Skip to main content
23 Aug 2005
Appeal Status

Transaction held to involve tax avoidance under Goods and Services Tax Act

The principal purpose of the transfer of a mining licence was to make a taxable supply.

Glenharrow Holdings Limited v Commissioner of Inland Revenue

Goods and Services Tax Act 1985


The principal purpose of the transfer of a mining licence was to make a taxable supply. Although the Commissioner did not establish the purchase price was a sham, the transaction involved tax avoidance as the price was grossly inflated.


This case concerns a GST input claim by Glenharrow Holdings Limited (Glenharrow) relating to the purchase of a greenstone mining licence. The mining licence was issued in November 1990 and due to expire on 14 November 2000. The licence was purchased in 1996 by Michael Meates for $10,000. In 1997 Mr Meates was approached by Gerard Fahey who wanted to purchase the licence. The Court found that Mr Fahey believed the licence area contained a large amount of valuable stone.

Mr Meates asked his cousin, who was not a registered valuer but who had studied valuation as part of his MBA, to value the licence. The cousin "conservatively" valued the licence at $45 million.

Mr Meates told Mr Fahey he would sell the licence for $45 million. Mr Fahey agreed to this price on the basis there would be vendor finance. A skeleton agreement provided for an $80,000 deposit, with the remaining $44,920,000 to be vendor financed. Glenharrow, a company controlled by Mr Fahey was nominated as the purchaser. The $80,000 deposit was paid and the licence was transferred to Glenharrow. There was an exchange of cheques between the parties, and mortgages executed over the licence and shares in the company in favour of Mr Meates. A debenture over the company's assets was also registered in favour of Mr Meates.

The Commissioner allowed an input claim for the deposit of $80,000. The application for a refund of $4,991,111 for the balance of $44,920,000 was rejected by the Commissioner.

In 1999 Glenharrow applied to the Minister of Commerce to vary the conditions of the mining licence and extend the term of the licence to 42 years. It later applied for a new licence to be issued. Both requests were rejected by the Minister. Glenharrow sought judicial review in two separate proceedings. Glenharrow was successful in the High Court with its first proceeding. However, Glenharrow was unsuccessful in the second review proceeding, which it appealed to the Court of Appeal and Privy Council, losing both appeals.

By the time the licence expired in November 2000 Glenharrow had mined only 36 tonnes of rock. The Commissioner argued that there was no credible reason why Glenharrow could not have worked the licence from the time that it was purchased to support the position that the vendor financed portion of the purchase price was a sham.



Chisholm J found that the full purchase price was not a sham. The evidence of the parties involved in the valuation and transaction was found to be credible. Although "much too optimistic", the parties intended to be bound to the full amount of the transaction. Chisholm J also found the valuation was flawed, but this did not detract from the fact it was genuinely believed to be accurate. The delays in Glenharrow commencing mining operations were attributable to Department of Conservation issues and thus the lack of mining activity not found to be inconsistent with the intention of the parties.

Principal purpose of making taxable supplies

The Commissioner submitted that the principal purpose of the parties was to claim a GST refund. Chisholm J held that "principal purpose" was the primary purpose that the taxpayer had in mind or view, and that it is not synonymous with intention or motive. The principal purpose has to be ascertained at the time the transaction takes place, and that actions may speak louder than words in determining what the principal purpose was. Chisholm J also found that both subjective and objective factors may be taken into account. Chisholm J found that the principal purpose of the transaction was to make a taxable supply.

Tax avoidance

This case fell under section 76 prior to its amendment, which required the intent and application of the Act to be defeated. It was common ground that there was an 'arrangement' on the facts of the case. The core issue was whether the Act required a subjective intent to defeat the intent and application of the Act, or whether an objective test should be applied. Chishom J adopted the reasoning in Ch'elle Properties [2004] NZLR 274 which held the section was objective in its application. His Honour held that notwithstanding being worded differently from section BG1, section 76 had "all the trappings of an anti-avoidance provision" and needed to be interpreted in a way that would give effect to Parliament's intent.

Chisholm J canvassed factual issues as to whether the consideration was grossly inflated. He concluded that it was. It therefore followed that the intent and application of the Act was defeated. His Honour roughly calculated the required reconstruction to be in the vicinity of $8 million, but requires the valuation expert of the Commissioner to revise his calculations and that a memorandum be submitted to the Court.