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24 Jul 2013
Appeal Status

Eligibility of goods to be zero-rated for GST purposes

2013 case note – exported goods subsequently incorporated in to other goods – Court found goods consumed in NZ and not eligible to be zero-rated.

[2013] NZTRA 04 TRA 31/11

Goods and Services Tax Act 1985


The taxpayer entered into an agreement to export goods to an overseas-based purchaser. After entering the agreement there was a change of approach by the purchaser who arranged for the goods to be used in New Zealand to manufacture different goods. The taxpayer argued that its goods were still ultimately exported and therefore that supply could be zero-rated for goods and services tax ("GST") purposes. The Court found that the underlying goods had been consumed in New Zealand and therefore were not eligible to be zero-rated.

Impact of decision

This decision confirms that where there is manufacture, the old goods lose their identity and are consumed within the new goods.


The dispute involves a challenge to the Commissioner's assessment disallowing the zero-rating for GST purposes of supplies of stainless steel spheres, made by the disputant, to a company based in the United Kingdom.

The disputant submits that it supplied and exported the spheres to the United Kingdom, and that those supplies accordingly qualified for zero-rating under section 11 of the Goods and Services Tax Act 1985 ("the GST Act").

The Commissioner believed that the disputant did not export the goods as required under the GST Act, and therefore incorrectly returned the supplies in the relevant GST period as being zero-rated. The Commissioner contends the spheres were used in New Zealand in the manufacture of a sculpture, which was subsequently exported to the United Kingdom by another party.

Accordingly, the Commissioner made an adjustment to the GST period ending 31 July 2009 to increase the GST payable by the disputant.


In regards to the first issue, the disputant argued that the goods exported were the spheres, not the sculpture. The Commissioner contended that the spheres were incorporated into the sculpture here in New Zealand, and it was the sculpture that was exported. Once incorporated in the sculpture the spheres no longer possessed an independent identity and could not constitute "goods" for GST purposes in their own right.

The Commissioner referred to a number of decisions from different jurisdictions and submitted that where there is manufacture, the Courts have held that old goods lose their identity and are consumed within the new goods. Judge Sinclair accepted the Commissioner's submissions that those principles are generally applicable here.

In Wellington City Council v Attorney General [1990] 2 NZLR 281 the Court of Appeal observed that whether a particular process has resulted in a product essentially different will be a question of fact and degree. Judge Sinclair found that the sculpture was very different from the spheres. For these reasons, Judge Sinclair found for the purposes of the GST Act the spheres were consumed and used in New Zealand in the manufacture of the sculpture, and accordingly the supplies of spheres were not eligible to be zero-rated.

In regards to the second issue, the Commissioner submitted that what is required by sections 11(1)(a), (b) and (c) is that the supplier of the goods is the person who exports the goods. Judge Sinclair agreed with that submission, and reiterated her earlier finding that it was the sculpture that was exported and this was not exported by the disputant.

In regards to the third issue, the disputant alleged that there was an informal agreement constituting an agency agreement between it and the company that manufactured and exported the sculpture under section 60(1) of the GST Act. The general manager of this company denied they were acting as the disputant's agent. Judge Sinclair also found that ownership of the spheres passed from the disputant to the United Kingdom company in New Zealand so that, at the time of the export, the disputant had no legal or beneficial interest in the spheres now incorporated into the sculpture on which to found an agency arrangement.

Finally, the disputant submitted that the Commissioner has discretion under sections 6 and 6A of the Tax Administration Act 1994 to allow zero-rating when the supplier does not export the goods. The Commissioner submitted that while she accepts the situation came about due to a change in terms of the disputant's contract of supply with the United Kingdom Company, and not because of any deliberate attempt to avoid payment of its tax obligation, she has no discretion to zero-rate the supply.

Judge Sinclair accepted the Commissioner's submissions that the care and management responsibilities set out in sections 6 and 6A of the Tax Administration Act 1994 do not authorise her to interpret or apply the GST Act in a manner which is inconsistent with the scheme of the legislation. In the present case, section 11(1) of the GST Act specifically requires that the supplier be the exporter. The GST Act does not provide any discretion to the Commissioner to deem someone to be the exporter to meet this requirement.