TRA clarifies scope of "control by any other means whatsoever" associated persons test

Summary

The Taxation Review Authority ("TRA") found that because two companies, the disputant and Company O were "associated persons" under section 2A(1)(a)(iii) of the Goods and Services Tax Act 1985 ("GST Act"), the disputant was not entitled to claim the entire goods and services tax ("GST") component of the purchase price of the property purchased from Company O. The GST input credits available to the disputant were instead limited to the GST component of the significantly lower purchase price Company O had originally paid for the property.

Impact of decision

The TRA has clarified the interpretation of section 2A(1)(a)(iii) of the GST Act, finding that it was intending to operate as a "catch all" provision covering the association of companies by control, not specifically covered by the tests under subparagraphs 2A(1)(a)(i) and (ii).

Facts

Mr A is the sole director of both the disputant company and Company O. The disputant company is wholly owned by Company W, of which Mr A is the sole director and shareholder. Company O is wholly owned by Company F, which is in turn wholly owned by Mr A. Company F holds 75% of the shares in Company O for the benefit of the LM Trust and the remaining 25% of the shares for the benefit of Mr A.

In October 2004, Company F (or nominee) purchased a property ("the Property") for a total purchase price of $847,000. This included a GST component of $94,111.12. Company F then nominated Company O as purchaser. Company O then began to develop the Property into an apartment block complex.

In July 2008, Company O and the disputant company entered into a sale and purchase agreement for the Property. Mr A signed the agreement on behalf of both companies. The purchase price including GST was $8,034,750, which was to be paid in 18 instalments by book entry to Company O. The disputant company claimed GST input credits in respect of those 17 instalments, paid in the GST periods between July 2008 and October 2009.

Decision

Sinclair J began by noting that the disputant and Company O were not "associated" companies under section 2A(1)(a)(i) or the test under section 2A(1)(a)(ii) of the GST Act. The focus of the case would therefore be on section 2A(1)(a)(iii). Section 2A(1)(a)(iii) states that two companies are "associated persons" for the purposes of the GST Act if, amongst other things, a group of persons has "control of each of those companies by any other means whatsoever". In essence, Sinclair J found that section 2A(1)(a)(iii) was sufficiently broad to apply in the present case, and held that both the disputant and Company O were controlled by Mr A and that the two companies were "associated persons" under section 2A(1)(a)(iii).

In considering the purpose of section 2A(1)(a)(iii), Her Honour referred to the Inland Revenue Department Commentary on Taxation (Annual Rates, GST, and Miscellaneous Provisions) Bill [Wellington: Policy Advice Division of Inland Revenue Department, May 2000] which summarised the amendments concerning input tax deductions for second-hand goods:

• The amendment limits the credit available in relation to supplies of second-hand goods between associated parties to the GST component (if any) of the purchase price to the vendor to remove the incentive to enter into transactions primarily to gain the input tax credit.

Sinclair J then considered the meaning of "control", as it appears in section 2A(1)(a)(iii). Her Honour accepted the Commissioner's submission that "control" has predominantly been held to mean legal control and found that Mr A did have legal control of each of the companies through voting interests. Sinclair J noted that section 2A(1)(a)(iii) was also wide enough to include other forms of control.

The TRA referred to IRC v Bibby and Sons Limited [1945] 1 All E R 667 (HL), which held that the fact a shareholder was a trustee was not a relevant consideration when determining legal control. In the present case, Sinclair J did not find the existence of the LM Trust to be a matter to be taken into account under subparagraph (iii). Her Honour went on to find that the phrase "by any other means whatsoever" suggested that subparagraph 2A(1)(a)(iii) had a broad effect and operated as a "catch all" provision, covering the association of companies by control not specifically covered by the tests under subparagraphs 2A(1)(a)(i) and (ii).

The disputant argued that the word "other" in the phrase "by any other means whatsoever" suggested that control must be by means other than those identified in subparagraphs 2A(1)(a)(i) and (ii). Her Honour held that the word "other" did not restrict the ability to consider voting interests under subparagraph 2A(1)(a)(iii) where the test set out in subparagraph 2A(1)(a)(i) did not apply. Sinclair J held that control via a corporate trustee comes within subparagraph 2A(1)(a)(iii) as it must be "by other means".

Sinclair J accepted the Commissioner's submission that there was no policy reason to exclude control by voting interests under subparagraph 2A(1)(a)(iii) and stated that it would be against the intention of the legislature to adopt the disputant's interpretation of section 2A(1)(a)(iii), because to do so would have the effect of limiting the application of subparagraph 2A(1)(a)(iii). Sinclair J rejected the disputant's argument that the use of the word "each" in section 2A(1)(a)(iii) suggested that the same means of control had to apply to each company. Her Honour disagreed and held the phrase "by any other means whatsoever" had a wide effect and included more than one or different means.

In addition, the Commissioner, relying upon the decision of RWR v AJR [Trusts] [2010] NZFLR 82 (HC), found that Mr A had control of Company O because he had control over the LM Trust. In opposition, the disputant submitted that the fact that Mr A had power of appointment did not mean that he had control of the corporate trustee. Sinclair J did not find it necessary to consider this point as she already found that Mr A had legal control of Company O and the issues in RWR v AJR [Trusts] were not relevant.

Accordingly, the TRA confirmed the Commissioner's assessment and ruled that the disputant company was only entitled to an input tax deduction of $94,111.12, being the GST component of the purchase price Company O originally paid for the Property.