Commissioner successful in associating two companies under section 2a(1) of the Goods and Services Tax Act 1985

Summary

The Taxation Review Authority ("TRA") held that the disputant and the vendor in a secondhand property transaction were associated persons under s 2A(1)(a)(i) of the Goods and Services Tax Act 1985 ("GST Act"). In the alternative, the TRA found the disputant had entered into a tax avoidance arrangement that was void as against the Commissioner of Inland Revenue ("the Commissioner") under s 76.

Facts

The proceeding concerned assessments made by the Commissioner reversing goods and services tax ("GST") input deductions claimed by Disputant Ltd ("Disputant") arising from the purchase of property from X Land Holdings ("X") for the GST periods ending 31 January 2007, 30 September 2007 and 31 January 2008.

In February 2006, Disputant and X entered into an agreement for the purchase and sale of property for $4,557,000.00 (including GST). By agreement, Disputant was to pay a $50,000.00 deposit to X with the balance for the land paid by nine instalment payments of $500,000.00 and a final payment of $7,000.00.

The Commissioner declined the GST inputs sought by Disputant under s 46 of the GST Act pending an investigation. Disputant issued a Notice of Proposed Adjustment ("NOPA") in respect of the Commissioner's decision to withhold the GST inputs and the Commissioner issued a Notice of Response in response. Upon completion of the disputes process the Commissioner made assessments for unpaid GST totalling $505,555.60 with shortfall penalties of $250,000.00.

The assessments were made on the basis that Disputant and X were associated persons under s 2A(1)(a)(iii) of the GST Act and alternatively, that the input credits claimed by Disputant were part of a tax avoidance arrangement that is void as against the Commissioner under s 76 of the GST Act.

Decision overview

The TRA decided in the Commissioner's favour finding that Disputant and X are associated persons under s 2A(1)(a)(i) of the GST Act by the binding High Court case of Concepts 124. In addition, the TRA upheld the Commissioner's alternative argument that the transaction constituted a tax avoidance arrangement under s 76 of the GST Act and was void as against the Commissioner.

However, the TRA did not find that Disputant and X are associated persons under s 2A(1)(a)(iii) of the GST Act - namely that Disputant and X were not associated by "any other means of control whatsoever".

In respect of the arguments raised by Disputant, the TRA:

1. found that the Commissioner did not unlawfully withhold the GST refunds sought by Disputant and that the decision to withhold the GST input credits was in accordance with s 46 of the GST Act;
2. upheld the Commissioner's position that the NOPA in respect of the GST return ending 31 January 2007 was received outside of the statutory time limit and that Disputant's explanation for the delay in issuing a late NOPA was without merit;
3. did not find that the Commissioner's assessments were invalidated for the various administrative arguments detailed by Disputant, including that the assessments were made without proper delegated authority, were in breach of s 6 of the TAA or New Zealand Bill of Rights Act, or that the Commissioner had a vendetta against Mr R.

These findings are discussed in detail below.

Discussion

Associated persons - ss 2A(1)(a)(i) and/or 2A(1)(a)(iii) of the GST Act

The Commissioner's principal argument was that Disputant and X were associated persons under s 2A(1)(a)(iii) of the GST Act. The TRA considered Disputant's argument that "association" under s 2A(1)(a)(iii) refers to legal control and that since each party had different legal ownership they were not associated under subsection (1)(a)(iii). The Commissioner submitted that even though X was legally controlled by shareholders based in the United States, the evidence showed that major decisions relating to the property were made by Mr R, and on that basis it was appropriate to find that Mr R had factual control of X. The Commissioner took a similar approach with Disputant, contending that while it appeared the Crown had legal control of Disputant, the Crown was unlikely to have any knowledge of Disputant and could not be said to have had any real control over Disputant.

The TRA did not uphold the Commissioner's argument and found that "control by other means" in s 2A(1)(a)(iii) does not include "factual control" but includes the other forms of legal control discussed in Concepts 124.

The TRA then considered the Commissioner's argument made on the final day of oral submissions that Disputant and X are associated under s 2A(1)(a)(i) of the GST Act due to a 100% commonality of voting interests between Disputant and X. This argument was made following the High Court's decision in Concepts 124 where Clifford J did not distinguish between shares held directly or in a trust capacity when considering whether two companies are associated by commonality of voting interests. Clifford J held that as a matter of basic company law, a share is held by the person registered as its holder for the time being in the company's share register and that company law requires companies to ignore trust interests. The TRA held that Concepts 124 was binding upon it and on that basis the TRA found that Disputant and X were associated notwithstanding the fact that Mr R argued the shares of Disputant were held on trust for the benefit of another company.

Tax avoidance arrangement - s 76, GST Act

The Commissioner's alternative argument was that the input tax credits claimed by Disputant were part of a tax avoidance arrangement that is void as against the Commissioner under s 76 of the GST Act. As a preliminary issue, the TRA accepted that the analysis undertaken in invoking s 76 of the GST Act would meet the requirements of the "four-step" analysis outlined in her Policy Statement on s 99 of the Income Tax Act 1976 ("ITA 1976"). However, the TRA agreed that the Policy Statement is applicable to s 99 of the ITA 1976 and the Privy Council's findings in O'Neil v the Commissioner of Inland Revenue (2001) 20 NZTC 17,051 and had no direct relevance in this proceeding.

