Commissioner's right to withhold a GST refund
2008 case note - Section 46 of the GST Act, CIR's right to withhold a refund, section 27 of the Bills of Exchange Act 1908.
Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001; Tax Administration Act 1994; Bills of Exchange Act 1908 ("BOEA"); Goods and Services Tax Act 1985 ("GSTA")
The High Court concluded that in any investigation of a refund that engages section 46(2)(a) of the GSTA, requests for information made under that investigation will engage section 46(2)(b) as well. Any such requests that do not comply with the time limits in section 46(4) will cause the Commissioner to lose his authority to withhold the refund while he carries out his investigation.
Impact of decision
If the Commissioner, during an investigation that engages section 46(2)(a) of the GSTA, makes a request for information, this will engage section 46(2)(b). Consequently, the Commissioner will need to issue any requests for information as part of that investigation within the time limits set out in section 46(4) or the Commissioner will lose his authority to withhold the refund while he carries out his investigation.
At relevant times, Contract Pacific carried on the business of an inbound tour operator, selling New Zealand-based holiday packages to overseas wholesalers who then sold to overseas retailers. Those retailers in turn sold to overseas-based holidaymakers who were to visit New Zealand.
Between July 1993 and April 1999, Contract Pacific included GST in the sale prices for the services it sold to overseas wholesalers while other inbound tour operators did not.
In May 1999, the law was changed (with a retrospective effect) to remove any ambiguity over liability to include GST in the sale prices for New Zealand-based services sold to overseas persons for the purpose of on-sale to New Zealand-bound visitors.
On 26 June 2000, on advice, Contract Pacific filed a GST return in which it sought a readjustment and refund of the GST it had paid between 1 July 1993 and 30 April 1999.
The Department's internal computer records for 28 June 2000 record a GST assessment from the taxpayer for a refund of $7,345,396.94. With the effect of additional sums, the entire refund totalled $7,542,295.51.
On 10 July 2000, the Commissioner advised that the GST refund had been withheld pending investigation of the readjustment claim.
Through an administrative error, a notice of assessment and refund cheque for $7,542,295.51 were issued on 5 February 2001. On 9 February 2001, the Commissioner became aware of the error and took steps to stop payment on the refund cheque.
Until 2 April 2001, the Commissioner advised the GST claimants that further investigation of their claims was required. On 2 April 2001, the Government introduced the Taxation (Annual Rates, Taxpayer Assessment and Miscellaneous Provisions) Bill ("the Bill").
On 2 July 2001 a notice of assessment was sent which disallowed the credit adjustment and consequential refund Contract Pacific sought.
On 24 October 2001, the Bill came into force as the Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001 ("2001 Act"), with retrospective effect. The general effect of the new legislation (section 241) was to make clear there was and always had been liability to pay GST on the service dispute. There was a savings provision that exempted a small category of persons from its effect. Contract Pacific would come within this savings provision if the circumstances of receiving the refund cheque meant it had been paid a refund.
After the enactment of the 2001 Act, the Commissioner entered into written agreements with the various GST claimants pursuant to section 89I of the Tax Administration Act 1994 ("TAA") to resolve the claims for readjustment of GST paid on facilitation fees and quantification of the Commissioner's liability to pay use of money interest.
On 11 December 2001, the Commissioner sent a letter to Contract Pacific which stated that the Commissioner's investigation into the inbound tour component of the taxpayer's GST affairs had been completed, resulting in the reassessment of periods ended 28 February 2001 and 30 April 2001 to allow a refund that reflected the overpaid GST for the period 30 June 1993 to 30 April 2001.
On 18 April 2005, a request was made to the Commissioner for payment of $6,281,767 plus interest, being the balance of the dishonoured refund cheque of $7,542.295 after the payment of the facilitation fee credit adjustment was deducted. The Commissioner rejected the claim.
As it was contended that the credit adjustment agreements were a complete bar to Contract Pacific's legal claims, the Court decided to consider the third issue first. Duffy J concluded that contrary to the Commissioner's assertion, the credit adjustment agreements did not bar Contract Pacific from suing for the balance of the credit adjustments it claimed it was due.
Duffy J then went on to consider the remaining three issues.
