Taxation Review Authority finds no taxable activity and upholds the Commissioner's GST reassessments and deregistration
2016 case note – TRA finds no taxable activity and upholds the Commissioner's GST reassessments and deregistration.
This is a decision of the Taxation Review Authority ("TRA") upholding the Commissioner of Inland Revenue's ("the Commissioner") reassessments of the disputants' Goods and Services Tax ("GST") returns. The input tax credit claimed by the disputants was disallowed and the disputants' GST registration was cancelled from the dates that the disputants originally registered on the basis that the disputants did not have a taxable activity.
This decision reaffirms that a taxable activity is necessary for a person to be registered for GST and entitled to claim input tax deductions. It also reaffirms the decision in Case 7/2012 (2012) 25 NZTC 1-019 that commencement work is not sufficient and does not create, or amount to, a taxable activity.
The first disputant is an individual ("Mr S"). The second disputant is a company of which Mr S is the sole shareholder and director ("the Company"). The disputants filed GST returns claiming input tax deductions. The Commissioner took the position that the disputants were not engaged in any taxable activity in any of the relevant GST periods and reassessed the disputants' GST registration from the date of registration. The Commissioner also imposed shortfall penalties on each of the disputants for not taking reasonable care.
The disputants each challenge the Commissioner's reassessments and contend that they met the requirements to be registered for GST and are entitled to receive the GST refunds claimed. They also challenge the imposition of the shortfall penalties.
On 27 January 2011 Mr S registered for GST with effect from 14 January 2011 for an activity described on the registration form as being "vineyard and farming". He stated on the form that his turnover in the previous 12 months was more than $60,000 and that he expected his turnover in the next 12 months would be greater than $60,000.
Mr S told the TRA that when he initially applied for registration he was proposing to develop two vineyards. The project was to be financed from various sources including overseas funders and from the repayment of a loan for $600,000.
Mr S claimed a GST refund of $1,267.17 for the period ended 31 August 2012. He wrote on the GST return "Purchasing grapes vineyard and winery". Mr S claimed a further refund of $17,795.80 in the period ended 30 September 2012. On the return for this period Mr S wrote "Start up of vineyard".
The Commissioner commenced an audit into Mr S's GST affairs in October 2012. In October 2012 Mr S advised that he had set up a company that would "handle most of my GST".
On 2 November 2012 Mr S requested his September 2012 GST return be amended to remove two tractors he had claimed costing $74,000 and $44,000 respectively. He advised that when the company was up and running he would purchase them through that entity.
In the period between June 2011 and January 2013 Mr S entered into around 40 agreements for the sale and purchase of wineries, vineyards and farms. The agreements were all conditional on finance being obtained. Either no deposit was payable or it was not payable until finance was arranged. None of these agreements settled.
In February 2013 The Commissioner wrote to Mr S advising that his GST registration would be cancelled with effect from the date of registrations and she disallowed all input claims made.
The Company was incorporated on 11 September 2012. On 11 October 2012, the Company registered for GST with effect from 1 October 2012. The business activity was described on the form as being "grow grapes/wine marketing". Mr S completed the form and stated that the Company's turnover in the previous 12 months was more than $60,000 and that its expected turnover in the next 12 months would exceed $60,000.
On 8 November 2012 Mr S provided the Commissioner with a copy of a business proposal for the Company. The proposal prepared by Mr S was for the purchase of established New Zealand vineyards. It was intended that the Company would be a parent company that would borrow the money and invest in various vineyards. These vineyards would be individually operated by separate entities to be wholly owned by the parent company. The proposal listed particular properties which it intended to purchase and sought a loan of $62 million.
On 20 November 2012 Mr S filed a GST return for the period ended 31 October 2012 on behalf of the Company. Purchases totalled $237,740.09 and an input tax deduction of $27,429.01 was claimed. The inputs included invoices for two motorbikes ($19,000) and a tractor ($186,875). The balance of inputs claimed related to private items and expenses previously claimed by Mr S in his individual GST return. Payment was never made on the farm machinery and the transactions were subsequently reversed.
Upon completion of the audit the Commissioner cancelled the GST registration of the Company with effect from the date of registration and disallowed all input tax deductions.
The TRA found that there was no evidence that either Mr S or the Company had the financial resources to commence the stated business activities.
The TRA noted that Mr S told the TRA during the hearing that finance was principally to be provided by offshore funders. He said that his project had run into a problem because of a substantial shift in the exchange rate between New Zealand and the United States which meant an extra $22 million was required to finance the project. However, upon the evidence before it, the TRA did not put any particular weight on that oral evidence.
The TRA found that Mr S did not have sufficient funds to complete the purchases which he claimed in his August and September 2012 returns. Likewise, the Company was not able to complete the purchase of the motorbikes and tractor and the transaction was eventually cancelled by the supplier.
The TRA also noted that Mr S had told the TRA that he intended that the farm machinery would be leased out while the vineyard project was being developed. However, there was no evidence of any contracts having been entered into or any business proposal relating to the alleged activity.
The TRA agreed with the Commissioner's submissions that at best, the steps taken by each disputant could be described as preparatory steps towards the commencement of a taxable activity.
The TRA reaffirmed that commencement work is not sufficient and does not create or amount to a taxable activity. There still must be an activity to which those steps attach (The TRA referred to Case 7/2012 (2012) 25 NZTC 1-019). In this case, there was no activity which either disputant was carrying on continuously or regularly and which involved or was intended to involve the making of supplies to other persons for a consideration. Instead, Mr S and the Company had a rudimentary proposal for an ambitious development which they did not advance to any extent.
For these reasons, the TRA was not satisfied that the disputants were engaged in any taxable activity during the time that they were registered for GST. The TRA ruled that the Commissioner was correct to cancel their GST registrations and reassess their GST returns to disallow the input tax deductions claimed.
The TRA stated that the requirements for GST registration are not complicated. Furthermore, Mr S claimed to be experienced in GST matters. The TRA was satisfied that a taxpayer of ordinary skill and prudence would have recognised that there was no taxable activity and would have foreseen a reasonable probability or likelihood of a tax shortfall as a consequence of registering for GST in such circumstances and proceeding to claim input tax deduction. As such, the TRA did not consider that Mr S and/or the Company took reasonable care in taking their respective tax positions. On this basis, the disputants are liable for shortfall penalties of not taking reasonable care.
Goods and Services Tax Act 1985: ss 6 and 52; Tax Administration Act 1994