input tax claims, the taxpayer must at least be carrying out activities to make taxable supplies. Merely carrying out commencement work is not sufficient.