Commissioner's right to withhold refunds confirmed by Supreme Court
2010 case note – Supreme Court confirmed that once notice has been given by CIR the 15-day working limit to pay refund no longer applies – GST, s 46.
Goods and Services Tax Act 1985, Tax Administration Act 1994
The Supreme Court confirmed that once notice has been given by the Commissioner under either section 26(4) or 46(5) of the Goods and Services Tax Act 1985 (GST Act), the 15-day working limit set out in section 46(1)(a) to pay the refund no longer applies and no refund is payable until the Commissioner is relevantly satisfied pursuant to section 46(1)(b) of the GST Act.
Impact of decision
This decision has clarified the Commissioner's position with regard to section 46 and confirms that once notice is given under either subsections (4) or (5), no refund is payable until the Commissioner is relevantly satisfied pursuant to section 46(1)(b).
The decision has also confirmed that if the Commissioner makes a timely request for information under section 46(4) (as opposed to the notification of an investigation under section 46(5)) but later determines that a fuller investigation is required, the Commissioner is not required to pay the refund should any notification of such investigation occur outside the initial 15 working days.
In addition, the Court confirmed that if the Commissioner makes an initial information request within 15 working days, the refund is not payable should he make a subsequent request for further information outside the time limit set down in section 46(4)(b).
At all relevant times, Contract Pacific Ltd (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 the packages to tourists set 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.
In May 1999, the law was changed 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, 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.
On 10 July 2000, the Commissioner advised that the GST refund had been withheld pending investigation of the readjustment claim.
During a meeting between the parties on 19 January 2001, the Commissioner requested the taxpayer provide further information about the refund claim. This was provided by letter dated 24 January 2001.
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 before it was presented.
On 24 October 2001, the Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001 (2001 Act), was passed with retrospective effect. The general effect of section 241 of the 2001 Act was to make clear there was and always had been liability to pay GST on services provided to overseas persons. A savings provision (section 241(6)) was enacted that exempted a small category of persons from this effect. Contract Pacific would come within this savings provision if the circumstances of receiving the refund cheque in error meant it had been "paid a refund".
After the enactment of the 2001 Act, the Commissioner entered into written agreements with various GST claimants, including Contract Pacific, pursuant to section 89I of the Tax Administration Act 1994 (TAA) to resolve the claims for readjustments for 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 operator component of the taxpayer's GST affairs had been completed, resulting in the reassessment of the 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, Contract Pacific wrote to the Commissioner requesting payment of $6,281,767 plus interest, being the balance of the stopped refund cheque of $7,542,295.51 after the payment of the facilitation fee credit adjustment was deducted. The Commissioner rejected the claim.
Contract Pacific later sued the Commissioner on the cheque issued in error on 5 February 2001, arguing that the Commissioner had breached section 46 of the GST Act and had paid the taxpayer a refund for the purposes of the savings provision of the 2001 Act.
High Court judgment
The High Court ((2009) 24 NZTC 23,092) confirmed that the Commissioner had issued a notice under section 46(2)(a) of the GST Act, notifying his intention to investigate the matter, and had done so within the 15-day time limit prescribed in section 46(5). However, the High Court held that as the Commissioner had also made requests for information pursuant to that investigation, and these were made outside the prescribed time limits in section 46(4), he had "lost his authority to withhold the disputed refund".
The High Court also held that the cheque issued by the Commissioner was valuable consideration, and therefore the position was "unaffected by section 241(6) of the 2001 Act". However, Duffy J did conclude that in any event, under the common law, the cheque was a "payment" for the purposes of section 241(6)(a).
Court of Appeal judgment
The Court of Appeal ((2010) 24 NZTC 24,006) allowed the Commissioner's appeal and set aside the High Court judgment. The Court of Appeal concluded that the Commissioner, when investigating Contract Pacific's GST return, had satisfied the time limits contained in section 46(5) of the GST Act and therefore there was no obligation to make a refund.
The Court also concluded that the Commissioner's investigation is not subject to any limitation, curtailment or restriction. Accordingly, if in the course of the investigation the Commissioner requires additional information, he can request it and such request will not engage section 46(2)(b).
The Court also confirmed there will be investigations that are complex and require a number of information requests, and there will be others only requiring additional information that has been overlooked. The Court held that "it is not sensible for these two different kinds of inquiries to be governed by the same approach. The more expansive must necessarily include the narrower process".
Contract Pacific appealed to the Supreme Court.
The Supreme Court dismissed the appeal.
Issue one - section 46 of the GST Act
The Supreme Court confirmed that while the purpose of section 46 is to require the Commissioner to act promptly in processing and paying refunds, the tax system would be subject to abuse if the Commissioner was required in all cases to pay first and investigate later.
The Court held that the provision seeks to balance these two policy considerations by providing the 15-day time limit to either pay the refund or give the taxpayer notice. The Court confirmed, referring to the decision of Commissioner of Inland Revenue v Sea Hunter Fishing Ltd (2002) 20 NZTC 17,478, that if the Commissioner does not give notice under either subsections (4) or (5) within 15 working days he will be required to issue the refund regardless of whether he is relevantly satisfied that the refund is payable.
However, the Court held that once notice is given under either subsections (4) or (5), the 15-day working limit set out in section 46(1)(a) to pay the refund no longer applies and no refund is payable until the Commissioner is relevantly satisfied pursuant to section 46(1)(b).
The Supreme Court agreed with the Court of Appeal that an investigation, as contemplated by subsections 46(1)(b) and 46(2), includes the request of information from the taxpayer (the registered person) and must sensibly encompass all or any of the wide powers available to the Commissioner under the TAA.
The Court also rejected Contract Pacific's argument that while the Commissioner was able to request information from third parties pursuant to his investigation at any time without breaching section 46, he was not able to request information after 15 working days from the taxpayer (being the registered person) without having to release the refund. The Court confirmed that this would place the Commissioner in the position of being unable to seek information from the most obvious and perhaps only source to complete the investigation; the registered person. The Court held that the two processes in section 46 are not entirely discrete in that "the greater includes the lesser; it does not exclude it".
The Court ultimately held that as the Commissioner had given notice pursuant to section 46(5) within 15 working days, the governing provision was section 46(1)(b). Consequently, the Commissioner was not required to pay the refund until he was relevantly satisfied pursuant to section 46(1)(b).
The Court also considered the position where the Commissioner's initial notice is a request for information followed by the commencement of an investigation and confirmed that in that situation the Commissioner should not be expected to have to pay the refund should he ultimately decide the return warrants investigation. The Court referred to Simon France J's decision in Riccarton Construction Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 24,191 and confirmed that it was a "commonsense and practical approach to the section". Blanchard J noted that if it were otherwise, there would be little reason in providing for any other step in section 46(2) other than an investigation since the Commissioner would be a significant risk if he merely requested information and indeed "would be foolish to do so".
The Court recognised that the result of this interpretation is there are also no equivalent sanctions should the Commissioner not issue any subsequent requests for information under section 46(4)(b) within 15 working days of receiving the initial information. The Court stated that it assumed the Commissioner would still continue to employ that procedure in routine inquiries to ensure reasonable expedition.
Blanchard J also noted that the section was poorly drafted and requires remedial construction.
Issue two - section 241(6) of the 2001 Act
As the Court found in favour of the Commissioner in relation to section 46, the Court considered it unnecessary to address the second issue.