The TRA was satisfied Disputant had entered into an arrangement. The TRA went on to consider whether there was any tax avoidance as defined in s 76(8)(c) of the GST Act. The TRA was satisfied that the increase in entitlement to a GST refund resulting from the arrangement satisfied the definition of "tax avoidance" in s 76(8)(c).

When considering whether tax avoidance was the purpose of the transaction, the TRA found that the various arguments made by Mr R were not substantiated and were inconsistent. The TRA held that the test to determine whether the purpose of a transaction is avoidance is objective and that "viewed objectively, [Disputant] has not given a cogent explanation to support a non-tax purpose of the arrangement … Put another way, 'but for' the arrangement no input tax credits would have been available to [Disputant]" (at [117]).

The TRA then considered whether the use of ss 2A(1)(a) and 3A(3) of the GST Act were within the contemplation of Parliament. The TRA observed that Parliament does recognise that claims for large input tax credits are made by registered purchasers stemming from the purchase of secondhand goods from non-registered vendors. Further, the TRA noted in some cases, the secondhand goods were being sold to an associated person principally to gain the input tax credit and to address this concern, Parliament had enacted ss 2A(1)(a) and 3A(3) of the GST Act to limit the credit available in relation to supplies of secondhand goods between associated parties.

The TRA agreed with the Commissioner that Parliament would not have contemplated that an input tax credit would be available on the sale of the property where the parties have gone to such efforts to minimise their formal association, and where a high degree of contrivance, pretence and artificiality is evident in the transaction. In support of this finding, the TRA's reasons included the ownership of both Disputant and X involved a complicated company structure, the fact that the transaction was not settled in accordance with the documentation and the fact that the day before the transaction occurred, Disputant and X swapped directors and Disputant had not provided any reason for why that step was taken. In the TRA's view, the only inference to be drawn was that it was done to lessen the association between the two companies.

Finally, the TRA agreed with the Commissioner that the purpose of tax avoidance was not merely incidental. Rather, the TRA was of the view on the evidence that the arrangement was entered into for the sole purpose of gaining access to input tax credits on the transfer of the property from X to Disputant.

Unlawful withholding of GST credits - s 46, GST Act

Mr R on behalf of Disputant submitted that the Commissioner's decision to withhold GST refunds due to Disputant contravened s 46 of the GST Act for a number of reasons.

In response to Disputant's argument that a s 46 notice is required to be issued by the Commissioner if she is not satisfied with a return whether there is a refund or not, the TRA held that s 46 is clearly intended to apply where a refund is sought and not otherwise.

Disputant argued that requirements under s 46 of the GST Act place a time limit on the Commissioner's ability to exercise her discretion under that section. The TRA agreed with the Commissioner and held that a decision by the Commissioner to withhold payment of a refund under s 46 is not a disputable decision.

Disputant argued that the Commissioner has chosen an arbitrary figure and because that figure was surpassed, the refund was automatically refused (and a s 46 letter issued). In these circumstances, Disputant argued that it was not a situation where the Commissioner (for the purposes of s 46(2)) had not been satisfied with the return. The TRA accepted evidence of the Commissioner's officer that there was no process in place for the automatic generation of s 46 notices.

Disputant argued that the Commissioner could have paid the refund and carried out any investigations subsequently. The TRA agreed with the Commissioner that Disputant's approach was at odds with the Supreme Court's view in Contract Pacific Limited v Commissioner of Inland Revenue [2010] NZSC 136. Accordingly, the TRA found that once notice is given by the Commissioner to investigate a particular GST return, the Commissioner is not required to pay any refund until the point in time stipulated in s 46(1)(b) of the GST Act.

Assessments invalid for administrative reasons

Disputant raised a number of administrative arguments as to why the assessments made by the Commissioner were invalid. The TRA considered each and made the following findings:

1. Mr R's allegations of vendetta were not upheld. The TRA considered that Mr R's submission of Judge Willy's comments in Case U11 (1999) 19 NZTC 9,100that "the feuding must stop" had no relevance to this proceeding. Further, the TRA considered that the TRA was not the appropriate forum to raise allegations of vendetta. The TRA held that if Disputant wished to pursue such allegations, the appropriate procedure is by way of judicial review in the High Court.
2. The Commissioner's decisions were made with delegated authority, notwithstanding that the authorised delegation holder did not conduct the entire investigation and associated consultation. The TRA relied upon the comments of Collins J in Accountants First Limited v Commissioner of Inland Revenue [2014] NZHC 2446 at [63]in coming to that view.
3. The TRA did not find that the Commissioner's actions were in breach of either s 6 of the TAA or the New Zealand Bill of Rights Act 1990.