Receivers obliged to pay GST on mortgagee sales
2012 case note – receivers obliged to pay GST on mortgagee sales to the CIR - creditor, liability, receivership.
This case was an appeal from the High Court which had found the receivers were personally liable for goods and services tax ("GST") payable by Capital & Merchants Investments Ltd (in receivership) ("CMI") in relation to five mortgagee sales. The Court of Appeal held that the receivers do not have "personal liability" for the payment to the Commissioner of Inland Revenue of GST payable by CMI but are obliged as receivers of CMI to pay GST to the Commissioner.
Impact of decision
This decision confirms that receivers are not "personally liable" for payments of GST when conducting mortgagee sales as agents of companies in receivership. However, the receivers are obliged to pay GST on mortgagee sales to the Commissioner.
Capital & Merchant Investments Ltd was placed into receivership by the general security agreement holder, Fortress Credit Corporation (Australia) II Pty Ltd ("Fortress"). Simpson and Downes, of Grant Thornton New Zealand Ltd, was appointed as receivers.
Five properties, which CMI held mortgages over, were sold by mortgagee sale and GST was incurred in respect of each sale. CMI filed returns under section 17 of the Goods and Services Tax Act 1985 ("GST Act") but no GST was paid with the returns.
The Commissioner and the receivers agreed that the receivers would pay GST to the Commissioner and the receivers would apply to the High Court for directions under the Receiverships Act 1993. The issue agreed upon in the application to the High Court was whether the receivers had "personal liability" to the Commissioner for the GST payable by CMI in relation to the mortgagee sales. If the receivers were not personally liable, the GST would be refunded within seven days.
The High Court1 found the receivers had "personal liability" to the Commissioner for the GST incurred in the five mortgagee sales. The receivers appealed to the Court of Appeal.
The Court of Appeal considered three issues:
- Did the receivership of CMI mean that the Commissioner became an unsecured creditor for the GST with Fortress, as secured creditor, entitled to receive the GST in priority?
- Did the receivers have "personal liability" to pay the GST to the Commissioner as the High Court held?
- What answer should be given to the agreed issue in the context of an application for directions under section 34 of the Receiverships Act 1993?
Does CMI's receivership mean Fortress is entitled to GST?
The Court determined that Fortress was not entitled to the GST and CMI was liable for the GST for the following reasons:
- Even though CMI, as a finance company, was not registered for GST they were still required to pay the GST. This is because under sections 5(2) and 17 of the GST Act, CMI was required to return and pay the GST regardless of whether it was registered for GST or not.
- Under section 185 of the Property Law Act 2007, CMI must pay all amounts reasonably paid by CMI "with a view to the realisation of the security", which includes the GST.
- Lastly, GST paid to a mortgagee on a mortgagee sale must be paid by the mortgagee to the Commissioner.
Applying Edgewater 2, the GST payment must be made to the Commissioner as a cost of sale and "simply does not reach the general funds of the mortgagee". The differences between section 104 of the Land Transfer Act 1952 (which has been repealed) and section 185 of the Property Law Act 2007 (which replaced section 104) are immaterial.
The Court found that the application of sections 5(2) and 17 of the GST Act and section 185 of the Property Law Act 2007 in accordance with Edgewater is not altered by the appointment of receivers because of the following:
- The judgment in Edgewater makes it clear that there is no policy in the GST Act of protecting secured creditors and the Commissioner is in a better position than secured creditors with respect to GST.
- Under clause 12.1 of the general security agreement between Fortress and CMI, Fortress was entitled to receive the "net proceeds of the sale" which excludes GST and any other payments made to third parties on the sales of the properties. Fortress therefore had no contractual right to the GST payments on the mortgagee sales and the GST payment must be made to the Commissioner as separate from the general funds of the mortgagee. The GST simply did not reach the general funds of the mortgagee.
- The Court distinguished the facts of Stiassny3 because that case did not involve a mortgagee sale nor the application of section 185 of the Property Law Act 2007. The Court also distinguished the Australian case of PM Developments 4 because in that case there was no provision equivalent to section 185.
- The view that as a matter of principle a receiver is obliged to account to the Commissioner for the GST received on a mortgagee sale is consistent with the English case of Sargent v Customs and Excise Commissioners 5 and there is force in the view that a receiver is obliged to pay GST even if no personal liability is imposed.
Because of these reasons, the Court found that the receivers were obliged to pay the Commissioner GST under sections 5(2) and 17 of the GST Act and not to the secured creditor. The terms of agreement by which the secured creditor released its caveats could not influence the application of the statutory provisions.
The personal liability of the receivers
The Court did not consider the receivers had "personal liability" for the payment of GST:
- Section 58(1) of the GST Act provides that a receiver is personally liable for the payment of GST incurred during the receivership; this does not apply to a mortgagee sale made by a company not carrying on a taxable activity and therefore is not relevant in this case.
- Section 5(2) requires that goods shall be deemed to be sold by the first person (the mortgagor) if sold by a second person who can exercise the power to sell the property. The receivers were acting as agents of CMI and therefore could not be the person by whom the power to sell can be exercised as referred to in section 5(2).
- Section 17 requires that "the person selling the goods" file a return and pay GST. As agents for CMI, the receivers did not, themselves, sell the properties. Therefore, the receivers have no personal liability to pay the GST.
- Because section 51B only applies to Parts 3 and 6 of the GST Act, and not to section 58, CMI cannot be deemed to be a registered person for the purposes of section 58.
- CMI was never registered for GST and never conducted any taxable activity in its own right. The mortgagee sale was taxable activity of the mortgagor (the first person) under section 5(2), not CMI.
- Finally, because the receivers have an obligation to pay GST to the Commissioner under sections 5(2) and 17 of the GST Act and section 185 of the Property Law Act 2007, it is unnecessary to impose personal liability on the receivers. It would be unlikely that Parliament would intend liability under the GST Act to be implied.
The answer to the agreed issue
Simpson and Downes, as receivers of CMI, does not have "personal liability" for payment to the Commissioner of the GST payable by CMI.
However, the Court found that, while the agreed issue referred to the "personal liability" of the receivers in their capacity "as receivers" to account for the GST, in the view of the Court, the question is whether the receivers "as receivers" are obliged to account. The Court found that the receivers are obliged to account to the Commissioner for the GST received.
The Court took a wide interpretation of section 34 of the Receiverships Act 1993, approached the issue as a matter of substance over form and gave a direction that Simpson and Downes, as receivers of CMI, is obliged to pay the GST received on the five mortgagee sales to the Commissioner.
1 Simpson and Downes v CIR HC Wellington CIV 2010-485-1860, 17 May 2011.
2 Commissioner of Inland Revenue v Edgewater Motel Ltd  1 NZLR 425 (CA); and  UKPC 44, (2004) NZTC 18,644.
3 Commissioner of Inland Revenue v Stiassny and Graham  NZCA 93.
4 Deputy Commissioner of Taxation v PM Developments Pty Ltd  FCA 1886.
5 Sargent v Customs and Excise Commissioners  1 WLR 235 (HC) and  1 WLR 821 (CA).
Goods and Services Tax Act 1985, Receiverships Act 1993, Property Law Act 2007