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05 May 2010
Appeal Status
Not appealed

High Court finds tax avoidance in an arrangement to develop and sell software

2010 case note - confirms that arrangements involving mismatches in GST accounting and payments bases will be considered tax avoidance arrangements.

Education Administration Limited v The Commissioner of Inland Revenue

Goods and Services Tax Act 1985


The High Court found an arrangement whereby two companies deliberately registered for GST on a mismatched accounting basis and incorporated by non-arm's length individuals for the purpose of developing and selling software was tax avoidance. Consequently, the Commissioner's decision to treat the arrangement as void was correct.

Impact of decision

The decision confirms that artificial and contrived arrangements involving mismatches in goods and services tax (GST) accounting and payments bases will be struck down by the Court as tax avoidance arrangements.


In 2001, Mr Grove was managing two Kip McGrath Education Centres ("the Centres") owned by his mother. He entered into an agreement with his mother's accountant Mr Grimmett to develop a software program for recording financial information that could be tailored to the Centres' needs. Two separate companies, the Taxpayer owned by Mr Grove's trust and Administration Systems Development Limited ("ASDL") owned by Mr Grimmett were established.

ASDL was responsible for developing the software and the Taxpayer was responsible for marketing and selling it once it was developed.

The Taxpayer was registered for goods and services tax (GST) on the invoice basis (filing its returns each month) and ASDL was registered for GST on the payments basis (filing its returns every six months). It was acknowledged that the registrations had been done this way deliberately as a means of generating funding for the development of the software.

The Commissioner assessed the Taxpayer by disallowing its tax input credits on the grounds of tax avoidance.


Her honour Justice French found that the arrangement had tax avoidance as a more than merely incidental purpose or effect and was structured in a way that could not have been contemplated by Parliament. The arrangement was found to be artificial and contrived in the manner described in Ben Nevis Forestry Ventures Limited & Ors v CIR [2009] 2 NZLR 289 (SC). In coming to this decision Justice French considered the following factors to be significant.

The relationship between the parties

It was considered that the creation of the two companies was pivotal to obtaining a GST benefit. Also the relationship and dealings between Mr Grove and Mr Grimmett were not at arm's length and were considered to be more in the nature of a joint venture rather than separate businesses. The Court could see no reason why the different objectives could not have been accommodated or recognised within a single company and two separate entities were not necessary.

The terms of the agreement between the Taxpayer and ASDL

The Court considered that the agreement contained some unusual features. Significantly the Taxpayer was only required to pay 10% of each of ASDL's invoices with the remaining 90% to be paid at some unspecified time in the future with no interest being charged and payment being conditional on revenue generated by sales. The agreement was in effect an interest-free loan and as such the Taxpayer was not subject to a real economic burden. The Taxpayer was therefore considered to be using the Act in a way Parliament did not intend. The higher than market hourly rate charged by ASDL was also considered to be an unusual feature of the agreement. The high rate had the effect of artificially increasing the amount of the invoices and the subsequent GST refund that could be claimed.

The fact that the Taxpayer had no independent source of funds

The Taxpayer had no independent source of funds other than through the receipt of the GST refunds. While this was on its own not considered to be sufficient to bring the arrangement within the ambit of section 76 of the Goods and Services Tax Act 1985, in combination with all the other factors noted above it did assume some significance for the Court.

Section 19D of the Goods and Services Tax Act 1985

Counsel for the Taxpayer argued that section 19D of the Goods and Services Tax Act 1985 evidenced Parliament's intention to mark out specific thresholds of time and value which it considered to be acceptable and unacceptable in relation to timing mismatches and the risk to the revenue. The Court rejected that contention.