GST paid on deposit
2006 case note - Correctness of the CIR's assessment disallowing the refund of output tax originally paid by each disputant on deposits later refunded to them.
GST Act 1985; Tax Administration Act 1994
The disputants, registered on a payments basis, entered into sale and purchase agreements to buy a number of apartments. The disputants then entered into sale and purchase agreements to on-sell the apartments to one of three purchaser companies, registered on an invoice basis. Deposits were paid to the disputants by the three companies when GST refunds were paid. The disputants paid output tax on the deposits. The vendor of the first sale and purchase agreement cancelled the contracts with the disputants for non performance. The disputants filed returns claiming back the output tax paid on the deposits. The Commissioner disallowed the claim.
This case is concerned with the application of the Goods and Services Tax Act 1985 ("the GST Act") in relation to a property transaction entered into by the disputants. The cases that are the subject of this litigation concern a series of interlocking events which exploit a timing mismatch arising from GST registration on an invoice basis compared to another on a payments basis. In particular, this challenge concerns the correctness of the Commissioner's assessment disallowing the refund of output tax originally paid by each disputant on deposits which were later refunded to them.
The disputants are 30 companies ("the disputants"). Mr X was the director of all disputants until he was adjudicated bankrupt in May 2001.
The disputants were each incorporated with 1,000 shares and a capital value of $100 on 30 April 1997. They were registered for GST as "property traders" on a payments basis. Two days prior to incorporation the disputants entered into Sale and Purchase Agreements with a developer, ("vendor") for 45 apartments. No tax invoices were issued.
On the same day the purchase agreements were entered into, each of the disputants entered into agreements to sell the apartment to one of three companies, A Ltd, B Ltd and C Ltd ("the three final purchasers"). The agreements contained conditions for deposits payable to the vendors. $100 of this deposit was to be paid upon execution with the remainder being paid on or before 30 June 1997. The balance was to be paid on the date of settlement being 1 May 2007. A tax invoice was issued by each of the 30 disputants to one of the three final purchasers.
The three final purchasers filed GST returns claiming input credits in respect of the apartments purchased. Upon receiving the refunds, the three final purchasers paid the remaining deposit to the 30 disputants.
On 30 September 1997, the 30 disputants filed GST returns for the periods ending 31 August 1997. They each claimed GST input tax totalling $0 and returned GST output tax totalling $152,756 based on the payment of the second instalment of the deposit which the 30 disputants received from the three final purchasers.
On 17 September 1999 the vendor cancelled its agreements with the 30 disputants for non performance. On 4 July 2001 the 30 disputants filed GST returns claiming back the output tax they had earlier paid on the sales to the three final purchasers.
The TRA makes it clear from the outset that the scheme was one designed to take advantage of the timing mismatch in the GST legislation which it viewed as unacceptable. The disputants argued that the forfeited deposits became an item of damages in its hands and therefore was not subject to GST. At the time of cancellation the purchaser lost the right to retain the input credit paid to it. The vendor's liability for output tax was then cancelled and it was entitled to a refund of the GST paid.
The Authority went on to state that the disputants were never entitled to a refund of the GST paid by them on the sales to the end purchaser. The Authority considered GST was always properly payable, and the fact that a series of events had intervened making it impossible for the disputants to perfect the overall scheme of arrangements for the purchase of the apartments did not make it less so.
In addition, the Authority considered that from its inception this was a scheme which blatantly exploited provisions of the GST regime enacted to provide some administrative relief for smaller taxpayers from the burden of GST compliance.
This arrangement sought to take advantage of the timing mismatch possible in the relevant section. The primary motivation in entering the transaction was not the making of taxable supplies but the derivation of large input tax credits. The input tax refunds were then used to pay the deposit to the 0 disputants. The payment of the output tax on these deposits could not be viewed separately from the other transactions that made up the arrangement as a whole.
The Commissioner sought to counteract the tax advantage by disallowing the refunds claimed by the 0 disputants. To permit these refunds would be to allow the disputants to benefit from an arrangement designed to defeat the intent and application of the GST Act. Therefore, the scheme in this case was void against the Commissioner pursuant to section 76.
The Judge confirmed the Commissioner's decision in each of the cases before the Authority.