Subdivision, Supply of Land, and Forestry: Taxable Activities?

Summary

The Commissioner of Inland Revenue (“the Commissioner”) reassessed the disputant, trustee of the X Trust (“the Trust”), disallowing the claim for GST input credits for the period ended 31 July 2009. The disputant challenged this on the following grounds:

1. the Commissioner’s decision to not issue a Notice Of Proposed Adjustment (“NOPA”) under s 89C(eb) of the Tax Administration Act 1994 (“the TAA”) on the basis of fraudulent activity was subject to a precondition of there being “reasonable grounds” for this, which was able to be challenged;
2. the Commissioner’s Notice of Response (“NOR”) was issued out of time;
3. the Trust was carrying on a taxable activity of subdivision, supply of interests of land and/or forestry;
4. the Trust was carrying on a taxable activity and it was entitled to the claimed input GST credits.

The Taxation Review Authority (“TRA”) found that, firstly, the Commissioner’s decision to not issue a NOPA under s 89C(eb) of the TAA could not be separated from the existence of reasonable grounds for belief in fraud, and so could not be challenged. Even if it could be, any failure by the Commissioner here would not be fatal. Secondly, notice of the Commissioner’s NOR was given when a notification card was placed in the disputant’s PO Box. Thirdly, the Trust was not engaged in a taxable activity. Fourthly, as the Trust had not been found to be carrying on a taxable activity, it was unnecessary to consider whether it was entitled to the claimed GST input credits.

Impact

The judgment confirms that the Commissioner’s exercise of her discretion under s 89C(eb) of the TAA is not subject to the right of challenge and that the existence of reasonable grounds to believe that the disputant has been involved in fraudulent activity is a matter left solely to the Commissioner. There is no basis for separating the decision not to issue a NOPA from the existence of the reasonable grounds.

The judgment also provides useful analysis of s 14 of the TAA (as it was then), clarifying that when notice is given by post under s 14(8), the deeming provision in s 14(9) applies unless there is evidence of actual delivery, in which case notice is given upon arrival.

Although specific to the facts of this case, the judgment provides interesting discussion on what tasks or course of conduct are required to constitute taxable activity. On the facts here, passively allowing planted trees to grow does not constitute the taxable activity of forestry and continuously awaiting the outcome of legal proceedings and the normal activities associated with purchasing land and land ownership do not constitute the taxable activity of subdivision.

Facts

The disputant (trustee of the Trust) challenged the Commissioner’s reassessment denying the disputant’s claim for input tax credits for the taxable period ended 31 July 2009 (“the disputed period”).

In or about 1992, one of the disputant’s companies purchased a block of land which had been used for forestry purposes. In subsequent years the land was subdivided, and in 2002 a certificate of title was issued for the property which was approximately 6.7419 hectares (“the property”). The property was then transferred between various entities related to the disputant.

The Trust was created by deed in January 2009 and was registered for GST. In March 2009 the disputant entered into a sale and purchase agreement to buy the property from Mr B, an associate of the disputant, with a possession date of 22 May 2009. The purchase price was $600,000 inclusive of GST (if any). In August 2009 the Trust filed a GST return for the disputed period and claimed a total input tax credit of $67,011.65 (including $66,666.67 on the purchase of the property).

During the period the property was owned by the Trust, the computer freehold register records that the property was transferred back and forth between trustees. The property was eventually sold to third parties in late September 2010.

Prior to the sale of the property in September 2010, a corporate trustee of the Trust granted a forestry right to itself for a term of 30 years at a consideration of $1.00 and provided an option for the grantee or nominee to purchase the grantor’s interest in the forestry block for $10.00.

At about the same time, an encumbrance was granted by the corporate trustee to itself which obliged the corporate trustee to establish a sustainable forestry management plan and/or vegetation and weed management plan. Both the forestry right and the encumbrance were then sold to entities related to the disputant for $40,000 each (GST inclusive). The GST on these transactions was returned in the disputant’s GST return.

