Court of Appeal dismisses taxpayer's appeal in relation to an entitlement to de-register from GST

Summary

The Court of Appeal found that the taxpayer was not entitled to deregister on 30 November 1999 and was not entitled to deregister until he could satisfy the Commissioner that his taxable supplies would not exceed $30,000 in the forthcoming year. On this basis, the Court determined that the Commissioner's assessments, which assessed output tax on three property transactions sold in the goods and services tax ("GST") period after the Taxpayer's de-registration, were correct. The Court of Appeal upheld the High Court's decision that the Commissioner was required to make output tax credit adjustments to the Taxpayer's GST returns in the relevant GST return periods.

Impact of decision

The test in section 52 of the Goods and Services Tax Act 1986 ("GST Act") is not whether a sale was "planned" or "contemplated", but whether the Commissioner has reason to be satisfied that no transaction taking all taxable supplies over the (then) $30,000 limit would occur.

Facts

The land in issue was purchased in 1979 by the appellant, before the advent of GST.

Application to deregister for GST purposes

In 1999, the appellant completed a form requesting deregistration for GST purposes with effect from 30 November 1999. When setting out the basis for the request, the appellant selected the statement which read: "I am conducting a taxable activity but my turnover for the next 12 months will be under $30,000".

On 22 December 1999, Inland Revenue sent the appellant a standard form notification of cancellation of his GST registration with effect from 30 November 1999.

The land sales transactions of the Rolleston farm

The three separate sales of land effected by the appellant after 30 November 1999 were:

1. the sale of a 49 hectare block to interests associated with Mr. Horsbrugh (settlement occurred in June 2000);
2. the sale of a 15 hectare parcel to a family company called Armagh Investments Ltd ("Armagh") (agreement signed on 31 March 2000); and
3. the sale of the remaining 138 hectare area to Armagh (on 29 September 2000).

Decision

The Court of Appeal, having noted that the appellant acted in accordance with the professional advice he received, discussed the Lopas v CIR [2006] 22 NZTC 19,726 (CA) decision and section 52 of the GST Act.

When considering the obligation to pay GST in respect of taxable supplies, the Court confirmed (following Lopas) that the reference in section 52(1) of the GST Act to "the amount specified for the purposes of section 51(1)" is referring to the amount specified in section 51(1)(a), namely $30,000 and that section 52(1) referred to all taxable supplies and did not exclude any sales of capital assets in the running of the business which occurred as a result of the cessation or winding down of the business.

The Court held that:

• ... it was common ground before us that Mr Thompson was entitled to deregister at 30 November 1999 only if there was a proper basis for the Commissioner to be satisfied that the value of his taxable supplies in the ensuing 12 months would not be more than $30,000. [24]

The Horsbrugh sale

Lopas identified two conditions that must be met before the Commissioner could be satisfied under section 52(1) that deregistration was appropriate. It must be the case that no sale is planned as at the date of deregistration (or at least not a sale that would mean the $30,000 threshold was exceeded) and the taxable supplies must otherwise be less than $30,000 in the next 12 months.

The appellant focused on whether a sale was planned at the date of deregistration. However, he did not deal with the other condition that if no sale proceeded, the taxable supplies would have been less than $30,000. The appellant continued to receive rent that, in the event that a sale was not planned on the proposed deregistration date, would have still exceeded $30,000.

The Court noted that the appellant emphasised the use of the word "planned" in Lopas whereas the Commissioner argued "contemplated" as used in Lopas better summarised the test. The Court, with respect to both counsel, considered that too much significance was being attached to the wording in Lopas. It was a judicial decision, not legislation, the Court in Lopas properly characterised the proposed sale, on the facts in that case, as "planned" but did not suggest that this was a gloss to be placed on the statutory wording of section 52.

After applying the statutory test the Court held that it was required:

• ... to determine whether, on the facts of the case, the relevant statutory test was met. In the present case, that requires us to assess whether there were grounds for the Commissioner to be satisfied that the value of Mr Thompson's taxable supplies in the 12 months beginning on 30 November 1999 would be not more than $30,000. Given the impending sale of part of the Rolleston property for well over $30,000, there obviously were not. That is all we need to say about this aspect of the appeal. [35]

The first Armagh sale

The Court upheld Dobson J's decision that the appellant's deregistration on 30 November 1999 was ineffective and that the Commissioner had properly reversed it:

• ... the first Armagh transaction took place before the subsequent deregistration date of 31 July 2000 and therefore at a time when Mr Thompson remained registered for GST purposes. [37]

The Court noted that Dobson J considered whether the first Armagh sale was "planned" but observed that, as previously noted, the statutory test is not whether a transaction is planned but whether the Commissioner has reason to be satisfied that no transaction taking all taxable supplies over the $30,000 limit would occur and in the present case, the appellant would not have been able to satisfy the statutory test at any time before the first Armagh sale.

The second Armagh sale

The Court, for the reasons given in relation to the first Armagh sale, considered that the appellant could not satisfy the Commissioner as at 30 November 1999, as at 30 July 2000 or at any time in between that he would not have taxable supplies exceeding $30,000 in the forthcoming year.

However, there had been a dispute between the appellant and the Commissioner over the request to deregister from 30 November 1999 and on 22 October 2002 the Commissioner sent an automatically generated letter that said:

• Your registration for GST has been cancelled, in terms of Section 52 of the Goods and Services Act 1985, with effect from the taxable period ending 31 JUL 2000.

The Court found that the appellant appeared to have been deregistered by an Inland Revenue Department officer holding the proper authority and was satisfied the Commissioner did deregister the appellant from 31 July 2000.

The appellant argued that a taxpayer must be registered for the relevant GST period before the Commissioner can make an assessment and that he was deregistered at the time of the second Armagh sale. The Commissioner was now time barred from overriding the 31 July 2000 deregistration and validly assessing the appellant for GST on the second Armagh sale.

The Court looked at the effect of section 108A of the Tax Administration Act 1994, which prevents the Commissioner from making an assessment after a four-year period has elapsed from the end date of the relevant taxable period. The relevant taxable period here was 1 August 2000 to 31 January 2001 and the Commissioner did make an assessment within four years of this. A letter confirming this was sent on 24 January 2005.

After interpreting section 108A, the Court held:

• ... The focus of s 108A is on the assessment, not on the registration ... As Mr Thompson made taxable supplies in the relevant period having a value exceeding the statutory period [sic], he was a "person who is required to provide a GST tax return" for the period ending on 31 January 2001. [55]

Even someone who has never registered for GST can be assessed if they have made supplies of sufficient value to make them liable to register. The GST Act does not oblige the Commissioner to register a person before making him or her liable for GST, the obligation to apply to register falls on the taxpayer alone.

It was concluded by the Court that the assessment for the period from 1 August 2000 to 31 January 2001 is valid and should have been upheld, and allowed the Commissioner's cross-appeal on this point.

Results

The appeal by the appellant was dismissed by the Court.

The cross-appeal by the Commissioner was allowed in part upholding the assessment for the GST period ending 31 January 2001.

The cross-appeal by the Commissioner against the High Court decision that the assessment for the period ending 31 July 2000 wrongly included output tax and did not take into account input credits was dismissed.

The alternative tax avoidance argument was not considered. The Court also agreed with the High Court's view that a number of other circumstances might make remission of penalties appropriate and that the there is a "strong basis" for the Commissioner to "acknowledge his Department's contribution to the non-payment of GST ... by any appropriate remission of penalties".

Costs were awarded to the Commissioner.