Receivers liable to return and pay GST on mortgagee sale
2011 case note - receivers liable to return and pay GST on mortgagee sale - GST, special return, caveat, liability.
Messrs Simpson and Downes, as receivers of Capital + Merchants Investments Ltd (in receivership), were personally liable to account to the Commissioner for the output tax on mortgagee sales.
Impact of decision
The Court affirmed a purposive approach to the interpretation of tax statutes.
A receiver of a mortgagee must personally account to the Commissioner for any output tax on any mortgagee sales and, it appears, must file the special return required by s 17 of the Goods and Services Tax Act 1985 (GST Act) as the person "selling the goods".
On 18 December 2006 Capital + Merchants Investments Limited (CMI) entered into a general security agreement in favour of Fortress Credit Corporation (Fortress) over all the assets of CMI. These assets included loans to five different borrowers, secured by mortgages over six properties.
After CMI defaulted on its obligations to Fortress, Richard Simpson and Tim Downes of Grant Thorton were appointed receivers ("the Receivers") of CMI on 23 November 2007. There were instances of default by the mortgagors and the Receivers exercised the powers of sale contained in the mortgages. CMI's indebtedness exceeded the gross realisation of all assets including the proceeds of the mortgagee sales.
GST was charged on each mortgagee sale. CMI completed s 17 of the GST Act special returns but did not pay the output tax returned in those returns.
Having traversed the factual background, the Court turned to consider the approach to the interpretation of taxing statutes. Having considered the Supreme Court decision in Ben Nevis Forestry Ventures Ltd & Ors v Commissioner of Inland Revenue, the Court concluded that both judgments (the minority and majority) in Ben Nevis recognised the appropriateness of a purposive interpretation to specific taxing statutes.
The Court then went on to consider s 5(2) of the GST Act and determined that the evident purpose of the subsection is to address the consequences of supplies occurring where the owner has granted security and the secured creditor effects the supply of the goods to a third party (ie, the secured creditor realises his/her/its security).
The aim of the provision is to match a buyer's entitlement to an input credit against the seller's obligation to account for output tax on the sale. To facilitate this matching, s 5(2) deems supplies in the name of the secured creditor to be supplies by the mortgagor. The critical element is not the identity of the person empowered to sell, but the identity of the person practically responsible for the power of sale being exercised.
The Court found that, were it necessary, it would be prepared to consider adopting the wider interpretation of s 5(2) that in circumstances such as the present, receivers would have standing as the "second person" where they exercised commercial and practical control over the transaction involving a taxable supply.
The Court, however, went on to determine the case on the basis of ss 17 and 58(1A) of the GST Act.
Section 17 imposes an obligation to file a special return on the "person selling the goods", whether or not the person is registered. The Court considered that it is a "fair assumption" that Parliament imposed this obligation because of an expectation that the person completing the return and effecting the sale will be the person who has received the consideration for the supply, including the GST.
The Court considered it relevant that caveats were lodged by Fortress on the properties and that Fortress purported to make it a condition of providing releases of the caveats that it be paid all monies available from the mortgagee sale, including any amounts paid by the purchaser in relation to GST. However, CMI as the mortgagee was only entitled to the net proceeds of the mortgagee sale after the payment of all expenses (which include GST, see Edgewater v Commissioner of Inland Revenue). Fortress could not assert any claim greater than that of CMI, which it was purporting to do by making the release of the caveats conditional on payment of all monies including the GST.
The Court went on to consider the further argument of the Commissioner that the Receivers were personally liable under common law and the equitable doctrine of the duty to account.
The Court accepted that, in public policy terms, it is undesirable to permit receivers to charge GST and pay that GST to their appointer (Fortress) when the mortgagee (CMI) would be required to pay the GST as an expense of sale to the Commissioner (Edgewater). This would demonstrate an indifference to the consequences for CMI (mortgagee) of being found in breach of obligations to account for the GST. The prospect of abuse of the provisions of the GST Act by engineering a receivership for the sake of the GST premium on recoveries in such situations and the equivalent cost to Inland Revenue could not be lightly dismissed.
The Court, however, was reluctant to impose a liability on the Receivers merely as a matter of public policy. The Court went on to consider, with it being inappropriate to attempt any definitive ruling without further evidence and argument, that there may be a credible cause of action against the Receivers in tort for having procured or been a party to a breach of a statutory duty.
Ultimately, the Court did not need to reach a decision that the Receivers were personally liable on these grounds as it had already found the Receivers liable under ss 5(2), 17 and 58 of the GST Act.
The Court concluded that the answer to the Receivers' application for directions was that they are liable to account to the Commissioner for the GST charged as an output tax on the respective sales of the relevant properties.
Goods and Services Tax Act 1985