Preliminary matters

There were two new issues raised by the disputant in his notice of claim and submissions:

1. Whether the reassessing officer lacked delegated authority to exercise any power or discretion under s 89C(eb) of the TAA and/or to make the reassessment so that the reassessment is invalid; and
2. Whether the Commissioner disregarded her obligations under s 27 of the New Zealand Bill of Rights Act 1990 (“NZBORA”) by making an unfair finding that the disputant was involved in fraudulent activity and/or not allowing the disputant to be heard in respect of s 89C(eb) so that the reassessment is a nullity.

In relation to both issues, the TRA concluded that these were matters that could have easily been raised in the disputant’s statement of position and as she considered the requirements of s 138G(2) had not been met, she declined the applications to allow these issues to be raised at the hearing. Further, the TRA considered that there was no basis on which a breach of s 27 of the NZBORA could be argued as the de novo nature of the hearing before the Taxation Review Authority cures any alleged breaches of process by the Commissioner and/or any irregular conduct.

Decision

Whether the Commissioner was entitled to exercise her discretion under s 89C(eb) of the Tax Administration Act 1994?

The issues raised by the disputant in relation to the Commissioner’s exercise of her powers under s 89C(eb) of the TAA were summarised as:

1. Whether the Commissioner had reasonable grounds to believe the trust was involved in fraudulent activity;
2. Whether s 89C(eb) provides grounds to refuse a refund of GST.

The TRA did not accept the disputant’s argument that although the Commissioner’s decision not to issue a NOPA cannot be challenged by the operation of s 138(1)(e)(iv) of the TAA, the issue as to whether or not the Commissioner had reasonable grounds to believe the taxpayer had been involved in fraudulent activity could still be the subject of a challenge. In the Judge’s opinion, the purpose of the section was clear and unambiguous: the Commissioner’s exercise of her discretion under s 89C(eb) is not subject to the right of challenge and therefore the existence of reasonable grounds to believe that the disputant had been involved in fraudulent activity is a matter left solely to the Commissioner.

In relation to the second question, the TRA did not accept the disputant’s argument that the Commissioner wrongly made her reassessment pursuant to s 89C(eb) and accepted the Commissioner’s contention that the assessment was amended using s 113 of the TAA.

Moreover, the TRA concluded that even if there had been a breach of s 89C(eb) by the Commissioner, the assessment would not have been invalidated due to s 114 of the TAA. The disputes process could still have continued, notwithstanding the Commissioner’s failure to issue a NOPA; in this case, the disputant did issue a NOPA and the dispute and claim proceeded in the usual fashion.

Whether the Commissioner’s Notice of Response was issued within time?

There was a factual dispute about when the disputant’s NOPA was issued. If the disputant’s evidence was accepted, the Commissioner’s NOR would have been issued out of time. However, the TRA did not accept the disputant’s evidence on this issue and concluded that the Commissioner’s NOR was required to have been issued and notified to the disputant by 2 November 2012.

The only address given by the disputant for the Trust was a post office box address. The Commissioner couriered her NOR to the AB Superette and Post Centre (“the Superette”), which operated as a shop and postal service outlet. The envelope was addressed for the attention of the disputant followed by the name of the Trust. The physical address of the Superette was then given as the particular courier company did not deliver to post office box addresses. The envelope containing the NOR was delivered to the Superette at 10.40am on 2 November 2012. The evidence of the Superette manager was that usual procedure was for the courier package or a yellow card to be placed into the post office box “straight away”. In this case, a yellow card was placed in the disputant’s post office box.

The TRA did not accept that delivery to a post office box is sufficient to satisfy the requirements of s 14(5) of the TAA under which the Commissioner could give notice by personal delivery to an addressee that is not a corporate body.

The TRA then considered s 14(8) of the TAA that enables the Commissioner to give notice by post and the postal deeming provision in s 14(9). In Commissioner of Inland Revenue v Sea Hunter Fishing Limited CA 142/01, 13 December 2001, the Court of Appeal said that notice is deemed to have been received when in the normal course of post it would have been delivered, however, if the notice actually arrives faster than the normal course of post it would be given upon arrival (at [21]).

