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10 Aug 2012
Appeal Status
Not appealed

No taxable activity

2012 case note - taxpayer objected to its input credit claims being disallowed and being deregistered for GST - taxpayer did not prove it had a taxable activity.

Taxpayer Ltd (in receivership) v Commissioner of Inland Revenue [2012] NZTRA 05


The taxpayer objected to its input credit claims being disallowed and being deregistered for goods and services tax (GST). The taxpayer did not prove it had a taxable activity and its other grounds of objection (sham, onus on the Commissioner, bad faith and malicious harassment) were all rejected.

Impact of decision

This finalises an objection first made in August 1996.


This proceeding originally involved two tax types: income tax and GST. The income tax issue was resolved in favour of Taxpayer Ltd ("the objector") thus leaving the GST issues to be determined.

On 1 October 1986, the objector registered for GST on a two-monthly return basis. Later, it changed to a six-monthly basis for periods ending 31 January and 31 July and described its taxable activity as unlicensed moteliers. On 20 February 1987, the objector was placed into receivership.

By October 1995, the objector was the principal in an agency and management agreement within a group of companies. The related agent was a fuel transporting company, F Limited.

In August 1996, the Commissioner reassessed the objector's GST returns (disallowing input tax credit claims) for the periods ended 31 July 1992 to 31 January 1996 inclusive and deregistered.


Did the objector supply sufficient evidence in support of its GST registration?

To qualify for opting to register for GST, the objector must carry on a "taxable activity" or intend to do so from a specific date (section 51(3) of the Goods and Services Tax Act 1985).

Evidence was given on behalf of the Commissioner at the hearing that the objector failed to show that it was carrying on a taxable activity. It was also noted that the objector stopped accounting for sales in 1990 and from then onwards the objector usually had large losses due to interest costs.

The receiver submitted that he was the receiver of the objector and was authorised to give evidence on its behalf. He argued that a taxable activity effectively continues to the end of a receivership. He submitted that as the receiver's costs are incurred in respect of the past taxable activity and the closing down thereof, such receiver's costs are a legitimate claim in respect of the period in which they are incurred.

When asked what the taxable activity of the objector was from October 1988, the receiver's response seemed to be that the objector's inputs were used by F Limited, which had become the principal with the objector as its agent. Accordingly, the objector's activity was purportedly hauling fuel.

Judge Barber found this to be inconsistent with the financial accounts for F Limited, which showed that in 1994 it had ceased receiving any cartage receipts or income. Further, his Honour found that:

  1. the chattels necessary to conduct the taxable activity, which the receiver purports to be continuing, were sold in 1989;
  2. there was an apparent and unexplained lack of sales after 1990, which lines up with the actual cessation of the taxable activity;
  3. no consulting fees to substantiate the objector's submission that an agency and a management agreement existed (between the objector and F Limited) prior to 1994; and
  4. there was no income from any business activities potentially capable of being a taxable activity until 1995.

The receiver's evidence showed that the inputs accounted for by the objector related solely to receivership costs and that the objector had to borrow money to meet those costs.

His Honour held that the taxable activity concluded in 1990 at the latest. He rejected the argument that a taxable activity can be assumed to exist from the mere fact of receivership and held that a taxable activity must still be conducted. The receiver may have entered into a new taxable activity in 1994 (although it is not clear) but any such new taxable activity cannot be part of the cessation of an earlier one.

Did the objector justify the failure to account for any output tax during the period it was registered for GST? 

The receiver submitted that output taxes payable by the objector were returned by F Limited as the objector's agent.

Evidence for the Commissioner emphasised that it was unusual for a single GST activity to be split so that one taxpayer accounts for the output and another for the input tax.
Judge Barber found that the objector had not returned any GST outputs since the date of registration and had only accounted for input credits creating refunds to it.

Other grounds of objection

The objector invoked a number of non-tax-specific grounds of objection:

  1. Sham must underlie the GST assessments and accordingly it formed a basis of objection.
  2. There is a threshold onus on the Commissioner to show any assessments are not manifestly arbitrary, or demonstrably unfair.
  3. The assessments are motivated by bad faith for the ulterior motive of destroying the receiver's business and that this is an illegal and proper purpose.
  4. The objector has suffered unfair and questionable conduct by the Commissioner as part of malicious harassment of the receiver.

Judge Barber rejected these grounds of objection and found that none of the contentions made by the objector were supported by evidence to establish its position on the balance of probabilities. Accordingly the objection was dismissed and the GST deregistration and reassessments (bar one due to time bar) were confirmed.

Judge Barber specifically noted that he imported into this decision the reasoning in [2012] NZTRA 04 issued on the same day, mutatis mutandis.

Goods and Services Tax Act 1985