Duffy J held that whether or not in this case there was antecedent debt or liability that was capable of constituting valuable consideration under the BOEA turned on the interpretation of section 20(5) and section 46 of the GSTA.
Section 20(5) requires the Commissioner to refund any excess where the total amount that may be deducted for a taxpayer's output tax exceeds the aggregate amount of the output tax for that taxable period. Section 46 deals with the Commissioner's right to withhold payments. It mandates that if the Commissioner is required to refund an amount under section 20(5), he shall do so within 15 days of receipt of the return subject only to his powers under section 46(2) to withhold payment.
After referring to the decision in CIR v Sea Hunter Fishing Limited (2002) 20 NZTC 17,478, Duffy J concluded that section 46 is a code for the authority to withhold payment of disputed GST refunds. In her Honour's opinion, there is only one interpretation of section 46(2) that does not undermine Parliament's intent to impose strict limits on the Commissioner's authority to withhold a refund. This is that whenever the Commissioner is faced with a refund issue under section 46 that requires both an investigation and the collection of further information, the two limbs of the section must be used in conjunction. Therefore, in any investigation of a refund claim that engages section 46(2)(a), requests for information will engage section 46(2)(b) as well. Any such requests that do not comply with the time limits in section 46(4) will cause the Commissioner to lose his authority to withhold the refund while he carries out his investigation. While the Commissioner need not engage both limbs of section 46(2), where his actions do entail both an investigation and a request for information he must comply with the prescribed time limit.
In this dispute, the Commissioner had issued a notice under section 46(2)(a), notifying his intention to investigate the matter, and had done so within the 15-day time limit prescribed in section 46(5). However, the Commissioner also made requests for information pursuant to that investigation, but these were made outside the prescribed time limits in section 46(4). Accordingly, Duffy J concluded that he "lost his authority to withhold the disputed refund".
Further, Duffy J found that the effect of finding that the Commissioner lost his authority to withhold the payment when the refund was issued meant that he was under an antecedent liability to pay the refund to Contract Pacific. That liability was sufficient to provide valuable consideration for the purposes of section 27(1) (b) of the BOEA. Consequently, this entitled Contract Pacific to judgment for that amount. Her Honour also held that the passing of section 241 of the 2001 Act could not on itself cause a failure of that consideration.
Contract Pacific had argued (in the alternative) that it was subject to the savings provisions in section 241(6) (a) or alternatively (c) of the BOEA.
In relation to the arguments under section 241(6) (a), Contract Pacific asserted that it had been "paid" a refund on or before 14 May 2001 and was therefore immune from the retrospective effect of the legislation. Duffy J concluded that under the common law, the issue of a cheque is a payment. Further, her Honour held that given it had already been concluded that the cheque issued on 5 February 2001 was valuable consideration, the position was "unaffected by section 241(6) and remains the same today as it was then".
In relation to the arguments put forward regarding section 241(6) (c) (ie that Contract Pacific was exempt given the Commissioner, on or before 14 May 2001, reduced the amount that would otherwise be tax payable in respect of the supply), Duffy J considered it unnecessary to determine whether Contract Pacific was entitled to a refund by virtue of that provision. This was because Contract Pacific had accepted that the success of both causes of action under section 241 depended on whether or not the Court found the refund cheque was a payment of the credit adjustment refund the company claimed (ie the first issue). In addition, Duffy J had some concerns regarding the Court's jurisdiction to grant the relief sought.
The Commissioner sought to argue that even if Contract Pacific could succeed in the action on the cheque, the consequential liability to pay the proceeds could be negated by set-off and that given a notice of assessment was issued which the taxpayer failed to respond to, it was too late for Contract Pacific to dispute the assessment.
Duffy J rejected this action. Her Honour found that the letter of 11 December 2001 was not sent as a notice of assessment but did note that there is a difference between an assessment and a notice of assessment. However, Duffy J found it unnecessary to conclude whether or not the letter of 11 December 2001 was in law a notice of assessment.
This was partly because her Honour did not want to risk offending against the limits in the TAA on the power of the Court to make determinations outside Part 8A in relation to disputed assessments. In addition, Duffy J noted that the set-off had not been pleaded by the Commissioner and was brought late in the proceedings, denying Contract Pacific the opportunity to "shape its case".