Supreme Court considers the application of sections 52(1) and (2) of the Goods and Services Tax Act 1985
2012 case note – Supreme Court held that rental income following sales showed an on-going supply and de-registration dates must be according to CIR's assessments.
Upon an appeal from the Court of Appeal, the Supreme Court was required to consider the dates of deregistration following three sale transactions; the Lopas decision; and the wording of section 52 of the Goods and Services Tax 1985 ("GST Act").
The Court held that the rental income following the sales showed an on-going supply and therefore the de-registration dates must be according to the Commissioner's assessments. The Court further looked at the Lopas decision of relevance and confirmed that the statutory language must govern any other interpretation. The Court further provided a test under section 52 that deregistration depends on the Commissioner being "satisfied" that taxable supplies for the following 12-month period were not going to exceed the threshold.
Impact of decision
The Lopas decision is reaffirmed. Proceeds from sales which were planned or contemplated as likely to occur at the time of deregistration should be allowed for in the section 52(2) assessment, which gives effect to the statutory language of section 52.
The Supreme Court has provided some helpful guidelines regarding the proper approach to deregistration for GST, and these are intended to assist in the future application of section 52.
This is an appeal from the Court of Appeal.
Mr Thompson owned just over 200 hectares of land near Rolleston that he acquired in 1979. It was leased out as a rental, which, because the rent included rates, was in excess of $30,000 per annum.
Mr Thompson was registered for goods and services tax (GST) purposes but applied to de-register on the premise that his taxable supplies would not exceed $30,000 within the 12 months following de-registration. The Commissioner accepted Mr Thompson's application to de-register and Mr Thompson's de-registration was effective from 30 November 1999.
After his de-registration, Mr Thompson disposed of the Rolleston land in three sale transactions, which occurred in December 1999, March 2000 and September 2000. The two latter sales were to an associated party. Mr Thompson did not account for output tax on any of the land sales given his de-registered status.
Despite his de-registration, up until mid-June 2000 (when the first land sale was finalised), Mr Thompson continued to recover the same amount of rent and GST. Following an investigation, the Commissioner cancelled the November 1999 de-registration and reinstated Mr Thompson's registration until 31 January 2001.
Mr Thompson challenged the Commissioner on the new de-registration date and was successful in the Taxation Review Authority ("TRA") where it was concluded that the proceeds of future sales were irrelevant to the section 52(2) assessment, but given that such sales were going to occur, his future rental receipts as at 30 November 1999 were going to be under the threshold.
Subsequent to the TRA decision, the Court of Appeal released Lopas v Commissioner of Inland Revenue (2006) 22 NZTC 19,726 (CA) where the Court of Appeal held that a proposed disposal of assets, which in that case had been "planned" at the de-registration date, was relevant to the section 52(2) assessment. They therefore rejected the approach to section 52(1)(c) which had been taken by the TRA in Lopas and which the TRA had applied in Mr Thompson's challenge. The Supreme Court subsequently declined leave to appeal in Lopas.
The Commissioner appealed the TRA decision given the result in Lopas. Millar J allowed the Commissioner's appeal and directed that a rehearing, which was necessary, should be in the High Court. Mr Thompson appealed to the Court of Appeal.
The Commissioner was partially successful in the High Court, which upheld the assessments of output tax on the first two sales but not the third, and completely successful in the Court of Appeal, which upheld all three assessments.
Both the High Court and Court of Appeal considered Lopas and, in particular, the significance of the word "planned". The Court of Appeal took the view that the High Court was wrong to focus on the words used in Lopas (and in particular the word "planned") rather than the text of the statute.
The Supreme Court granted leave on the following grounds:
- When did the appellant become entitled to be de-registered for GST purposes?
- In light of that determination, and the circumstances in which they took place, did the second and third sales of land attract GST?
The most important issue in the case was whether at the two possible de-registration dates proposed by Mr Thompson (namely 9 February and 31 July 2000), the proceeds of the second and third land sales were required to be taken into account in assessing prospective turnover.
Given that the case was dealt with differently in the High Court and Court of Appeal, the Supreme Court addressed the significance of the rental turnover, which involved considering whether the prospective rental income alone would have surpassed the threshold at the two possible de-registration dates proposed by Mr Thompson, before addressing the significance of the proceeds of future land sales.
The Supreme Court considered that by 31 July 2000, Mr Thompson had resolved the problem that the rent he had been receiving included GST and as the first two sales had occurred, the rental turnover for the following 12 months would be under the threshold.
However, the Supreme Court considered the earlier date problematic. As at 9 February 2000, Mr Thompson was in the course of the "unsatisfactory implementation of a doubtful tax plan" and therefore was not a promising candidate for the favourable exercise of a discretionary judgment to move his de-registration date. In any event, Mr Thompson had continued to collect GST from his tenant until June 2000, which meant that he could not obtain a de-registration date that preceded the time of supply in relation to the second sale.
Relevance of the proceeds of future land sales
The Supreme Court disagreed with the High Court's interpretation of "planned" in the Lopas case. Although the Lopas judgment used the word "planned" in the context of a sale being planned at the time of deregistration, it also used the words "in contemplation", which in that context suggested that proceeds from sales that were contemplated at the time of deregistration should be allowed for in the section 52(2) assessment. Accordingly, the Supreme Court reaffirmed the Lopas decision although making it clear that the statutory language must govern.
The Supreme Court held that on any possible approach to section 52(2), it could not be predicated as at 30 November 1999, 9 February 2000 or 31 July 2000 that there would not be a sale of the balance of the land within the next 12 months.
Application of the test under sections 52(1) and (2)
The Supreme Court stated that de-registration depends on the Commissioner being "satisfied" that taxable supplies for the following 12-month period were not going to exceed the threshold.
The Supreme Court provided the following advice to assist in the application of section 52:
- The section means what it says and there is not much point in trying to paraphrase it.
- The section requires the Commissioner to be satisfied that turnover will not exceed the threshold. This involves an objective, forward looking assessment, not one controlled by hindsight.
- The test will not be satisfied when transactions which would result in the turnover being exceeded are either:
- being implemented at the proposed de-registration date, or
- planned to occur (or contemplated as likely to occur) in the course of the following 12 months.
- The test will probably only be satisfied where a taxpayer can show a settled intention that such transactions will not take place.
Both grounds on appeal were dismissed.
Goods and Services Tax Act 1985, Tax Administration Act 1994