Entitlement to deregister from GST and decision on whether or not a sale was planned results in partial win for the Commissioner
2009 case note – Partial win for CIR and taxpayer – GST de-registration, Lopas Test, Court's power to vary interest and penalties.
The case was a partial win for the Commissioner and Taxpayer. The Court found that the Taxpayer was not entitled to de-register on 30 November 1999. The Commissioner's assessment which assessed output tax on two property transactions sold in the Goods and Services Tax ("GST") period after the Taxpayer's de-registration was consequently upheld. The third property transaction which the Commissioner had assessed in a later GST period was found incorrect; rather the Court found that the output tax on that property should be returned by the Taxpayer as a deemed disposition in the Taxpayer's unregistered capacity pursuant to section 5(3) of the Goods and Services Tax Act ("the Act").
Impact of decision
For the purposes of determining if transactions are relevant to the projection of whether a Taxpayer's taxable activities will exceed the legislative threshold over the ensuing 12 months, a transaction will be "planned" prior to de-registration if there is evidence that the transaction, has at that time been advanced "in a sufficiently choate way that it is to be seen as connected with the conduct of the business, even when it is being downsized". Neither contemplation nor intention to sell will be enough. It appears that "major steps" must have been taken in relation to the sale. Therefore it would seem that the test in Lopas v CIR (2006) 22 NZTC 19,726 has been narrowed.
It is important to note that an amendment to section 10(8) of the Act with application on and after 10 October 2000, has removed the opportunity for Taxpayers to reduce their liability for GST by de-registering and paying GST on the cost price of the goods rather than the market value. With one exception the amendment has the effect of requiring GST to be paid on the market value of the goods. However for goods acquired prior to the introduction of GST on 1 October 1986, GST is either payable at the lower of cost or market price of the goods.
The Taxpayer had been registered for GST since 1986, on a six-monthly return basis. In November 1999, he sought to deregister. The Commissioner initially accepted the Taxpayer's de-registration application from 30 November 1999 and advised him of this in December 1999. The Taxpayer then disposed of the relevant land in three transactions, in December 1999, March 2000 and September 2000 and did not account for GST on the sales. Default assessments for GST were raised in July 2004 for the six months to 31 July 2000. A subsequent assessment was also issued in January 2005, for the period ending 31 January 2001.
The Taxpayer argued that the sales went ahead only after he was deregistered and, accordingly, liability was confined to a deemed disposition to himself in his unregistered capacity (ie one ninth of the original acquisition cost) pursuant to section 5(3) of the Act.
The Commissioner contended that the Act entitled him to revisit an approval to de-register where he was not fully informed at the time of giving approval to de-register. In this case, the Commissioner considered that he was entitled under section 52(3) of the Act to treat the Taxpayer as re-registered until all the transactions had been undertaken. Accordingly, the Taxpayer was assessed for output tax for the consideration on all three of the transactions based on the sale price rather than the original acquisition costs.
In March 2005, the Taxation Review Authority ("TRA") upheld the Taxpayer's challenge to the decision of the Commissioner to re-register him. The Commissioner appealed the decision. However, before the hearing of the appeal, the Court of Appeal delivered its decision in Lopas v CIR (2006) 22 NZTC 19,726. Lopas was a decision with similar issues where the Court of Appeal found that the TRA had erred because the projected extent of taxable supplies should include the value of deemed or actual dispositions of property that had been used in the GST registered business.
These proceedings were in part an appeal by the Taxpayer from a further aspect of the TRA decision as to the de-registration date and also a dispute over the correctness of the GST assessments.
Issue One - Whether the Taxpayer was entitled to deregister on 30 November 1999
Before considering the liability of the Taxpayer to account for GST output tax on the three land transactions, his Honour analysed the decision in Lopas. Dobson J stated that the facts in Lopas were "slightly different", in that the Taxpayer in this case did not account for the deemed or actual disposal of any of the properties, on any basis, at the time of de-registration.
