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06 Sep 2007
Appeal Status

GST Tax Avoidance

2007 case note – input/output tax constituted tax avoidance - property transactions, deferrable contracts, credit contracts, contract cancellation, objective test.

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


The taxpayer had claimed GST input tax credits on a total of 117 property transactions. Payment to the vendor was by way of a small deposit with the remainder payable on settlement. The difference in registration types (payment and invoice) between the parties saw the taxpayer claiming an input credit on the entire purchase price whilst the vendor only paid output tax on the deposit paid. The Commissioner considered the arrangement was set up for the tax advantages it could obtain and alleged tax avoidance under section 76 of the GST Act. The TRA, High Court and Court of Appeal all agreed with the Commissioner.


This was an application for leave to appeal the Court of Appeal ("CA") decision upholding the Taxation Review Authority ("TRA") and High Court ("HC") decisions finding that the Commissioner was correct in disallowing input tax credits claimed by Ch'elle Properties Ltd ("Ch'elle").


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

A friend of the taxpayer'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 taxpayer 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 taxpayer 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) 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 section. Each of the vendors issued an invoice to Ch'elle for the total ultimate price.

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 TRA, HC and CA all considered the scheme constituted tax avoidance pursuant to section 76 of the GST Act. The HC and CA considered the test of avoidance under that section was an objective one and that while timing mismatches were provided for in the Act, these transactions exploited that provision and defeated the intent and purpose of the Act.


The Supreme Court considered it unnecessary to express any view on the merits of Ch'elle's arguments that 1) the CA erred in finding it was unnecessary for the Commissioner to show an intention to defeat the intent and application of the Act and 2) that an arrangement can defeat the intent and application of the act only if there is a tension between the commercial and juristic nature of the transactions, on the basis the TRA had made factual findings that Ch'elle did have an intention to defeat the intent and application of the Act.

The Supreme Court also considered Ch'elle's third ground of appeal that it did not gain a "tax advantage" equally as hopeless. The definition of that term included "any increase in the entitlement of any registered person to a refund of tax". Ch'elle clearly came within this definition.

Goods and services tax 1985