Declaratory judgment on deemed value payments by fishers
2005 case note - taxpayers successfully sought a declaratory judgment that deemed value payments are subject to GST – fisheries.
Pacific Trawling Ltd and Forty South Ltd successfully sought a declaratory judgment that deemed value payments made by fishers are subject to GST.
The Crown regulates the commercial exploitation of fish species in New Zealand waters under what is known as the quota management system, which the Ministry of Fisheries ("the Ministry") administers. Under the quota management system, a commercial fisher may take and sell quota species only if it holds a valid fishing permit and a quota for a share of the total allowable commercial catch for the relevant species.
When fishing, a fisher frequently catches other quota species for which it does not hold quota. These fish are called by-catch. Both the Fisheries Act 1996 ("the 1996 Act") and its predecessor, the Fisheries Act 1983 ("the 1983 Act"), recognise that by-catch is inevitable, and seek to create incentives to minimise it and avoid wastage. A fisher is required to land by-catch, and may then process and sell it, but must also buy/lease quota to cover the by-catch, or make a "deemed value" payment to the Ministry. Deemed values for each quota species are set at a level that makes by-catch unprofitable, but creates an incentive to land the fish (dumping by-catch at sea is prohibited under both Acts).
The plaintiffs are commercial fishers who have held fishing permits and fish lawfully against quota owned by other firms. They called on the Chief Executive of the Ministry of Fisheries in November 2000 to issue tax invoices in respect of their deemed value payments. The Chief Executive assesses the deemed value of by-catch and administers the quota management system. The Commissioner of Inland Revenue was included in the proceedings because the plaintiffs sought a binding ruling from him under section 91E of the Tax Administration Act 1994. They abandoned it when it became clear that the ruling, if issued, would have been unfavourable.
For the plaintiffs, Mr Cullen argued that a taxable supply is made when something is supplied in consideration for payment. He characterised that which the Ministry supplies in return for deemed value payments in various ways: as the right to keep and sell the fish, as 'authorisation' of the fisher's ownership of the fish, and as an entitlement to continue fishing without attracting prosecution (under the 1983 Act) or automatic suspension of a fishing permit (under the 1996 Act).
For the defendants, Mr Coleman responded that deemed value payments do not confer property rights since the fisher retains ownership of the fish throughout. They are not fees for services since no services are supplied, nor payments for statutory privileges. If anything, they are statutory demands analogous to levies. Lastly, imposition of GST would give rise to practical difficulties.
After covering the background to the GST Act 1985 and the deemed value regime, His Honour turned to consider what goods or services, if any, the Ministry supplies in return for the deemed value payments.
He concurred with the defendants' contention that ownership of fish, including by-catch, remained with the fisher whether or not deemed value payments were made. The payment did not, therefore, confer a right to keep and sell the fish.
However, Miller J noted that under the 1983 Act, payment of deemed values was part of a defence to what would otherwise be unauthorised possession and sale of by-catch (it being a strict liability offence to catch fish for which the fisher did not hold quota). That being so:
"[i]t follows that something was indeed supplied in consideration for the payment, in the form of authority to keep and sell the by-catch covered by the payment where the fisher could also prove that it was genuine by-catch."
He went on to say that although the mechanism used to control by-catch under the 1996 Act is quite different (non-payment of deemed value payments results in suspension of the fishing permit), it too confers a right in return for payment of deemed values - the continued right to use the fishing permit.
As far as the defendants' submissions that the deemed value payments were analogous to a levy or a penalty were concerned, His Honour noted that nothing in the GST Act expressly excludes fines, levies or penalties from GST. Rather, they are excluded because they are not a taxable supply, in which a good or a service is provided in consideration for payment.
Justice Miller was not persuaded that the fact that payments are held on trust until the end of the year in any way altered the situation, and also dismissed the defendant's submissions that there would be practical difficulties in imposing GST on deemed value payments.
Fisheries Act 1983, Fisheries Act 1996, Goods and Services Tax Act 1985