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25 Jun 2007
Appeal Status

Court of Appeal upholds TRA's tax avoidance findings for property development

2007 case note – arrangement with gaps of up to 20 years between the right to claim input tax and the liability for output tax held to be tax avoidance – section 76.

Ch'elle Properties (NZ) Limited v The Commissioner of Inland Revenue


An arrangement in terms of whether there were gaps of up to 20 years between the right to claim input tax and the liability for output tax was held to be tax avoidance


This was an appeal from the decision of the High Court upholding the Taxation Review Authority conclusion that the Commissioner was correct in disallowing input tax credits claimed by respondent.


In 1996 and 1997, Nigel Ashby incorporated a total of 114 companies, all registered for GST purposes on a payment basis.

Michelle Wilson, a friend of Mr Ashby's former wife, registered Ch'elle in July of 1998 and for GST purposes, it was registered on a monthly invoice basis. The taxable activity was "property trader".

On 5 November 1998, each of the 114 Ashby companies entered into conditional contracts to purchase from Waverly Developments Ltd a lot in a subdivision in Papakura for $70,000.00. Each contract provided for a $10 deposit on execution with the remainder of the deposit to be payable on the date for settlement specified in the contracts which was 31 August 1999.

On 21 May 1999 Ch'elle entered into conditional contracts with the 114 Ashby companies to purchase these properties for a total price of $80 million; an average of about $700,000.00 per contract.

Settlement was deferred for between 10 to 20 years. An initial deposit of $10 was payable on execution, with the balance of the deposit (29,990.00) being payable subsequently. The vendor did not hold the deposit as a stakeholder but during the deferred period, the vendor was to construct a house on each. Each of the vendors issued an invoice to Ch'elle for the total ultimateprice.

In June 1999 Ch'elle filed a GST Return for the period ending 31 May 1999 claiming input tax credits of $398,333.00 in relation to 13 property transactions, including 10 of the 114 transactions. On 20 October 1999, Ch'elle filed a further GST return for the remaining 104 properties claiming $9 million in input tax credits based on the estimated market value on the respective settlement dates 10 to 20 years into the future.

The Commissioner issued notices disallowing the claims and all 114 contracts between Waverly Developments and the companies were cancelled for failure to settle on the stipulated date of October 1999.


The Court of Appeal considered whether the arrangement defeated the intent and application of the GST Act. In doing so it held that it is the objective assessment of the arrangement which will determine the issue.

Secondly, the fact that the arrangement complied with the black letter terms of the Act was not determinative of whether section 76 applied because section 76 provides for an overview and assessment of the combined effect of the individual components of the Act. It is necessary to assess the scheme and purpose of the Act to assess whether section 76 is triggered.

The Court went on to hold that the longer the time gap between the taxpayer's eligibility for an input tax credit and its liability for an output tax, the less likely the arrangement will conform with the intent of the Act. In the present case, the gap of between 10 and 20 years between the input claims and output tax liabilities defeated the intent and purpose of the Act and triggered section 76.

Further, the proliferation of vendor companies had no rationale or utility but to create a mechanism to exploit atax advantage by coming under the $1 million threshold. This exploited a mismatch between the invoice and payments accounting bases and defeated the intent of the Act.

Goods and Services Act 1985