The Lopas decision
His Honour agreed with the Commissioner that the Court of Appeal's reasoning in Lopas "does not recognise any material distinction between immediate cessation and a staged winding-down of an about to be de-registered business". Dobson J stated that section 5(3) applies irrespective of whether the business is going to cease upon de-registration, or continue in a reduced form but in a level less than $30,000 taxable supplies for the ensuing 12 months.
His Honour also noted that the Court of Appeal in Lopas interpreted the proviso in section 51(1) as only applying in situations where an initial obligation to register would otherwise be triggered by the circumstances of cessation, namely, where the deemed disposal would for the first time push the scale of taxable activities over $30,000. Accordingly, in the present case, Dobson J concluded that the three land transactions were relevant to the projection of whether taxable activities would exceed $30,000 over the ensuing 12 months, on whatever basis they are to be valued.
Further, his Honour noted that in Lopas the Court held that where transactions were planned as at the date of de-registration, the sale will be treated as part of the taxable activity. His Honour rejected the Commissioner's argument that the test was whether a sale was "in contemplation". Rather, the transactions need be planned and firmly in place to be effected. This will require a fact specific assessment in each case to determine whether the transactions are planned in a "sufficiently choate way that is to be seen as connected with the conduct of the business, even when it is being downsized". Dobson J considered that Lopas suggests that an intention to sell will not be enough.
The three land transactions
Dobson J concluded that the Taxpayer was not entitled to de-register until 31 July 2000.
As for the first land transaction, his Honour concluded that it was sufficiently planned as at the de-registration date and so the Taxpayer was obliged to account for GST on the sale price. With regard to the second transaction, while his Honour determined that more would have been needed for it to be planned; he did not accept that "each transaction can be viewed in isolation". In his opinion, because of the first transaction, "the second transaction is to be assessed as it occurred within the following six month period". Accordingly, the Taxpayer was also obliged to account for GST on the second sale on the basis of the sale price.
However, as for the third transaction, Dobson J concluded that it was not planned as at 31 July 2000. Accordingly, given the Taxpayer was in a de-registered status at that time, he was only obliged to account for GST on an apportioned component of the original acquisition price pursuant to section 5(3) of the Act.
His Honour did note that, notwithstanding the land sales, the rental income derived would have amounted to more than the required level of supplies.
Issue Two - Whether the steps taken by the Commissioner to de-register and re-register the Taxpayer were adequate
His Honour also discussed the arguments raised by the Taxpayer over the adequacy of steps taken by the Commissioner to de-register and re-register the Taxpayer. Dobson J concluded that "although inconsistencies in communications from the Department are unfair, they could not be sufficient to deprive an assessment for a subsequent period of its lawful effect". His Honour stated that any unfair communication could not affect the extent of basic GST for which the Taxpayer is liable.
Issue Three - The correctness of the assessments
The Taxpayer had also asserted that the default assessments issued were incorrect. His Honour agreed that the default assessment for the 31 July 2000 period was in error because the rental income, on which output tax had been assessed, ought to have been offset against the expenses incurred in earning that rental income. Further, the default assessment for the 31 January 2001 period was wrong by virtue of the inclusion of the third sale. In addition, a further extension of his re-registration beyond 31 July 2000 was not warranted in the absence of a planned transaction. Accordingly, Dobson J held that the default assessment for the period prior to 31 July 2000 be increased as a result of the deemed disposition. Consequently, the default assessment for the period from 1 August 2000 was considered incorrect and should be cancelled.
Issue Four - The application of the anti-avoidance provision in section 76
His Honour concluded that it was unnecessary to consider whether the anti-avoidance provision applied given his conclusion on the earlier issues.
Issue Five - Whether the interest and penalties imposed on the Taxpayer should be varied
His Honour concluded that he did not have jurisdiction to vary the extent of the late payment penalties or interest but invited the Commissioner to exercise his discretion to remit the penalties under section 183D of the Tax Administration Act 1994.
Goods and Services Tax Act 1986