High Court guidance on GST "associated persons" test

Summary

When determining whether two entities are associated under the Goods and Services Tax Act 1985 ("GST Act"), the High Court held that the 100% voting interest that one  company ("Company A") holds in a second company ("Company B") is attributable to the owner of Company A for the purposes of s 2A(1)(a)(i) of the GST Act.

Facts

This appeal concerns the associated persons test for goods and services tax ("GST") purposes.

Mr Cummings was the sole director of both Concepts 124 Limited ("Concepts") and Ormiston Residential Ltd ("Ormiston"). He also owned 100 per cent of the shares in both Concepts and Ormiston via intermediate holding companies, Working Concepts Ltd ("Working Concepts") and Flatbush Holdings Ltd ("Flatbush"). Flatbush held 75% of the equity in Ormiston for the benefit of the Flatbush Holdings Trust ("the FBH Trust") and 25% for the benefit of Mr Cummings.

In October 2004, Flatbush purchased a property ("the Property") for $847,000, which included GST of $94,111.12. Flatbush later nominated Ormiston as purchaser, and Ormiston began to develop the Property into an apartment block complex. Ormiston was not registered for GST.

In July 2008, Ormiston and Concepts entered into a sale and purchase agreement for the Property which was signed by Mr Cummings on behalf of both companies for a total purchase price of $8,034,750. This purchase price was to be paid in 18 instalments. Ormiston was not GST registered, therefore its sale of the Property to Concepts was not a taxable supply.

Concepts, on the other hand, was GST registered and claimed GST input credits in respect of 17 instalments which were paid during the GST tax periods between July 2008 and October 2009.

However, the Commissioner took the view that Ormiston and Concepts were associated persons. As such, under s 3A(3) of the GST Act, the Commissioner reassessed Concepts as only being entitled to claim an input credit equal to the GST ($94,111.12) included in the purchase price Ormiston paid for the Property, rather than the $799,000 input credit Concepts had claimed, being 1/9 of the second purchase price of $8,034,750.

Concepts challenged the Commissioner's assessment in the TRA. The TRA, in a decision dated 17 December 2013, upheld the Commissioner's approach, finding that Concepts and Ormiston were associated persons under s 2A(1)(a)(iii) of the GST Act.

Concepts appealed the TRA's decision to the High Court on the basis that it was wrong in law.

Decision

Based on the overall scheme and history of the relevant provisions, the High Court concluded that contrary to what was argued by the Commissioner, Concepts and Ormiston were "associated persons" by virtue of s 2A(1)(a)(i) of the GST Act. The High Court held that under s YC 2(1) of the Income Tax Act 2007 ("ITA"), Working Concepts and Flatbush both had 100% voting interests in Concepts and Ormiston respectively. Pursuant to s YC 4(2) of the ITA, those voting interests in Concepts and Ormiston were attributable to Mr Cummings because he owned both Working Concepts and Flatbush [38].

The High Court noted that, if it had accepted the Commissioner's view on the non-applicability of s 2A(1)(a)(i) of the GST Act, it would have agreed with Concepts' submission that the control to which the Commissioner had pointed, being one based on share ownership, would not be a means of control "by any other means whatsoever" [78].

The High Court accepted the Commissioner's alternative argument that Concepts and Ormiston were associated persons pursuant to s 2A(1)(a)(iii) of the GST Act because the combination of Mr Cummings' voting interests in Concepts, his ownership and control of Flatbush, and his power of appointment and removal of trustees in the FBH Trust, meant that he had control of "each of those companies by any other means whatsoever" [79].

The High Court rejected Concepts' argument that s 2A(1)(a)(iii) of the GST Act required the "any other means whatsoever" to be the same means for each of the two companies in question. Clifford J considered that this was an overly strained interpretation of the provision [81].

Despite the way the parties argued the appeal, Clifford J decided that he was not precluded from dismissing Concepts' appeal for reasons other than those argued. As a result, the Commissioner's assessment was confirmed and the appellant was only entitled to an input tax deduction in the sum of $94,111.12 [74 and 82].