The TRA concluded that there was no reason to believe that the usual practice was not followed by the Superette manager in respect of this delivery and she was satisfied that the yellow card was placed in the post office box immediately after the courier delivered the envelope on 2 November 2012. The Judge did not find any particular relevance in the fact that the envelope did not include the disputant’s post office box number, as the Superette manager’s evidence was that there was a list of post office box holders and the disputant was well known at the Superette. Further, the Judge did not place any significance on the fact that a yellow card and not the package itself was placed in the post office box, as this was the usual procedure adopted for post office box holders where the package is oversize and/or a signature is required.

The TRA concluded that notice had been given when the yellow card advising the disputant that a package was held for collection was put into the post office box, which she found had occurred within the response period.

Whether the Trust was carrying on a taxable activity?

Section 6 of the GST Act 1985 defines “taxable activity” and the TRA noted that the law is well settled. There are four requirements which must be met under s 6(1) of the GST Act.

Firstly, there must be an activity. “Activity” is a broad concept involving a combination of tasks undertaken or a course of conduct pursued by a taxpayer. An activity cannot be entirely passive.

Secondly, the taxable activity must be “carried on continuously or regularly” and whether the test is satisfied is a question of fact and degree.

Thirdly, a taxable activity must involve, or intend to involve, the supply of goods or services to another person. Where no supplies have been made, the assertion of an intention to supply can be tested against the objective evidence.

Fourthly, the supply or intended supply of goods and services must be made for consideration.

The TRA noted that whilst s 6(2) of the GST Act treats anything done in connection with the beginning of a taxable activity as being carried out in the course of the taxable activity, the provision does not create a taxable activity where one would otherwise not exist. Section 6(2) merely “adds” the commencement activity to the taxable activity.

The disputant contended that the Trust’s taxable activities were (i) subdivision; (ii) supply of interests in land; and (iii) forestry.

Subdivision

The TRA found that of the particular activities undertaken by the Trust in relation to subdivision, some of these were the usual tasks related to the purchase of land (arranging finance and instruction of lawyers) and other tasks related to ownership of the property (installation of water tables and spraying of blackberry). The Judge held that work done by the disputant on matters brought by him as trustee of other trusts or representing other entities was not relevant for the present purposes. In relation to other tasks (such as photocopying and research for a Court of Appeal hearing in July 2009, preparing a claim against the territorial authority for alleged breaches of its statutory duties under the Resource Management Act, continuously chasing up resource consent applications and continuously waiting on the outcome of appeal proceedings before the Environment Court) the TRA held that the Trust was not a party and consequently had no active involvement in these matters.

The TRA noted that no subdivision work of any nature was carried out on the property. In her opinion, the tasks identified were simply not sufficient to amount to carrying on the activity of subdivision.

Supply of interests in land

The TRA concluded that there was no evidence of any combination of tasks or course of conduct being undertaken by the Trust in relation to supply of interests in land. A quid pro quo proposal that was under consideration by the Environment Court did not proceed, and the granting of the forestry right and encumbrance (which the Judge noted were unusual transactions) and the sale of the property occurred well outside the disputed period. The TRA concluded that there was no evidence before the Authority that the Trust carried out any activity related to the supply of interests in land during the disputed period and that at best it could be said that the trust had identified such supply as a potential activity and was waiting on other events to occur.

Forestry

The property comprised of planted pinus radiata and native regeneration. The TRA concluded that during the relevant period the pinus radiata trees were simply left to grow, were not pruned or otherwise maintained and no other forestry activity was undertaken. The Judge accepted the Commissioner’s argument that doing nothing other than letting the trees already planted on the property continue to grow is not sufficient to constitute the taxable activity of forestry.

The TRA accepted the evidence of the Commissioner’s forestry expert that native regeneration does not constitute forestry unless there is under planting of commercial species and there was no evidence that this had been done. She also determined that holding the property awaiting the outcome of proceedings in the Environment Court as to whether the quid pro quo proposal would be implemented did not amount to carrying on the activity of forestry.

If the Trust was carrying on a taxable activity, whether the Trust is entitled to the input tax deductions claimed in the disputed GST period?

As well as the input tax credit claimed for the purchase of the Property, the Trust also claimed other relatively small amounts in its 31 July 2009 GST return including for telephone, photocopying, power and computer repairs. The TRA held it was not necessary for her to consider this issue as she had concluded that the Trust was not carrying on a taxable activity.